Datasets:

FINDA-FIT

/

Fin_Corpus_EarningCall

like 1

Follow

Find-A 6

EarningCall_233900

Here’s the entire text of the Q&A from Nike’s (ticker: NKE) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Thank you everyone. If you would like signal for a question it is “*” “1” on your touchtone phone. And if you are on a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again it is “*” “1” to ask a question. We’ll pause for just a moment to give everyone a chance to signal. We’ll go first to Robert Drbul with Lehman Brothers. Couple of questions, first one is on the footwear product margins, can you talk a little bit more about your expectations of what happened this quarter, elaborate a little bit more in terms of the lower product margins in every region. And I guess as you look into the back half of the year with some of the comments you made around gross margins, what are the risks that you still see on the gross margin side around footwear product. First of all, a lot of the factors we’ve already talked about so just to reiterate what the major drivers have been, we are seeing higher commodity costs primarily oil, there have been some changes in minimum wage loss, in Asia we’ve seen some impact from that as well, so that is one of the prime drivers in footwear. Second key element has been that our unit demand has been tremendous. You noted with our results for this quarter, the US posted over 20% growth in unit sales in footwear. So as we built our capacity for servicing all unit demand, that has increased our cost somewhat. That is related to things like adding additional tooling sets and moving to additional factories to produce products. So it is a bit of a good news bad news in the sense that we’ve got such great unit demand. Sometimes our margins are a little bit lower. We’ve also seen that, we’ve had to move the product over here, we’ve had some higher air freight numbers, so those are all product cost drivers. We see those basically being somewhat consistent with the back half of this year but easing as go on into ’07 as long as commodity prices stay above where they are. Second major driver this quarter was the mix of products. We did see some shift in mix to the US which has slightly lower footwear margins than say Europe, and we did see a little bit of mix shift into some product types like sport culture that tend to have slightly lower margins. So on that front, that is very hard to predict. At this point we think as we said in our guidance, the third and the fourth quarters are going to look somewhat like the second. And the last item that we talked about is the investments for making product value in Japan and Europe and we were largely anniversary those come Fall of 2007 but obliviously the decisions we make around pricing are very dynamic and we look at each market individually. Okay. Great. And just a question on the Futures, when you look throughout the period that you have, did it significantly change from the first half of the period to the second half of the period? The Futures are stronger in the front half of this window that we are reporting today, we do have some timing as Mark mentioned we do have some phasing of our World Cup product introductions and we do believe that we are going to see some acceleration as we go into the fourth quarter, particularly in Europe. But the Futures we reported today are definitely stronger in the front half of the window. Thank you. May be two questions. On the SG&A side Don, you and Bill talked about several initiatives, should we think about as we look out further, should we think about you guys sort of getting back to this objective of other overhead growing at half rate of revenue growth and demand creation growing at the rate of revenue or could really be the other overhead I guess, be even better than that, that is one. Well, I think directionally the comment that we want to focus our investment in SG&A on demand creation that directly drives revenue as well as operating overhead that directly drives revenue that is definitely true. I will suggest that the absolute percentage is not something that you might want to model out exactly like that but definitely we expect to see a lot more leverage on the operating overhead side than we would on the demand creation side and overall we are committed to delivering SG&A leverage over the long-term. Secondly on the balance sheet capital structure, you guys are just generating so much cash even as you buyback a ton of stock. Any, should we just think about you guys doing more about it, I know you raised the dividend substantially as well, but the priorities levers are again are still dividend and share repurchasing and then last acquisitions, any sort of changing in that thinking too, thank you. Virginia, this is Bill here. We are obviously very targeted into I think it is $2.1 billion of cash sitting on the balance sheet today and we discussed with the finance committee of the Board, and I hope some of the things we’ve done haven’t gone unnoticed. We did increase the dividend by 24%, I think we repurchased close to quarter of a billion of the stock during the past quarter. In 18 months into a 4-year buyback plan, we’ve already repurchased about a $1 billion, just under a $1 billion of a $1.5 billion target. So our forward thinking why it be based on generating a highest return for our shareholders whether that be increase in dividend repurchasing stock or investing in higher return opportunities and with regards to your specific questions about acquisitions, as we indicated in June, we have ample opportunity to grow with our current portfolio, we are not actively pursuing acquisitions, if the right opportunity presents itself, we will take a look at it. But that is not a priority. Hi, good evening I guess. My first question relates to, it sounds like you were saying that you have a bit more spending discipline and reality monitor that in within a quarter to determine how much you can spend, I mean, it sounds to me like this quarter for instance your gross margin was a little bit wide of expectation, so you turned off the spicket a little bit in terms of demand creation spending, is that the right way to think about yet, and then how do you manage with adverse sales growth, if you do, realize the demand creation ultimately drives sales growth. That is my first question and then my second question is, why are gross margins in the back half expected to be similar to Q2 if you had benefit of 150 basis points from currency in Q2 and will have that benefit in the back half, thanks. Okay. With respect to your first question Liz, we definitely do not manage the business on a quarter to quarter basis, and what we are really aiming for here is managing the portfolio over a period of time to deliver great results for our shareholders and build the business for the future. So it is I really a questions of balance of profitability today and long-term investment going forward. What I did want to communicate is that I think what you saw in the second quarter was our ability to pull the levers the demand creations spend is not a tool that we use to manage the P&L it is really a phasing based on what we think makes the most sense for driving the business and the impact you saw in SG&A is really a longer term initiative to bring some more productivity out of our operating overhead spending and you started to see that in the second quarter and we are committed to continuing to deliver that over time. So you should definitely not think about this as a quarter-to-quarter exercise. Yes. We did perform better than our guidance on SG&A in the second quarter and that does reflect that we’ve double our efforts around productivity and operating overhead. But we are not doing this in terms of turning the spicket on or off for any given quarter. We just don’t manage the business that way. And your second question was around gross margins? Yeah. Just currency benefit, will be there for the back half or atleast that is the guidance you’ve given us in the past so, why is gross margin expected to down only similar to Q2 when you did have a currency benefit in Q2? A lot of it has to do with the mix of products we expect to sell, for example in many of our markets as we sell, World Cup replicas apparel that tends to be a higher margin than some of our inline products same thing for some of the footwear, so there is a large number of moving parts in the gross margin equation, at this point, with a neutral currency environment, we do expect to see roughly the same year-over-year change in margin, but is really related to more to product mix and geographic mix. I wanted to ask a little bit more detail on some of the comments Bill made up front around the retail strategy, I know you had mentioned that distribution is still going to be anchored to the retail partners, I wanted to get a better flavor for what some of the strategies will be there on a global basis, especially any plans to move outside the outlook format to create retail environments appropriate to the brand? Omar, as I had mentioned before, we are in the process of setting a strategy for our direct-to-consumer business and I see opportunity to significantly increase our online business, I think we have created retail concepts that elevate our brand, and close distribution gaps in a number of markets. But as I said earlier in our preference designed to partner with retailers who do a good presenting footwear and Charlie do you want to add to? Yeah. I will jump in on this a little bit Omar, I think, one other things that we’ve talked over the last several years is our ability to partner with some of the key retailers around the world and that strategy doesn’t change and we continue to emphasize that as I think that Bill made reference to that in his comments that will be the cornerstone to our retail strategies. I think while we do have the ability to do is take on and look at ways to change the landscape of the retail marketplace with very specific and strategic executions of opportunities that we may have come available to us whether it is real escape play or something like that. I think a great example of that is the Champs Elysee store that we’ve opened up on a very key and significant street in a very important marketplace worldwide, where we can control the entire brand presentation and focus on some of the pieces there. So those are some of the key points that we want to make sure that everybody understands on the retail front. We will continue to look at opportunities as we’ve discussed in the past but we are still anchoring most of our retail distribution strategies with our partners around the world. Yeah. I just want to add, this is mark speaking, I just want to add to that, we are going to continue to invest in our, as Charlie said our key retail partners, a great example in this past quarter is some of the work we did around Pro, and the Pro revolution doors we opened up with some better sporting goods partners, we found that, that not only helped the tremendous sell-throughs on the Pro product but actually helped lift our entire apparel business in just about every category. Such a great example of key invest in important retail partners against the big initiative for the company. Charlie, I wonder if you could give us a little bit more a time horizons on the challenging markets that you did a nice job in highlighting for us the markets like Japan, France and the UK. Those are major markets for Nike in terms of it’s international presence. And I am assuming that you’ve already pre-aligned most of those markets for the Fall ’06 selling season. Can you give us an idea of if the market environment from your conversations with retailers are starting to turn, and whether are not you see some opportunity as we get further into Calendar ‘06 in terms of the business opportunities particularly as we get into the important Fall selling season in those markets. We have done some pre-aligning John, we are not quite that far into, although we’ve, most of the accounts have seen, the product lines, I think the two big pieces of areas that I highlighted in the prepared comments are areas that we are really excited about. And that is getting after this sport culture consumer piece which is becoming a much more dominant piece of the puzzle in the European market and then I think also the overall perspective on distribution and making sure that we continue to build a premium brand position over the long term, and in some cases, this has a little bit of familiarity with the conversations we had around the US marketplace, 3 – 4 years ago. So we are still very optimistic about growth potential coming out of the European marketplace, when that is going to turn around, I am not quite ready to predict some of the economic challenges that that overall marketplace faces. We are seeing some very strong results coming out of some very specific parts of that market. Specifically in Italy and to some degree in Liberia, I think the other think that we feel great about is the Fall product line and again moving through World Cup and into the Fall season when the football product is really the most relevant and part of the product launches we’ve staged will, put us in a great position to take advantage of that. So it is not, I am not ready to say we are completely around the bend, but I really like what we are doing in Europe right now, very confident and comfortable with the strategy and plans we have in place. With respect to Japan, I think it is a little bit different, the marketplace is a little bit healthier and as I said again in the remarks, we are going to make sure we manage inventories there, we are not going to put ourselves in a position where we chase bad business, we think we have a great opportunity to introduce more energy to that marketplace through products and innovation, Mark referenced the Max 360 product which we are very excited about this next spring. And we got a couple of more things in the half up our sleeves, that quite frankly we are not ready to talk about but think they will be very exciting pieces of the product distortment going forward and Japan will be a fantastic market for some of these products. That was very helpful. And the last question I had, really directed at you Bill, we’ve heard from a number of the retailers that we follow whether it is athletic specialty chains or sporting goods or even family footwear retailers the Nike has been reaching out more and particularly you, yourself has reached out more to a lot of the retailers to better partner with up with them, is this a change in terms of the approach that company’s relationship with it’s retail partners and is this something that is being motivated by basically the organic growth of the US market versus may be some of the market conditions in the other areas, or just that you see an opportunity to just continue to ramp up your market share positions in this country? I think John is pretty consistent with what we talked about before in terms of retail, we always start with retailers who can help us elevate the brand and on the brand properly and we always attempt to work with them in the first place, I go on out to meet people to understand our customers understand their needs, trying to understand how we can fit out plans in what their and create a synergistic situations we are also working with number of retailers to access their data because I believe if we have access to their data and we have a growing number of retailers who are in our database now with online point of sale information, I think it can be one, one, we can increase consumption for them and we can increase consumption of Nike product as well, but it is not change in strategy, I think it is a long standing strategy, it is just an opportunity for me to know people better. Do you think Nike can grow with market share position you have, by far the dominant factor in the market, can you continue to grow eventhough you basically have a large position already. John, we only have a 25 share market in the US, we can double it, we have ample opportunity to grow in the US in footwear and in apparel. Hi, I have a couple of questions, I am, a little bit of clarification I guess, are you expecting SG&A leverage in the second half of this year. And how do you go from a 2% to 3% Futures order to a mid single digit sales growth in the second half of the year, and why is that the Futures order slowed into the forth fiscal quarter, what caused that? I do not expect SG&A leverage on the back half of the year, I do expect SG&A leverage for the full year, we are currently 110 basis points, I believe levered through the first half of the year, and as we said before some of the demand creation is more back loaded so on the full year we do expect to get leverage, we are committed to that, I don’t necessarily expect that in the second half. Your second question is how do you get from current Futures to mid single digit? One of the things to bear in mind is that the Future window does not include the entire forth quarter, so we do expect to see some good numbers coming out of our Fall booking that fall into May and some of our May numbers, we have some early indications, so we think that we are going to see some acceleration there related to the World Cup and some other product initiatives that we have in the pipe. We also have a quite a bit of Atonce and replenishment business, have done very well for us so far this year, that will also improve our revenue growth over the back half of the year. And your third question I believe was why the deceleration in Futures, and the first point I’d make is that a lot of it foreign exchange. When we reported it at the first quarter, our expectations around the year on Yen were much stronger than where they are today, and if you take that out, our Futures numbers for the five months window is actually up 7% which is pretty consistent with our long-term growth model. We have seen a little bit lower number in the US, the US was a +12 last time we reported. We think +9 is very very good for that market. And as I said earlier some of the phasing of some of the World Cup product means that we expect to see some of those sales come in the back half of the quarter. Lastly thing I say, if you think about the fundamental business health here, I want to highlight again the strength of our unit demand curves. We are seeing enormous growth in units which says, we are really doing well, in terms of share fete, I think that our profitability picture across the portfolio is pretty good. We are very confident on hitting our goals for the year. Okay. Did you say that European apparel was an area of opportunity as you look forward, what was the challenges in European apparel, specially with the World Cup, I would think European will be one of your strongest businesses and how does this make you pro factor in there? Hi Margaret, this is Charlie. What I said was that our apparel business is accelerating in Europe so as you talk, as you know we’ve talked about some of our apparel inventory issues over the last couple of seasons, and we feel pretty good about the progress we’ve made in getting the inventories back inline and then as you mentioned, accelerating in to the World cup, we are very excited about both the product that has been laid out for the World Cup tournament itself and we’ve had pretty strong response going into Fall. I think the other thing that is adding a lot of energy into the European apparel market is the Nike Pro equation. And we’ve had great response to Nike Pro over there, I don’t know you have been over there recently but that team has done a fantastic job of placing that product and the consumer has responded very well to it. So it is an accelerating environment for our European apparel picture. A couple of other areas I’d add to that would be the women’s fitness, we just had a great round of sell-throughs on our women’s fitness and fitness dance products over this past quarter and we expect that to continue through the spring, tennis is up quite a bit and sport culture remains a big opportunity for us over there as well. Thanks guys. Actually just one question, I was hoping since the 360 Air launches coming up in January, can you just walk us through the rollout process for Calendar ’06, regionally and also which channel partners we should be looking at as having more of a position with this product and also can you give us some info on advertising and also sort of global launch versus what is going in the US, it would be great as well, thanks. Yeah. This is Mark. Let me hit that, the 360 launches you mentioned hits in later in January, as I said we are really excited about that, not just from the excitement around that single model, that product, but the plan that we have around reenergizing our whole Nike Air collection. And that is really the Van Der Aar product, the spotlight product that we are going to rally behind for Nike Air as a total collection of performance products. You will see that expanding as we move into spring into fall into other product categories, 360 that is, the next category would be basketball and we expect to actually have a full product offering both on the sport performance side of the business and the sports culture side of the business. You will see some pretty exciting things happen at retail on the sport culture side starting as early as January of this year. The primary initial introduction, the thrust will be in the USA and Asia-Pacific, and then you will see Europe picking that up into late spring into the fall season as well, so Europe will sort of follow that wave a bit as we head beyond World Cup, you will see how much bigger emphasis on that from Europe in that fall season. Although they are trying to see what we can do in Europe in leading upto the World Cup effort as well. This is Charlie. Just as far as channels, I am not get into specific’s but to Mark’s point I think you will see the product globally in all the major key retailers around the world, the high-end product will be on limited basis availability which is traditionally the way we’ve launched most product innovations and then Mark relayed and talked about, it is not just about single shoe, it is entire concept, and you will see products throughout the product line. Yeah. On the advertising as well I didn’t mentioned that, we kickoff with a new advertisements with a national TV campaign, later in January we will carry that through this spring season. We will have energy account based products exclusivities and some energy type events happening, digital online activity, it is really total of what we call 360 marketing campaign around the shoe and the broader Nike Air line. And from a Futures perspective is this something that sort of, you are going to limit allocations in the spring but it could have a meaningful impact to your Futures as you move toward back to school ’06 or is this we got to wait till ’07 it is really meaningful to Futures? Well, I think I mean, we will limit it at the top end as we always do, but we will see that positive and part of driving into whole demand creation around the concept. I think as we move into the first half of ’07 it is going to become very significant part of the product offering and we are excited about some of the new products that we’ve started to pre-align on the some of the accounts worldwide. I think the thing you have remember is that isn’t a single shoe launch, this is effort around Nike Air at large. So you will see some broader distribution of products within Nike Air, beyond or relative to the 360 product itself. So you will see some impact on this initiative this spring and it will certainly build through next fall. Yeah. Just to clarify Robert, fiscal ’07 is what Charlie was talking about, so we do expect to see some impact for Fall. Thank you Robi and thank you everyone for participating, we wish you all a very safe and happy holiday season, talk to you soon. 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_233901

Good morning and welcome to Procter & Gamble’s Second Quarter 2006 Conference Call. Just a reminder, today’s call is being recorded. Today’s discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K and 8-K report you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections. As required by Regulation G P&G needs to make you aware that during the call the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results excluding the impacts of foreign exchange and acquisitions and divestitures where applicable. Free cash flow represents operating cash flow less capital expenditures. P&G has posted on its website www.pg.com, a full reconciliation of non-GAAP and other financial measures to provide additional clarification. Now I would like to turn the call over to the Chief Financial Officer, Clayt Daley. Please go ahead, sir. Thank you and good morning everyone. A. G. Lafley, our CEO, and John Goodwin, our Treasurer join me this morning. As usual I will begin the call with a summary of our second quarter results. John will cover our business results by operating segment, and I will wrap up with an update on the Gillette integration and our expectations for both the March quarter and the fiscal year. A.G. will join the call for the Q&A’s, and as always following the call John Goodwin; Chris Peterson, our IR director, and I will be available to provide additional perspective as needed. Now onto the results. The strength of our innovation program and the breadth of our portfolio enabled us to deliver another strong quarter of balanced top and bottom line growth, despite numerous challenges, including the impact of hurricanes Katrina and Rita, higher commodity and energy prices, continued high competitive spending behind competitors’ restructuring charges, and a tough base period comparison. Diluted net earnings per share were $0.72, in line with the prior year, and $0.03 ahead of our previous guidance and the consensus estimate. This included Gillette dilution of $0.06 to $0.07 per share. Excluding this dilution, diluted net earnings per share were up 8 to 10% versus a year ago. The results were better than expected as the result of stronger top line growth on both the P&G and Gillette based businesses. Now, note that we are reporting Gillette dilution as a range given the inherent difficulty in tracking all of the acquisition related impacts on the P&L. And keep in mind that this reporting will get increasingly difficult as the P&G and Gillette operations become more integrated. Total sales increased 27% to 18.3 billion. Organic sales growth, which excludes the impact of foreign exchange as well as acquisitions and divestitures, came in at 8%, well ahead of our long-term organic sales growth target. Total shipment volume increased 27% driven largely by the addition of Gillette. Organic volume grew a strong 6%. The growth was broad based with every global business unit delivering solid organic volume growth, household and family health each delivered 7% organic volume growth, while the Gillette GBU and beauty care each delivered 5% organic volume growth. All regions grew organic volume during the period. Developing markets continue to set the pace with volume growth in the mid-teens, led by strong growth across Asia and Central and Eastern Europe. Price mix was up 2% versus year ago, primarily as a result of pricing actions to recover higher commodity costs. As expected, foreign exchange was a 2% reduction to the top line, due primarily to the strengthening dollar versus the Euro, pound, and yen. Next, on to earnings and margin performance. Operating income was up 31% to $3.9 billion due to strong results on P&G’s base business and the addition of Gillette. The operating margin was up 60 basis points versus year ago, as we continue to benefit from volume leverage on our SG&A costs. Gross margin was flat versus year ago at 52.4%. Higher commodity costs hurt the base P&G gross margins by about 150 basis points in the quarter. The leverage we get from scale, cost savings efforts, pricing, and the mix benefit from the addition of Gillette, offset the commodity cost impact. Selling, general and administrative expenses improved by 50 basis points. This was primarily driven by strong sales growth, sales growth simply outpaced our SG&A costs as sales grew well above both our long-term targets and short-term forecasts. We repurchased 3.5 billion of P&G stock during the December quarter as part of the previously announced Gillette buyback program. This brings the total amount repurchased under this program to 12 billion. We now expect to repurchase about 20 billion in total under the program and to complete it by mid-calendar 2006. The tax rate for the quarter was roughly in line with prior year as favorable Gillette business mix was offset by temporary tax friction associated with the acquisition. Hurricane Katrina’s impact on our coffee business negatively affected results by about a penny a share in the quarter. Earnings per share included $0.02 of stock option expense, in line with both year ago and previous guidance. Additionally, earnings per share included $0.03 of one-time charges related to the Gillette acquisition, again in line with previous guidance. Now, let’s turn to cash performance. Operating cash flow in the quarter was $2.6 billion, up more than 500 million from the same period last year. The improvement was largely driven by the addition of Gillette earnings and Gillette growth, and earnings growth from the P&G base business. Working capital was about neutral on cash versus year ago. Inventory days, excluding Gillette, were down about 6 days versus a year ago, due to continued focus on inventory reduction. Payable days, again excluding Gillette, were down about 3 days versus year ago to both timing effects and our efforts to take advantage of supplier term discounts. Receivable days excluding Gillette were about flat versus the same period last year. Free cash flow for the quarter was $1.9 billion. Capital spending for the quarter was 3.4% of sales. Free cash flow productivity came in at 76%, roughly in line with year ago, but importantly we remain on track to deliver our target of 90% free cash flow productivity for the entire fiscal year. To summarize, these are strong quarterly results. Both the P&G and Gillette based businesses continue to deliver good results. P&G continues to drive balanced top and bottom line growth, even through this challenging cost and competitive environment. And, we continue to benefit from our balanced portfolio and robust initiative program. Thanks Clayt. The beauty business delivered 9% volume growth for the quarter, including 4 percentage points gain from acquisitions and divestitures, sales of $5.4 billion up 7% excluding both acquisitions and divestitures and foreign exchange. Organic sales grew 5% versus a strong base period with 8% organic sales growth. Net earnings increased 7% to $848 million. Earnings growth was driven by the addition of Gillette and solid top line growth. Scale benefits from growth more than offset increased marketing investments behind new initiatives and the impact of higher commodity costs. In response to cost increases, the US FemCare business has announced a price increase of about 6%, the increase will be effective in May. P&G’s skin care business delivered strong results for the quarter with global volume up in the teens. In the US, the Olay brand posted value share gains in facial cleansers, facial moisturizers, and hand and body lotions. These gains were driven by new product innovations such as regenerist thermal polish treatment, and microdermabrasion, and peel system kits, and new Anti Aging cleansers in the total effects lineup. The feminine care business delivered another quarter of solid volume growth behind the top sheet softness innovation, scent line extensions, Naturella expansion and continued growth of Tampax Pearl. Past three months Always value share in the US feminine pads segment is 52%, up nearly 5 percentage points versus the prior year. Tampax US value share of the tampon segment is nearly 50%, up almost 3 percentage points versus year ago. In Western Europe, FemCare share is now over 51%. The Naturella expansion in Russia continues to progress well, adding about 7 incremental value share points to the business. P&G now has nearly 44% value share in Russia FemCare. Retail Hair Care volume was up mid-single digits led by developing markets and double-digit growth of hair colorants. This was partially offset by a slight decline in developed market shampoos, due mainly to loss volume from discontinued minor brands in the US. The hair colorants growth came behind the innovations on the Koleston and Wellaton brands. In the US, value share is now over 36%, up about a point versus prior year on the strength of the Nice n’ Easy Root Touch-Up innovation. The cosmetics category had lower shipment volume versus prior year against difficult comparisons that included pipeline volume of significant new initiatives. HealthCare delivered another quarter of strong results and benefited from the addition of the Oral-B franchise. Volume was up 31% versus the prior year including 23 points of growth coming from the net impact of acquisitions and divestitures. Pharmaceuticals and P&G’s base oral care business, excluding divestiture impacts, both delivered double-digit volume growth. Sales were $2.6 billion, up 29%. This includes a 1% negative impact from foreign exchange. Excluding the impact of foreign exchange and acquisitions and divestitures, organic sales growth was 8%. In addition, mix lowered sales by 2%, due mainly to rapid growth of developing markets and the addition of the Gillette oral care business, which has a lower average selling price than the balance of the segments. Net earnings were $427 million, up 41%, driven by the addition of the Gillette oral care business and solid top line growth and margin expansion on P&G’s base business. Actonel had another very good quarter globally, with volume up more than 20%, and global value share of the bisphosphonate segments up a point to approximately 33%. In Oral Care, Crest toothpaste past three months all outlet value shares in the US, was 35%, up 2 points versus the prior year. In the Rinse business, Crest Pro-Health Rinse has over 10% value share of the mouthwash segment, with 9 points incremental to the Scope brand. Value share in the US toothbrushes is 49%, up more than 4 points versus prior year, led by Oral-B share gains in all segments: manual, battery, and rechargeable brushes. Oral Care volume in developing markets grew double-digits behind continued good results in China and Turkey. Prilosec OTC volume growth moderated as expected due to the previous quarter customer pre-buy ahead of the mid-September price increase. However, consumption remains strong, with US value share of heartburn remedies now 39%, up 9 points from last year. Baby and Family Care delivered solid top line growth in a difficult, competitive, and commodity cost environment. Volume grew 5%, with Pampers and Bounty up high single-digits. Sales were up 2% to $3 billion. This includes a negative 2% drag from foreign exchange and a negative 2% from geographic and product mix. Organic sales, which exclude acquisitions and divestitures and FX impacts, were up 4%. Net earnings for the quarter were $330 million, down 5%. The earnings decline is versus a very strong base period where earnings increased 29%. Also, December quarter earnings reflect lower volume in North America Baby Care and a spike in energy costs, mainly natural gas, which followed the hurricanes in September. Recall that P&G has announced a 6.7% list price increase across the US Bounty and Charmin businesses, effective January 31, to recover the impact of sustained higher energy costs. Global Family Care organic volume grew mid single-digits for the quarter, which excludes the impact of the Korea tissue divestiture. In the US, all outlet value shares for Bounty is 42%, in line with last year, and Charmin is 27%, down a point. The global Baby Care business delivered high single-digit volume growth driven mainly by developing markets. Pampers value share in China is now approaching 60%, and in Russia, Pampers value share is now over 50%. The rapid growth in Russia is behind the contour fit and absorbency improvement initiative. In the US, past three month of all outlet value share for P&G diapers is 37%, up slightly versus year ago. Pampers diaper share is over 28%, up nearly 2 percentage points versus the prior year. This is being partially offset by Luvs, which is down over 1% versus year ago. In Western Europe, Pampers diaper share is over 54%, up nearly a point versus year ago. This growth is being driven by new innovations such as the Baby Stages full motion fit and absorbency improvement initiative. While the partial rollback for pricing in the US Baby Care has received a lot of attention, pricing in the US is still up versus year ago. Also the global pricing trend is increasing. We have already taken pricing up in several developing markets to recover higher costs, and new pricing is coming in select Western European markets. Fabric Care and Home Care delivered strong top line growth with volume up 7% and sales up 8% to $4.1 billion. Foreign exchange impacts reduced sales growth by 2% while price increases, to offset higher commodity costs, helped sales growth by 2%. Organic sales, which exclude acquisition and divestiture and FX impacts, were up 10%. Net earnings for the quarter were $593 million, an increase of 8% versus last year, driven by volume growth, pricing, and cost savings programs, which more than offset higher commodity costs. Fabric Care grew global volume high single digits for the quarter with good performance in both developed and developing markets. All outlet value shares for US laundry business is now 61%. Tide value share is over 39%, up nearly 3 points versus last year behind the Tide with a Touch of Downy, Tide Coldwater and Tide with Febreze premium initiative innovations, which were coupled with very strong customer support. In Japan the launch of the Bold Liquid Detergent led Fabric Care to volume growth of over 20% for the quarter. Home Care delivered modest global volume growth for the December quarter. This is versus a base period that was helped by initiative pipeline volume on Febreze and followed a strong quarter that helped by forward buying ahead of the dish washing price increases in September. Past three month US all outlet value share for Dawn hand dishwashing is up 2 points to 42%. Cascade auto dishwashing is up a point to 59%, behind the strength of the action packs initiative. And hair care is up more than 3 points to 20% behind continued growth of Febreze air effects. Home Care volume in Japan was up high teens behind the continued success of the great Fruitjoy initiative and launch of Febreze solid air freshener. Snacks and coffee results for the quarter were again heavily impacted by the effects of Hurricane Katrina. Unit volume grew 3% despite a modest decline in coffee volume. Sales of $927 million, an increase of 10%, this includes a 9% benefit from pricing to recover higher green coffee costs. Net earnings were $95 million, a decrease of 20%, driven primarily by the decline in the coffee business due to shipment disruption and higher costs associated with Hurricane Katrina. Folgers past three month US all outlet value share was 28%, about 5 points lower than prior year. Consumer product availability for Folgers was significantly disrupted in October and November, two of the highest volume months of the year. Pringles past three month all outlet value shares was over 14%, up slightly versus last year. Finally, moving to the Gillette GBU, as you know these businesses were not included in P&G’s results last year. So on a reported basis the sales and earnings are totally incremental to P&G. However, to assist investors, we have published historical pro forma results for the new Gillette reporting segments and will discuss trends versus those estimates. Blades and Razors continued its strong momentum in the December quarter. Volume mix grew 6% versus prior year and sales were $1.2 billion also up 6%. Pricing added 2% to sales growth and foreign exchange reduced sales by 2%. Organic sales, which exclude acquisitions and divestiture and FX impacts, were up 8% versus prior year pro forma results. Earnings before taxes were $375 million, up 11% versus pro forma results for the prior year. Excluding the impacts of purchase accounting related adjustments, earnings before taxes were $491 million, an increase of 46%. Approximately one third of this percentage increase was caused by non-recurring costs in the base period. These costs were primarily related to charges for the European manufacturing realignment and the functional excellence program. The balance of the earnings increase was driven by strong sales, a more profitable product mix, price increases, and lower overhead and manufacturing expenses. Reported earnings, net of taxes for the segment were $272 million. Global trade up to premium systems continued in the December quarter. The combined Mach3 and Venus blade franchises grew by 2 share points versus year ago and now represent half of Gillette’s global 72% blade share. In the US, past three month all outlet value shares for Gillette Blades and Razors remained over 70%, despite heavy competitive spending behind the new product launch. Mach3 share of blades improved by about 1.36% on the growth of M3Power. M3Power remains the top selling razor with an 18% share of the global razor market. Venus Vibrance remains the top selling female razor in the US Past three month US all outlet value share of Venus blades grew 1.29% driven by Venus Vibrance and disposables. The Duracell Braun business delivered strong volume mix growth of 4% despite the prior year’s, versus the prior year’s pro forma results. Sales were $1.3 billion, up 1%, including a negative 2% impact from foreign exchange. Organic sales, which exclude acquisition and divestiture and FX impacts, were up 3%. Pricing was down slightly on a global basis. The shift to larger pack formats in the US factories caused a modest negative sales impact. Importantly, Duracell pricing in the US continues to trend upward, following the list price increase taken in August and the rollouts across trade accounts. Earnings before taxes were $243 million up 46% versus pro forma results for the prior year. Excluding the impact of purchase accounting related adjustments, earnings before taxes were $286 million, an increase of 71%. Approximately one half of this percentage increase was caused by non-recurring costs in the base period. These costs primarily related to charges for the functional excellence program and other asset write-downs. The balance of the earnings growth is driven primarily by favorable volume, lower manufacturing expenses, and reduced overhead costs. Reported earnings net of taxes for the segment were $165 million. Duracell all outlet value shares in the US reached 48%, up almost 2 points versus the prior year. Growth in Latin America was very strong driven by a successful Christmas season in consumer programs. Also the China battery business delivered volume growth of more than 25%, behind increased outlying market penetration. The good Braun results are driven by 360 complete and Contour shaving innovations and the expansion of the Tassimo on demand coffee system into Germany and the US. Given the strong earnings results from the Gillette GBU in the quarter, I want to provide some additional perspective going forward. We expect earnings before tax indices to moderate significantly in the second half of the fiscal year, versus the exceptional December quarter results. This is due to Lakme at the functional excellence program benefits investments behind the Fusion launch and tough base period comparisons. Thanks, John. I would like to start by providing a brief update on the progress of the Gillette integration. The December quarter was an important period as it was our first quarter operating as a combined company. We’re making very strong progress on both the revenue and cost synergies. And we remain on track with our three year commitment to return P&G to the pre-Gillette double-digit compound earnings growth trend line by fiscal 2008. The integration is progressing very smoothly with minimal business disruption due to excellent work by each of the Gillette integration sub-teams around the world. And I want to particularly recognize the dedication of the Gillette people, who have worked tirelessly now for a year to make this deal a success. To highlight a few of the milestones we achieved during the quarter, we realized our first revenue synergies by executing a number of company-marketing promotions between P&G and Gillette brands such as Venus razors coupled with Always and Olay total effects. In addition, we expect revenue synergies from distribution gains to ramp up over the next several quarters. We also realized our first cost synergies during the quarter by combining our purchasing efforts and several areas including media, brand saver coupon inserts, and a few raw materials. As part of our ‘field the best team efforts’ and our people strategy, we have now completed the staffing decisions for the top 1,000 Gillette managers and are on track to complete the rest by the end of March. Retention rates of key personnel are in line with our plans, providing continuity of leadership during this critical integration period. Finally, on the divestiture front we closed the previously announced SpinBrush and Rembrandt divestitures on October 31st and December 21st respectively, in compliance with the FTC requirements and we are on track to complete the Right Guard divestiture, in line again with FTC requirements. In summary, we remain on track with both the integration and acquisition economics. Now, let me move onto guidance. Before getting into the details, I want to give you a brief update on several topics that will affect the numbers. First innovation, second commodity costs, and finally, pricing. With regard to innovation, the combined company has a robust pipeline of recently launched innovation that should continue to fuel strong top line growth going forward. Some of the bigger innovations include Tide Premium initiatives, Tide Coldwater, Tide with a Touch of Downy, and Tide with Febreze, which continue to drive strong growth on laundry detergents. The Olay Regenerist Thermal Polisher, Microdermabrasion, the Quench Body Care line and Olay Ribbons Body Wash, which are driving strong growth on Olay. The Crest Vivid White Night and Expressions Lemon Ice SKUs are driving strong growth on the Crest dentifrice business. Lacoste Essentials, Hugo Energize, and the recently announced Dolce & Gabbana license, should continue to drive strong growth on our fragrance business. Finally, Gillette Fusion and Fusion Power started shipping in the US and Canada earlier this week and are off to an excellent start with over $100 million of shipments on the first day, driven by very strong customer support. Both Fusion and Fusion Power products significantly outperformed Quattro Power in consumer tests, and we expect Fusion to be a billion dollar brand of the future. Now, turning to commodity costs, we continue to expect pressure from higher commodity energy costs through the end of the fiscal year, although we expect the pressure to moderate, as we begin to lap higher base periods in the March quarter. To mitigate these cost increases, we are aggressively pursuing cost savings projects, reformulating our products with lower-cost ingredients, driving innovation with the resulting volume leverage on fixed cost. And where needed, we are pricing to recover higher costs. During the past year, we have taken pricing in many of our categories. Most recently, we announced pricing plans for Feminine Care in the US, where we increased prices an average of 6% effective May 1, in our razor blades where we will increase prices by 3% to 4% both in Europe and North America over the February/March period. In instances where costs are up for all industry participants, our expectation is that pricing relationships between brands and private-label will remain about the same over time. Importantly, to date we have not seen any significant reductions to market sizes or major shifts away from premium priced products as we have priced up to recover higher costs. Going forward, we will continue to assess pricing decisions with the objective of striking the right balance between recovering commodity cost increases, while insuring our brands continue to offer great value to our consumers. Now turning to the specific guidance for sales and EPS. For fiscal 2006, we expect P&G’s base business to deliver its fifth consecutive year of growth, at or above P&G’s long-term target. Organic sales, which exclude the impact of foreign exchange and acquisitions and divestitures, are expected to grow 6% to 7%. This is an increase of 1% versus our previous guidance due to continued base business strength and strong momentum in developing markets. Within this, we expect the combination of pricing and mix to contribute about 1%, and foreign exchange is expected to have a negative impact of about 2%. Acquisitions and divestitures are expected to add 14% to 15% growth to the top line, which should result in an all-in sales growth of 18% to 20% for the year. Turning to the bottom line, we now expect earnings per share to be in the range of 258 to 262. We are raising our EPS guidance for the fiscal year driven by the strong top line momentum on both the P&G and Gillette businesses. The midpoint of the new range is up $0.03 versus the midpoint of our previous guidance, which is consistent with our over delivery in the December quarter. Included in this we now expect dilution from Gillette to be in the range of $0.19 to $0.23 for the fiscal year, at the low end of the previous guidance range. We are lowering our estimates for Gillette dilution for the year due to the better than expected top and bottom line results in the December quarter, and a good start on the integration program. We expect one time items associated with Gillette acquisition to be in the $0.09 to $0.11 per share range, in line with previous guidance and we continue to expect stock option expensing to be about $0.11 per share. Now to avoid confusion you should note that due to the change in the share count from the Gillette acquisition across the quarters, the fiscal year earnings per share will likely calculate to be $0.02 to $0.03 lower than the sum of the quarters. Now frankly, this frustrates those of us who like things to add up, but trust me, there are very specific accounting rules on this one that we are following. Turning to the March quarter. Organic sales, which exclude the impact of foreign exchange and acquisitions and divestitures, are expected to maintain strong growth in the range of 5 to 7%. With this, we expect the combination of pricing and mix to contribute about 1%, foreign exchange is expected to have a negative impact of about 2%. Acquisitions and divestitures are expected to add 17 to 18% of P&G’s top line growth for the quarter, which should result in all in sales growth of 20 to 23%. Turning to the bottom line, we expect continued pressure in the quarter from higher commodity and energy costs; we anticipate this being more than offset by volume leverage, pricing, cost savings programs, and the positive mix effect of the Gillette business. As a result, on an all-in basis, we expect the operating margin to be up 75 to 100 basis points in the quarter versus year ago. We expect earnings per share to be in the range of $0.58 to $0.61 for the quarter including Gillette. Gillette dilution is expected to $0.07 to $0.10 per share during the quarter. Now Gillette dilution will be higher than in the December quarter due to the seasonality of Gillette earnings and significant cost behind the Fusion launch. Excluding the impact of Gillette dilutions, we are estimating core P&G EPS to be up in the mid-teens, versus a strong year ago base period. This includes the impact of stock option expensing, which we expect to be about $0.03 a share, one-time items associated with the Gillette acquisition should be in the $0.02 to $0.03 per share range in the quarter. Okay, in closing, both P&G and Gillette have strong growth momentum. We continue to benefit from our balanced portfolio and robust initiative program. We are off to a good start on the Gillette integration. All of this combined gives us the confidence to raise our earnings outlook for the fiscal year. And now, A.G., John, and I will open the call up to your questions. Thanks Calyt, question and answer session will be conducted electronically if you would like to ask a question please tuning with us pressing “*”, “1” on your telephone keypad. If you are joining us today using the speakerphone please remember to release the mute future on your telephone before signaling to allow your signal to reach our equipment. And once again that “*”, “1”, to signal us if you have any question. We will pause for just a moment to assemble the roaster. First one, it sounds like the gross margin could be up beginning in the third quarter based on the cost moderating and some of the pricing that you are putting through, I just wanted to confirm that. And then, on the price mix, your outlook looks like it is moderating from the 2% you delivered in this quarter. Can you talk about that other than the US Baby Care? Any other, segments where pricing is not sticking and specifically on US Detergent and battery pricing, if you can comment on those? I think the gross margin might be up a bit, but I think most of the gross margin, most of the margin expansion, is going to be on the SG&A line. I think we are starting to lap some of the price increases that we took before. And so, the price mix I think is going to begin to moderate a little bit. And I think on the general question on pricing, I think except for the Baby Care situation in North America, which by the way, we rolled back part, not all, of that price increase. The price increases are going in pretty much as we had expected, and in batteries, as I think you know, there are a lot of contractual arrangements in batteries that suggests pricing comes in over an elongated period of time, and we are still confident that that is going to happen. Bill, this is A.G. If you step back and think about it simply, the consumer is still finding strong value in our brand and product line offerings at the new higher prices and the evidence for that is in the market shares. And in the US laundry business, our market shares are as strong as they’ve been in a long time and our growth is broad. And what I think is going on is, we’ve been consistently strengthening our strategies. We’ve been consistently strengthening our brand equities and executions and we’ve obviously been leading innovation, and that shows in the products. I think the same thing is going on in the battery business. I think the ‘trusted everywhere’ advertising campaign has clearly resonated with consumers. I think the Duracell brand equity is strong and I think they have done a superb job executing with our customers. I just wanted to clarify the slower sales growth that your guiding in the third quarter. Is that strictly just the comps, because what you quoted on the first shipment day of Fusion, it sounds like that will be a strong contributor in the quarter. So, I just wanted a… No, I think you are right. It really is mostly a comp issue in terms of lapping some things. You’re spot on. Just in terms of Gillette, I think when Mach 3 was launched, there was some fairly significant trade destocking ahead of the launch. And it looks like Gillette’s volume is pretty good. What’s different this time than the last time when Gillette launched Mach 3? Well, I think there has been some modest destocking, but of course, what we expect Fusion to do is to increase Gillette’s incremental space in the section. Yeah. I think a couple of things are going on. One, I think Gillette and P&G have been focusing on managing their inventories, and I think they have done better job, both of us have done a better job, of managing our inventories. So, we are in better position going into this launch. I think we are also, as we said, coming off from strong consumptions and strong market shares and M3 Power and Mach 3. So, it’s not like we are loosing steam on the previous generation of razors. And then as Clayt said, many of the customers, most of the customers are choosing to give us a little more space and strong display through the introductory program, because that’s in their interest. Thanks. And then can you just comment on developed markets outside the US? There are some signs nascent albeit, that Japan is starting to turn, and Germany is doing a little bit better. But France and U.K. are somewhat mitigating that. Is that kind of what you are seeing on the marketplace? I guess, really there are two questions. One is overseas markets and then the other is the developing markets. I think the headline in developing market is we’ve been strong, as Clayt said in his remarks, and consistently strong and balanced across all of the developing market. In Western Europe, we have enjoyed a good run in Germany. Our total Western European business is still growing mid single-digits on the top line and it’s fairly consistent. We have ups and downs in countries and in categories, but that’s just the ebb and flow of our initiative and innovation program and frankly, the ebb and flow of competitive activity. One thing that’s been much talked about over the last year or two is the discounter phenomenon. And we’ve actually, fairly, significantly increased our distribution in so-called soft discounters the liedels of the world over the last year and that has obviously strengthened our positions. Japan, as we’ve been reporting for some time, has been very strong market for us. I mean we’ve been growing near, at, or even above, depending on the period, double-digits on the top line. Our market shares have been improving. And I think that economy hasn’t been robust, but there’s some evidence that it is turning in the deflation that marks Japan for nearly a decade. There, you can actually see some pricing in certain categories. So, we still feel very good about Japan. What we love about Japan, is it is an innovation driven marketplace. And if you can lead innovation or bring distinguished innovation, meaningful innovation that consumers respond to, it’s good for your business. The last thing I would say is Korea has also picked up for us and we’ve had quite a good year in Korea. So I would say the international and developing market outlook, if you look at it on a macro basis, is pretty good right now. No, we are not changing our guidance for 2007 at this point. Really the dilution change you are seeing is strictly the better October/December results. First of all, can you just comment on, in a little bit more detail on this Western European diaper increase? How much? When does it go into effect, and which markets it is in? There have been price increases that we have taken, some of them list and some of them promotion reduction, in a number of markets around Western Europe and frankly, the details involve like Germany, up 6% this month, in the U.K. 6% was last October, and these are obviously, there’s announcement dates that are effective sometime later. And as I said before, there are some in terms of Spain we announced in the fall, but there’s also some pricing going on in the form of reduced promotion spending as well. So we’re taking them as we think we can get them around the markets, but in the same mid-single digits ranges that we’ve tried to price pretty much everywhere. Understood, okay. And just any comments on laundry pricing and whether you might move forward there? I know that is the one category where you cited where there has been some trouble taking pricing? Well we did raise prices in US laundry quite awhile back on several of the mid-tier brands, and at this point I think that was 8% where we went up about a year ago. And I think at this point that’s going to probably meet our needs, because effectively on Tide we have raised price, but we have raised price with all these premium price initiatives that we have been launching, as opposed to raising list price. Okay, through mix. Okay. And last but not least can you give us an update on the go-to-market reinvention and whether you have made any new progress there that you can share with us? Well, the go-to-market reinvention is of course part of our overall Gillette integration plan. And those plans are solidifying, and all I can say is I think there is a lot of excitement in the organization about the prospects for the program. I think in Spain, is that right was the first… We have started the test, We have started that test already in Spain. If you step back though, I would argue that what’s been driving our business consistently now for five years has been the choicefulness of the strategies, the focus on our core competencies, deep consumer understanding, leading innovation, building and strengthening our brand equities, and the fourth one has been the way we go to market and work with our customers. So we’ve been continuously improving the way we work across channels and with customers, and without going into all the details, we set goals together, we do joint business planning for a year to 18 months out. We look at joint value creation, how can we create more value, not just move the gross margins, but how we can create real value on cost, cash and importantly growth lines. And we’re doing a much better job of planning our initiatives out further. I mean what you’re seeing on Fusion on the Gillette side, what you saw on Prilosec a couple of years ago, what you’re seeing as our initiatives impact the marketplace, is much broader customer support and they are sticking with the innovation longer because they know it takes a little bit longer to build the trial rates and we are sticking with some innovations in the first, after the first year for two and three and four years, and they are still growing. So, I think there has been a continuous reinvention of the way we go to market because it is a core capability and it’s of course, strategic for us. My first question has to do with the Pharma business. You talked about Actonel still doing incredibly well from the market share standpoint globally. But it seems like when we look at the data in the US, the business has really begun to flatten, and in fact, lose share to some competition. Do you have plans, whether it’s from innovation or for marketing to step that back up? And secondarily, how sustainable is the growth overseas? Are you just growing because you’re entering new markets or is the competitive environment overseas different than the US? Well there, gosh, Wendy, there are differences market by market. But I would say, broadly, I think you’re aware that Boniva was introduced in the last year in the US. And that has clearly had some impact on the marketplace. And again, I won’t go into all the details, but I am sure you’re also aware that we have formally challenged some claims that they’re making, okay, which, at least based on all of our understanding is not supportable in their clinical studies. Having said that, in the US, we have stepped up our communication to doctors, because that’s the first place that you’ve got to go to make sure that they understand the differences between Actonel and the other bisphosphonates in the market. The second thing we’ve done is, we’ve stepped up our consumer programs and we’ve stepped up the work that we do with pharmacists and with customers. But if you step back, the post-menopausal osteoporosis market is still a very attractive one, and that’s really the way you need to think about it. The market is, this is still an under diagnosed, under treated disease. Given the demographics of Western Europe, Japan and the US, there are only going to be more women, and men, who will suffer from osteoporosis as they age, and who will need treatment, pharmaceutical treatment, and right now the bisphosphonates are the best alternative. So, we are going to have ups and downs as new products enter the market, but we think we can keep the share growing because we think we have a better drug. The potential overseas is good. The potential in Western Europe is obviously very good, given the demographics, and frankly, even in the US, our new Rx scripts were up in December. So, like I said, this is another case of you have ups and downs when there are new competitors who enter the market. But, the overall outlook in the foreseeable future, next 2 or 3 years is very positive. And the important thing is, this market’s been growing at a rate of 20% per year for several years. And even though it’s now a much larger market, I think it is still growing in the teens. So, we can still grow our business, even if our share flattens out for a bit, simply because there’s still pretty good market growth here. Okay. And then just aside from Actonel, in terms of other Pharma products in the pipeline, anything of note or anything that we should look for kind of over the next 12 months? Well I think it’s, I think the only thing we’ve talked about is we have re-engaged on Intrinsa with regulatory authorities in North America and in Western Europe, and I would say we are cautiously optimistic. Okay. Thanks. I just have one more follow up, just to clarify, when you’re talking about the Duracell and Braun business, you talked about strength, I think in the US, China and Latin America, but the overall business was only up 1%. So was Western Europe the shortfall, because I’m figuring something must of not been good to drag down the overall? Just I want to follow up on the Pharma side. Can you talk more about on the OTC distribution anything that could be coming up soon or your outlook there, especially with the success of Prilosec? Well, I guess, Jason, this is A.G. Again, I think our over the counter, or personal healthcare business has been pretty strong. We have obviously been strong on Prilosec. I think our market share on Prilosec is now up around 39%, and again, that’s a growing market, okay, the heartburn market. But we have also, I think, posted good performance on our other brands. Vicks has been very solid for us, ThermaCare has been growing steadily, Metamucil has been very solid for us. And this is another case where we step back and we have been focusing our strategies, looking at our portfolio, and picking our brand equities that resonate and have real trust with consumers, and focusing on those equities and then bringing a program of product innovation that meet their needs. So, I feel like we have got a good portfolio, we’ve got a good strategy and we have had very steady growth from this part of our business. Okay. And then, just changing the topic a little bit, just with the Fusion launch coming out, could you compare, I guess in terms of the spending behind Fusion versus maybe with, when Mach3 came out, not Mach3 Power, but Mach3, when that came out, and any differences there? Okay. Okay, fine. And then, I guess the last question, just the press release that came out about your involvement with nanotechnology has kind of piqued my interest. Can you elaborate a little bit more on that? Well, I think that, I don’t think there is any secret that a company like ours in the industries that we are in has been interested in biotechnology and nanotechnology for some time. They are both potentially transformative technologies. We are committed to innovation and innovation leadership, but we are in very early stages. Okay? We are in very early stages. And I guess the last thing I would say, is this is just another example of our preference for an open innovation system and our commitment to what we call ‘Connect and Develop’, which means identify inventions and new innovations externally and then work with external partners, whether they are entrepreneurs, inventors, research laboratories, universities, whatever. And this has been very powerful for us. I think last year, something over 30% of the initiatives that we commercialized were, had some partnership with some external party. And as we look ahead in the innovation pipeline over the next 3, 4, 5 years, we can actually see ourselves getting to 40 to 45% of what we commercialize would be with an external party. And our goal has been to get to 50%. And the reason we set that goal and at the time we set it I think we were running about 10 to 15%, so it was fairly stretching 5 years ago, but we set it because we wanted to change the mindset. We wanted to change the mindset, and we wanted to open our minds and open our doors to innovation. We are very good at developing, qualifying, and commercializing inventions, and I think that has worked for us. Very interesting. And just the last question and I will jump off, what was the share count at the end of the quarter? I know what the average was for the period. I think, John, I think in your comments you might have mentioned pricing in developing markets. I think it was maybe in the Baby and Family Care business if I got that right. Is this a new initiative, and is it more widespread than before just in general pricing and developing markets, excluding any kind of currency impacts that you might be pricing to mitigate? No, it is just, as in developed markets, John, it is linked to the underlying cost developments and what is happening in the marketplace. But stepping back, this is A.G. Stepping back, our primary focus in developing markets is one, delivering consumer value, and that means primarily affordability. Two, creating a capital and cost structure that is low enough so we can deliver affordability and deliver our margins and, as we’ve said before, our after-tax margins are very competitive and very satisfactory in developing markets. And then thirdly, it’s been on expanding distribution and frankly, expanding our brand portfolio and our product offerings. So I think there is still too many consumers in developing markets that we are not serving, certainly not serving on a regular basis, and that’s why we still think there is a awful lot of potential in developing markets. Got it, and then just one broader one. I wanted to ask sort of about the flip side of innovation I guess with Whitestrips, Classic, Premium, Premium Plus, Renewal, the Tide extensions, I mean these obviously bring sales growth and higher product margin, but is there any sort of unallocated offset with SKU growth like does revenue per SKU come down, and how do you manage that or even think about it? Like your garden. We try to weed, and it’s interesting because we want to be consumer off-take driven, and it’s another area that we obviously work very closely with customers. But there clearly is a cost of complexity. There is a certainly is cost of SKU proliferation and we watch it very carefully. And we do, when we justify any of these new initiatives, and the financials always include any incremental cost associated with additional SKUs. So is that something that would be meaningful, and if I know you would never quantify it or call it out, but I mean is it something that is clearly a negative to operating margin in general, I guess net of everything else that you have going on? Not really, because what you typically see is even though there is a modest increase in complexity, if you build the volume then the costs are fine. Now if you were adding a lot of SKUs, and not building your total business, then absolutely, the cost of complexity would start to get you. Yeah. The other thing I would say is that you have to sit back and look at the macro level and what we’ve been doing strategically. Our focus on our core businesses, our focus on the top 15 or so countries, which are, our core businesses, our billion dollar brands are about two thirds of our sales. Right? So those 16 or 17 brands, 22 now that with Gillette, we focus on them. We focus on the 15 or so countries that are like 85% of our sales, and we focus on our top customers. That focus, okay, drives a lot of simplicity and efficiency. So while we have extended some of our lines like the Tide line, like the Pampers Baby Stages of Development line, we have reduced the focus on the number of brands, and you have seen us over the last 5 or 6 years, we’ve divested a number of brands and we’ve just shut down some brands. So while there is some extension in the product lines on the big mega brands we have improved our simplicity and reduced our complexity in other areas. We just shut them down and we said no problem, we’ll take flat shares for a while. It’s worth it because the return is better. And I guess the last thing I would say is we’ve been very pleasantly surprised by how big these Tide extensions have become. I mean these are big brands in their own right, Tide with a Touch of Downy and Tide Coldwater and Tide with Febreze. Pretty quickly. The retailers were very anxious to get it on shelf and most retailers had already allocated the space and were ready for the trucks to arrive And we’re, Joe we’re, our first television advertising is going to break in the Super Bowl, so that’s what, about ten days after Yeah, 9 or 10 days from first shipment. I mean you can’t do better than that. And we’re not breaking advertising until it’s on the shelf, on display, ready to be purchased by consumers. Okay. And then in terms of the price gaps, it sounds like you guys are a little more comfortable this conference call than last conference call. Are there other areas or any areas that you guys need to address over the next six months, or it seems like you’ve got things pretty much covered? Well, Joe, we’re watching this continuously, and it is continuously changing, okay, because the marketplace is dynamic. But, we sort of have a fairly simple one-page matrix that has countries, categories and brands on it, and we know what our pricing strategy is. In almost all cases, we price at some premium or parity with the best branded competitor, and we just monitor whether we are in the range or not. And I would say at any given time, we run 85 to 90 plus percent in the range. It is hard to get it to 100% and hold it there, because of the dynamism in the market. But, if we can hold in the 85, 90, 90 plus range, that we consistently build our market shares. On that chart, if you are off price strategy, you’re a ‘red box’. And you don’t want to stay a red box too long. Okay. Fair enough. And then lastly, on batteries, I know John said that pricing is going up there. But I was just curious what drove your share gains, and if you’re doing any promotions in that category? Well, I think two things are clearly working, there is a fair amount of advertising, there is fair amount of evidence, that the ‘Trusted Everywhere’ campaign has worked for us, and we are doing an excellent job at retail, in terms of display, display productivity and off-takes. And those are critical, critical drivers for that category. And, Joe, as mentioned on the call, I think Clayt mentioned the fact that, as a consequence of some of the longer-term contracts, it takes a bit more time to see the pricing come through. If we look at the blade/razor margin, which came in using the numbers without the charges, about 43%, which is pretty far above trend, and you talked about some of the factors there. Can you give us a little idea as we look towards the Fusion launch, was that, was there spending, where you said you don’t want to, let’s pull back on Mach3 in front of the Fusion launch, or was advertising up at sort of the rate where you are used do with Gillette in terms of, how should we look at that 43% quarterly margin relative to what we are going to see going forward? I don’t think there was any kind of function, there was any kind of spending pullback in the marketplace. I think a lot of it is accounted for by functional, excellent spending at Gillette that was in the base period that was not in the currently recorded period. Okay. And then secondly, Clayt if you could talk about, when you talk about the ‘teens’ underlying EPS growth at Procter & Gamble, sort of realizing that is a non-GAAP measure, can you give us an idea in terms of what’s included or not included in that? Like, for example, is the repurchase included, et cetera? Well, I think what we did, no, we really and we would not include anything more than our normal repurchase in that. So, I am not taking credit for the Gillette repurchase. I think what we’re seeing is that as pricing comes in and as some of, we lap some of these commodity and energy cost increases, and some of these other things that are going on, that the core P&G business is going to get back to the kind of double-digit growth that we want to deliver. I was actually pleasantly surprised that you announced your first revenue synergies today. I was wondering if you could talk a bit more about the co-promotional activity that you have already run with Gillette? What was the trade and customer response like? What was consumer response like, and should we expecting more of these initiatives in the very near-term? This is A.G. you can expect more of these initiatives. They are literally being created and commercialized and executed as we speak. And I think this is one of the strengths of our market development operations and Gillette’s commercial operations group. We are agile, we are flexible, and were reasonably fast, bringing this kind of innovation to market. The other, the reason why I say you can expect more of this, is because there is a really good match on the Venus side, with a lot of strong P&G feminine Personal Care brand, brands like Olay, Pantene, Always, et cetera. We’ve been able to match up some of our brands with Braun obviously. Hair Care is a good match and frankly, we are doing these as fast as we can conceive of them, and as fast as we can qualify them, and as fast as we can execute them. And this is important because in the early stages of revenue synergy, we have two big opportunities. One is extending distribution, and we’ve talked about that before, which markets we can extend Gillette in the P&G distribution, and a couple of markets where we can extend P&G brands into Gillette distribution. And then its just all of this joint merchandising, joint promotion, joint marking work which we can do with existing brands and existing product lines. So those are sort of Phase I. And we weren’t particularly thrilled with the fact that it took us 8 months to get the deal cleared from an anti-trust standpoint, but we used those 8 months to do planning and to get some of these co-promotions scheduled and ready to go, so as soon as the deal closed, we got into action. That’s great. Just one follow-up question if I could on Colorants please because John, I think, mentioned in the prepared remarks that you have some nice growth in Colorants in the quarter, could you just expand a little bit on your initiative in that category because it sounds like that business might actually be reaching an inflection point? We actually had a good year of growth in Colorants. In the US which is our biggest market and Clairol’s biggest market, we’ve been growing sequentially versus year ago on a past 12, past 6, and past 3 months basis. There is sort of been 3 or 4 things. One is the Root Touch Up initiative. What we’ve done, if you step back and think about it strategically, and think about the consumer insights, without going in all the detail this at-home coloring is not a terribly pleasant experience and the good results don’t last very long. So we’ve been working on improving the experience and we’ve been working on improving the performance of all of the products that are in the kit, not just the dye but also the conditioners and treatments, where we make some of the best conditioners and treatments in the world. And we’ve been working on things like root touchup which enables you to touch up the roots in between colorings, and we have dyes and colors that match not just, not only our brands but also the most popular competitors colors and brand. Second thing, I think has been announced is our next round of initiatives, which is glazing. Third thing is we got Wella on going, specifically Koleston, which is probably one of the premier coloring equity in the world, and we have innovation coming there and on Wellaton. So it took us awhile because frankly, we had to get through the integration and frankly on the Clairol side, the cupboard was rather bare. But you’re going to see initiatives and innovations coming and you’re going to see much better co-ordination between the Clairol and Wella businesses. Hi, I had one question, couple of questions, first one just on the advertising spend in the quarter can you just give some sense what happened there? I was going to say, we tried to stay very consistently somewhere between 10 to 11% of sales. And I think this quarter we came in again between 10 and 11% of sales. And the key thing about advertising is the consistency of your advertising spending, and frankly, how smartly you spend it behind your copy alternatives and behind the media choices, which there are more of. Okay great. And then can you give me a sense of, just on the SG&A line it was just so much better than what I had expected, and obviously you probably knew that Gillette was lapping some of the functional excellence costs, and obviously had good volume growth, was there anything else in there? It’s really top line. I mean, your budgets for most of your SG&A items tend to be established, and so when you grow sales a little bit faster, you just get a real nice pick up. Okay. And then, one question just on Gillette revenue synergies in some of the developing markets. How quickly do we get to see some of the benefits of that, as you bring some of the Gillette brands into the distribution infrastructure you already have? Yeah. I mean most of the integration work in our MDO, in our go-to-market operations are occurring during calendar 2006, with the systems integration work, which is also a key enabler, happening more from mid-year 2006 into the early part 2007. And that’s consistent, Sandy, with what we had anticipated at this time we’ve announced some of the joint connections. So this is very much in line, but the execution, as Clayt mentioned in his comments, is going very well at this point. And then my final question, just in terms of the last quarter conference call, there just seems to be a lot of concerned about what was going on with the consumer and just the uncertainty on that front. Has the strong organic sales performance this quarter, maybe feel more comfortable about the US consumer environment? Yeah, in a word, yes. And I think as we said, if you think about when we were together last time, we had just had 1 or 2 major hurricanes, oil pricing was up, natural gas pricing was up. We had fairly severe shortages across a number of materials input. And we were going into a winter season that we didn’t know what it would be like. And we had taken a lot of pricing over the previous year and in that period. So, we are with the consumer everyday. I think we have a pretty good understanding of family needs and wants and concerns. And we are trying to stay really close, and we are trying to make sure that our brands and our product lines and our innovation, represents superior value for her, for him, and for family, and so far so good. Thank you. The Beauty Care profitability was just a little bit lower than I was expecting and you had mentioned some increase marketing investments. Are these the same types of things you had talked about last quarter, earlier, or there are some new things you are doing? No. It’s very much consistent with what we’ve said before. I believe the Beauty Care business was coming off an incredibly strong base period, 24%, 25% growth or something like that, it’s 28%, sorry I am low, in the base period. And a lot of this really just relates to the timing of initiatives, and it is absolutely nothing to worry about. We really do focus on profitability on the fiscal year, not the quarters in our business units and so, why your observation is spot on, it’s just simply nothing to be concerned about. Yeah, Linda, when you step back and look at over 3 years, 4 years, 5 years, 6 years, okay, the performance of the Beauty Care businesses, I mean Hair Care has had a phenomenal run and is still growing at a very high rate. Skin Care has had a phenomenal run and is still growing at a very high rate. In both cases, we are clearly leading some innovations. Power programs for the second half. And we touched on what’s coming on the fragrance side. We’ve got entirely new program coming on Cover Girl, it’s being sold in right now. Our colorants business is picking up, I mean SK2 is strong. This is a strong portfolio of brands and a strong portfolio of technologies and innovation. So, I am still feeling pretty bullish about that business. Okay. And can you just be more specific on the advertising and promo. Was the ratio in the base business up or down year-over-year? Oh that’s okay. And finally, I was just curious about your comment that in terms of the Fusion launch, the existing SKUs had retained more shelf space than in previous launches? I think the way to think about it is Gillette will have a stronger in-store, the total Gillette line will have a stronger in-store position. Obviously, the focus will be on the new Fusion items, but we are retaining, because when you’ve got M3Power the size that it is and growing at the rate it is, and Mach3 the size that it is and growing at the rate it is, they are retaining relatively more space then they did in the past. It shouldn’t. Because all we want to make sure is that if the consumers choose to stay in the existing Sensor or Mach3 line, those products are there for them. And of course, our intention is to try to move as many as possible up to the new Fusion systems. Because all the focus in the advertising, which is the awareness and trial generating activity and the whole sampling program is of course directed at the new Fusion products. Okay. And can I just ask one final thing about the Clairol brands that you discontinued, did you see buyers for those brands? Great, thank you. One thing I noticed in the commentary on Beauty Care that was conspicuously absent was Professional Hair Care. Could we get an update on what that did this quarter and kind of, what your outlook is for the next year? It’s been very, our Professional Hair Care businesses has been very steady. I think we are strengthening the innovation program in the salon business. We are expanding, slowly but surely testing as we go, directly selling to salons, which is the model that works for us in Western Europe and Japan and other strong markets overseas. We are increasing our education efforts, which are very important to salon owners, cutters, colorants, and stylists. And we are pretty much positioning ourselves strategically as the full service alternative in the industry, and that is what has worked for Wella, Wella professional colorists and stylists. Our position in styling is leadership in the industry, our position in coloring is number two, and we are obviously trying to strengthen those two pillars. Okay. If we break it up then, because it sounds like, I mean, expanding and testing the direct selling that is clearly in the US, and it already exists in Western Europe. So, is Western Europe growing or is it steady? And then in the US, then maybe a term while you are expanding…? The underlying growth rate in the industry has not been exciting, but it is slow and steady. And then we stay very focused on our top markets and frankly, we are looking at, at least an annual program. And I think you are seeing us bring a number of initiatives to market on the salon side, which they were not able to do when they were running independently, because they did not have as much access to technology and they did not have the financial wherewithal to do it. Okay. And just completing this on the US, as you are expanding and testing the direct selling model, has there been any disruption in the intermediate term for the business down in the US? And we just ought to say that where we have direct sales now in the US we are exceeding the sales growth rates of the previous model. Okay, great. The second thing was just to clarify on the guidance and then the comments about the quarters not adding up to the year? Because as I look at it, your guidance now for the second half of the year is $1.10 to $1.14, consensus is currently at $1.16, so how does that line up? And then, on this question of the quarters not adding up for the year, but have we already seen a $0.01 or $0.02 of that in the first half? Lauren, we’re going to need to get on the phone with you and we will take you through the whole thing, okay? Good morning. Just a clarification on the commodity outlook, as you look going forward the pricing that you have put in is now going to start to offset it where you are comfortable, or do you see something on the horizon where commodity costs, it will be, rather than be at whatever, are starting to ease, maybe six months out? Well, I think what we are seeing right now is a lot of these commodities are topping, all right? And there is still obviously a lot of volatility out there in markets. A lot of our raw materials are sourced off a natural gas feedstock stream and as you know, because of the mild winter, natural gas prices have come way down and are frankly, I think, well below what we would have expected them to be a few months ago. On the other hand, the flip side is oil is popped back up to the upper 60s and so, I think it’s not, the individual commodities are playing out on a month-to-month basis, but it again, most of the things we buy are as I say, you know, they are not dropping, but they are kind of flattening. Got it. And then I guess if you look on the price increases other than what you talked about today. Are there other areas where you see price increases or are you pretty much done for I guess this year? So, I, we never want to say we are done, okay. But, I think at this point we’ve taken the actions that are necessary to deal with the current market. I have a question about your guidance for the March quarter. If I take out what you, I am just using the mid-point of the ranges that you are talking about. And if I take out the dilution and the one-time items, it looks like EPS would be $0.71 in your guidance for the March quarter, up 20%. And if I do a similar adjustment for the December quarter, EPS was up 13 to 14%. Both numbers obviously are great, but why the acceleration in growth? Well, I mean you are, let me make sure I understand your question. You are trying to back out all the Gillette stuff, is that right? Yeah, but the one-time items, okay, okay, the one-time items are embedded in the Gillette dilution, right. So, you can’t add them. You just have to take a look at this Gillette dilution. If you back out the Gillette dilution, the $0.06 to $0.07 in OND October-November-December, and the Gillette guidance for Jan/March I think you’ll find that the OND quarter was, as we said, 8 to 10 and we are in the teens in Jan/March, okay? And why is the Jan/March quarter better, given the fact that you just said that Gillette will be spending more heavily behind Fusion again, which is fine. But what other factors, is it gross margin… Yeah, that’s, the Gillette Fusion spending is embedded in the Gillette dilution numbers and that’s why the Gillette dilution range, one of the reasons why, the Gillette dilution range is higher in Jan/March than it was in OND. Yeah, I think when it starts to annualize some of the increased costs that are in the base, the gross margin is not under as much pressure as it was in OND. So don’t forget we had that commodity spike which is obviously going to, it’s going to be a big factor in the sequential OND to JFM {January-February-March}. And then, another question is on, could you give us an update on the synergies? I know that they are not huge at this point but I think you planned something of between 250 and 300 million to come through this year? I think that’s high. I’d have to go back and check our numbers, but let’s put it this way. The synergies are coming in pretty much spot-on plan, and. for the current year. And now we’d have to call you back and confirm that exact number but… But, well, I’ll ask separately, I have one last question. And this goes back to batteries. I understand you probably will get price increases. Is there an offsetting shift in mix going on with those shift to the large size packs? There is a no question about the facts that the large size packs are a negative mix effect in the business. Thanks very much. Well, we appreciate your attendance and patience. As I think you all know this is a much bigger company and we are trying to be as succinct as we can in our comments. I think you’ve obviously seen good P&G and Gillette based business, lower dilution in the current year from Gillette and put some good numbers on OND, but also some pretty good prospects for Jan/March. So thank you all for joining us. And as I said at the outset, John, and Chris and I will be around to take questions for the rest of the day. Thanks.

EarningCall_233902

Here’s the entire text of the Q&A from Focus Media’s (ticker: FMCN) 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. First of all, congratulations Jason and Daniel on a fantastic first quarter as a publicly traded company. I have-- maybe just start with two questions. My first question is you've increased the cycle time in all of your Tier II cities from 9 to 12 minutes. Could you maybe discuss how the split between your distributors and Focus Media of those additional 3 minutes are going to be allocated in those cities going forward? The second question is about concentration-- actually; let me ask about ASPs. It's kind of a two-part question. Have we seen a bottom for your overall ASPs from here? You're going to be increasing your cap ex pretty substantially, or should we see that go down and then could you maybe give us, just tell us how the absolute pricing in Tier II cities is going? I realize its less than Tier I cities, but are we seeing a strengthening in Tier II relative to Tier II cities, say earlier in the year? Let me answer this question for Jason. We actually, when increased the cycle time from 9 minutes to 12 minutes on July 1st for all the Tier II cities, we did inform our franchise, our distributors that we are increasing the cycle time to 12 minutes. We encouraged them to follow our practice of increasing the cycle time from 9 minutes to 12 minutes but it's their discretion, so many of the-- several of the distributors did increase the cycle time to 12 minutes and some of the distributors actually still operate 9 minute cycle. For the distributors which have increased the cycle time from 9 minutes to 12 minutes we share 2 of 9, so it's proportionately to Focus Media as free minutes so we can sell on their network, so if that answers your first question. And for the second question regarding ASP. Let me answer that question. If you see the Press Release we put out, this press release we specifically provided information for the Tier I cities and Tier II cities. As you see for the Tier I cities, the ASP in the third quarter of 2005 actually increased by 7% to approximately $9,115 U.S. so if you see, that is partly due to the high utilization rate, also due to the price increase we put in effect on July 1st for the Tier I cities. So for Tier I cities we expect to continue to see the trend of ASP moving in the positive direction, as we have also implemented-- we have announced that we have another price increase starting from October 1st, 2005. So for the rest of the Tier II cities, as you see the ASP actually lowered, but if you look at capacity rate you can find the absolute increase of time slots are from the Tier II cities are much more from the absolute increase of time slots sold in third quarter of 2005 from Tier I cities, so because we're selling more time slots in the Tier II cities because the average selling price in Tier II cities are lower, so that's why our blended ASP actually went down in third quarter. Going forward, we think-- at this time Tier I cities contribute 66.7% of our total advertising service revenue for the commercial location network. We think going forward you will still going to see Tier II cities will increase the revenue contribution to the commercial location network going forward. However, for the Tier I cities and both Tier I cities and Tier II cities, as you see we have continued to have pricing power. We've been able to continue to increase our price, so we think for each of those sub segments you will see pricing increases going forward and we'll be able to achieve higher ASP. Just looking at the absolute dollar of-- we'd be able to achieve on the second tier cities, that's actually varies widely so you can have a city, which-- well in the major cities if you can see actually our rate card is on our Web site. You can see more of the major cities in the Tier II cities can be at the same price. It's very close to center in terms of price, but there you can see maybe another less important Tier II city, or a Tier II city we just start the network that the advertising rate locally is maybe only one-fifth or one-sixth of Shenzhen, so it's a huge discrepancy between Tier II cities just because that's how Chinese economy is and it also depends on how big the city is, how mature the network is and how local economy well being of that particular city, so you can get all the rates for all the cities from our Web site and discounts apply similarly. Daniel, I think what I'm trying to get is the equivalent of a same store sale number in let's say a retail context, which would be take a major Tier II city, well take any Tier II city and compare it to itself say in Q, the pricing you were doing in Q1 versus the pricing you're doing now, so not within the high and low of the overall Tier II, but a specific city. Are we seeing strengthening in individual cities? Is it flat or are we seeing any weakening in individual cities in the second tier? Okay, I'd like to make a couple points. First of all, you see in this quarter Tier II cites overall contribute a higher percentage of revenue versus the previous quarter, so the previous quarter Tier II cities contribute about 30% of our total revenue and this quarter they contribute 33% of the total revenue or advertising service revenue in commercial location network, so overall the Tier II revenue, as percentage of total revenue is increasing, so the revenue contribution over there is strengthening. And also we do see significant pickup of advertising demand from major advertisers who are more interested in focusing on the major Tier II cities, so that's why if you also can see is we have implemented a price increase on October 1st for some of the-- even for some of the major Tier II cities the price increase is more significant versus the Tier I cities, so hopefully that sort of answers your question that way. Congratulations on a good quarter. Two questions, first question in regards-- along the way was the first tier city ASP, I believe on July 1st you increased your rate card by 10% and the effective increase coming out for ASP turns out to be only 5%. I'd just like to understand. Is this because of partial implementation during the quarter because you are using an inventory using the old rate cards, or is it because you're offering deeper discount? That's why the effective increase is lower than the rate card increase? That's the first question. Let me answer that first question very quickly. This is because for the contract we signed with advertisers prior to July 1st, we have to keep the original advertising rates, so that's why those contracts, as you see, on average our advertising contracts are 8 weeks or 12 weeks, so and also the Tier I cities they in the second quarter was sold near capacity as well, so typically the advertisers would sign a contract with us 2 to 4 weeks ahead of broadcasting of the advertisement. So of course there's a delayed effect of price increase on our revenue, so also that we have discussed with the Streets that the price increase of October 1st will also have a delayed effect because due to it's for the reason. So in terms of this delay would it be somewhat similar, which means that in this case on July 1st then you got 5%, that means that there's basically about 6 to 8 week delay? Is that a good assessment? Yes, that's a good assessment, but I don't want to sort of imply that October because will it have the same absolute same effect because the October price increase is actually is larger versus July 1st and I do want to be a little bit more conservative on that. Congratulations on a good quarter. This is Paul Beaver for Safa Rashtchy. Regarding your guidance that you provided for the fourth quarter, does that include the Framedia acquisition and can you also just go over the guidance that you did provide when you had your-- when you announced the Framedia acquisition? Okay, this guidance does not include Framedia acquisition because Framedia consolidation will start-- we expect to close the transaction December 31st, 2005, so Framedia's financials at earliest will be consolidated into Focus Media's number starting from next year-- beginning of next year, so that does not include Framedia acquisition. And then your second question was the Framedia guidance? Okay, we actually have not provided Framedia guidance on the call for the Framedia acquisition. Framedia, we expect that business to in terms of-- you can sort of read from the acquisition structure. If you see the acquisition PE was 11 times US GAAP EPS, then if you see the minimal and maximal, sort of there's and indiscernible with a minimal of 88 million, so this sort of gives you a sort of rough estimate in terms of how we look at Framedia can contribute to our business going forward, but we will provide guidance for the consolidated entity Focus Media plus Framedia on the next conference call for the fourth quarter of 2005. Framedia has similar margin. Their gross margin-- look at their current business. Their gross margin may be slightly lower than our commercial location business, but their operating margin is-- their operating expense is also lower, so on the operating level we think its Framedia has similar margin as Focus Media. Yes, gentlemen, congratulations on a good quarter. Just another question on Framedia, do you expect to be able to cross sell advertisement on both forms of media, or are they going to be-- is there some risk of cannibalization? Jason said, basically if you look at Framedia, their advertising business is more focused on the residential building complex and for Focus Media we're more focused on the commercial area, so for any advertiser they look at potential target audience. Residential and commercial are the two areas which are most important and which they need to cover absolutely, so for Focus Media or Framedia each of our sales team approach advertisers. If we can offer an integrated solution to allow to provide the advertisers ability to target audience both in the residential area and the commercial area, that actually is a very effective and powerful from an advertisers point of view, so we believe actually combining the residential Framedia network and the Focus Media commercial location network it's very effective to attract advertisers to this media platform. And also, on the other hand the second point Jason made is if you look at many of the advertisers we have relationships with, they also have non-digital budget, so they not only-- you know they use their TV commercial on the Focus Media network, but they have other form of commercial in place somewhere else and by providing the venue to advertise through Framedia's network and residential area, so we can actually get to the other part of the advertising budget. So this actually shows by consolidating multiple media it gives Focus Media more, let's say, power or makes Focus Media more important in front of our advertising clients and also in front of advertising agencies. So we believe actually the effect that Framedia will have a significant media synergy with Focus Media's current business and we believe this is going to be a positive impact on the business, rather than any cannibalization. Congratulations, two questions. First question, just continuing with a previous question, you mentioned that there might be a 4 to 6 week delay in terms of the contract pricing, so you have raised the price by pretty big rate beginning October 1st, so I mean the ASP looks like it should be growing by 20% in the fourth quarter, but your guidance pretty much assumed the same growth rate on the revenue side. Are you conservatively assuming that you're not expecting the time of slot to increase? Okay, Ming, a couple points. First of all, the price increase we implemented on October 1st for the pier 1 cities is only 20%, but only for selected Tier II cities there's 30, 40%, so that's-- and all-- in some of the Tier II cities actually the increase is less, so let's first of all clarify that point. Second, in terms of the delay effect, the advertising contracts are typically 8 weeks or 12 weeks, not 4 to 6 weeks and typically when advertisers-- they sign contracts. They need to sign contract maybe 4 weeks ahead of time for the broadcasting or the advertisement and typically when there's a price increase they will tend to sign before the price increase, so they can lock in the lower rate, so it's I would say the ASP estimate of, you know, based on your knowledge is maybe a little bit too aggressive. We think the Street analysis is more reasonable. Okay. The second question about your accounts receivable, it's increased significantly this quarter. Could you give us some comments on the accounts receivable and particularly do you have customers from the local handset makers who recently have reported some bad numbers. Is that the reason we should be worrying about? We actually don't see any unusual signs from accounts receivable. Accounts receivable actually increased proportionately with revenue. Our DSO is still at 75 days and typically you see in China is, you know, some of the accounts receivable will actually get collected before end of the year more likely and we don't see any specific accounts receivable problematic from local handset manufacturers because keep in mind in Focus Media network in terms of time slots right now it's in a very high demand, so people if they think this is a very important media they need to pay us because otherwise if they delay their AR payment then they won't be able to get on the slot, so this is something we think we have more leverage with our customers and so far we have not run into any accounts receivable problems. The accounts receivable problems with our advertising clients, at 75 days between 50 to 90 days is very typical in China as an industry norm. Congrats on a strong quarter. Just in terms of your advertising clients, you increased the number of new advertising clients quite significantly during the quarter; can you give us some color in terms of what core cost sectors are they coming from and the split between local and international? Thanks. Sean, to answer your question here. For the advertisers we added in the third quarter it's approximately 50/50 in terms of domestic and international split and in terms of the sectors where the advertisers are from we actually didn't notice a sign of increasing of fast moving consumer goods advertisers, even not only for the in-store network, which is pretty obvious, but also for the commercial location network. That is probably the reach of our network is being recognized as adequate or as sufficient for those consumer, fast moving consumer goods advertiser, brand advertisers the major brands. For example, Colgate, the toothpaste and also the detergent from P&G and we did-- we actually have them major fast moving consumer goods to advertise our Focus Media network because they think the reach of those Focus Media network has reached a level, which effective for their advertising strategy. A couple of questions here-- first of all could you give us a little bit more granularity in terms of Tier II? You've expanded into a number of cities, maybe break it down between Tier II through tier three and tier four through six and any numbers you could give that would be great. Tier II growth in China you know it's a very, very, let's say diversified country so the Tier II cities currently we have 23 city wide networks and 4 of them are Tier I cities so Tier II cities are 19 of them. If you look at the 19 Tier II cities, there are approximately 5 or 6 cities which are more significant contributors to our business versus other cities, cities such as major proper venture capitals like Nanjing, Chengdu, Shenzhen, and Changzhou. These cities are very, very important in terms of contribution to our business but there are many other cities if you look at a map such as some of the let's say Kunming, or some other cities which are less important for in terms of revenue contribution. This has to do with a few factors. First of all it has to do with how big the city is. Advertisers look at the population of the city, the economy, local economy, at the welfare of the city and also in terms of how long Focus Media has been there. It's because if we've been there longer so we build advertising client base and it's more accepted the advertising network is more accepted by the local media, local advertisers, so all those factors contribute to the revenue contribution of any particular Tier II city. So if you do want to sort of-- I think probably to answer your question directly, the easiest way to look at it is the rate card we have on our Web site. So if you look at the rate card, the rate card basically shows the different rates we apply to each sub group of Tier II cities. So for Tier II would you say the top 6 in Tier II is maybe 80% or 70% of revenue or--? Yes, I would say the top Tier II cities contribute maybe 60-70% of the Tier II city revenues so it's very similar to how Tier I-- if you look at the Tier I contributes 66.7% of the revenues. Okay great and the second question is on the in-store you said your customers were very pleased with the feedback. How exactly are you or they measuring that? This very similar to our previous experience with the commercial location network. Advertisers, they typically what they do is they spend some money. Then they will engage a third party or their internal people to do market research. The market research is basically-- you know one of the very typical market research is they send people to do surveys of traffic in the store in terms of the recall rate of the ad, in terms of and also they look at the improvement, the impression or the image of their brand and also they look at the same store sales. There are many, many different ways they look at the effectiveness of advertising with Focus Media's in-store network. Once they complete those research, sometimes they share with us those research and they come back to us. They want to spend more money so that's our advertising with Focus Media's in-store network. So we have seen the research feedback from our advertising clients are very, very positive so we are actually very happy to see those results. Okay and then just the last quick question, could you just give us a sense, an update on sales direct versus agency? Congratulations with a very good result. I have a few questions. First one you mentioned demand for your indiscernible is very high and my question is that because clients are waking up to your advertising format or it's because generally the advertising environment is quite healthy? Well it looks like you said demand in Tier I is high and that demand in Tier II cities are picking up so my question is regarding the general advertising environment. Are the people spending more with you, cut spending say with the other medias? I think overall if you look at all the research data that overall advertising environment in China is positive. It's growing. The advertising market is growing at 15-20% based on a number of different attributes by market research firms. The specific segments may vary so overall we operate in the LCD out of home audio video segment. We believe our segment is growing very rapidly and the advertisers see the Focus Media as a very, very important complimentary network versus TV so Focus Media provides our advertising clients a way to reach their target audience during the daytime at various locations versus TV, typically seen at nighttime and at home, and also given the increasing of pay channels or cable channels and given the increased penetration of the Internet, people are watching less and less TV. So we do see for out of home this particular segment where in we think this segment is a demand extremely strong. But I can't speak for the rest of he specific segment but overall China advertising industry is growing. Okay the other question is you know you did the two small acquisitions in the third quarter and also you signed up two distributors too. What's the revenue contributions from these acquisitions and distributors? Very small. If you overall the two distributors would if you think-- let me talk about two distributors. The two distributors once with our distributor agreement, they have to apply for local business license. Then they have to spend money to set up their network, to install the machine before they can sell advertisements so typically there is a six-month lagging effect before they actually can contribute or generate any revenue and for distributors their revenue is not consolidated with Focus Media. It's their own investment. It's their own network. We only get 2 minutes out of the 9 minutes advertising cycle for free so it's almost nothing. So for the two acquisitions Signal acquisition was the acquisition of their lease contract so we basically acquired their building and for Shengyang it's a regional distributor originally a part of Focus Media's network. We consolidated that business into ours so both of those acquisitions doesn't contribute meaningfully to our business. Okay so in that way for the fourth quarter guidance basically if there are any more acquisitions like this, that will not be contributing much either? There was an earlier question regarding cannibalization and the Framedia acquisition. I want to maybe ask the other side of that, which is considering the cross-selling opportunities. Could you maybe discuss the size of the Framedia sales force and whether you're currently training your sales force to sell Framedia in advance of the closing and also comment on will your distributors in your network in your Tier II cities also be selling the Framedia product going forward after the beginning of the new year as well? Thanks. I will get your answer to the question. Just give me a minute. Jason, this is the answer to your question hopefully. First of all we actually are working at the time very closely with Framedia sales marketing team. Their sales people are about 200-300 people and we actually have our-- internally Focus Media has our own training department and our department actually, including Jason himself, is heading there this week to provide training to Framedia sales and marketing team. And also our internal media circulation such as our Focus Media Media Weekly and also our on-line education platform is also open for Framedia sales people to learn of our business and for them to bring up the level of their sales marketing team. To answer your second question regarding the distributor on whether its readers are selling Framedia. Framedia business mostly at this time are focused on Beijing, Shanghai, Guangzhou and Shenzhen and Nanjing and Wuhan. That's their current network so there is a very-- you know all those networks are part of Focus Media's directly owned network so we don't think the distributors will actually be part of that because Framedia has not expanded to those cities. That is actually Framedia's strategy going forward. I think their strategy first of all is to penetrate before they continue to expend their penetration in Tier I cities, which is Beijing, Shanghai, Guangzhou, Shenzhen and Wuhan and Nanjing. Those are their major cities and also part of this strategy is to expand to more important Tier II cities but still I think I have actually answered this particular question in the Framedia acquisition call. If from Framedia's strategy point of view, they have partnerships or they have relationships with over 20 smaller Framedia type operators in less important individual cities so they have access to those inventories at their attractive price so if they need to enter those cities they actually have-- they don't have any fixed costs. They can buy inventory from the local operator in those particular cities, which at this time Framedia believes that strategy is very, very cost effective for them. So in the future Framedia as the business continues to grow and the first city penetration reaches its peak, Framedia may consider to expand into additional cities beyond Beijing, Shanghai Guangzhou, Shenzhen and Wuhan and Nanjing and those strategies have not been finalized at the time. Thank you. That concludes today's taped conference on our third quarter 2005 results. We look forward to speaking with you again next quarter. 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_233903

Good afternoon. My name is Eduardo and I will be your conference facilitator today. At this time I would like to welcome everyone to the Hollywood Media Corp. Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time please press star, then the number one, on your telephone keypad. If you would like to withdraw you question, please press the pound key. Thank you. It is now my pleasure to turn the floor over to Jeff Stanlis of Hayden Communications. Sir, you may begin your conference. Jeff Stanlis: Thank you and welcome everyone, to today's conference call regarding Hollywood Media's 2005 Third Quarter Financial Results. Today's press release announcing these results is available for viewing on the Investor Relations section of Hollywood Media's website at www.hollywood.com. On the call today is Mr. Mitchell Rubenstein, Chairman and CEO of Hollywood Media Corp., as well as Laurie Silvers, President of Hollywood Media. At the conclusion of the call, there will be a short question-and-answer period. At this time, I'd like to turn the call over to Mr. Brian Walsh, Associate General Counsel of Hollywood Media to read a cautionary statement about forward-looking information. Brian: Brian Walsh: Good afternoon. This presentation may contain in addition to historical information forward-looking statements within the meaning of federal securities laws regarding Hollywood Media. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may cause actual outcomes to differ materially from outcomes reflected in forward-looking statements. Potential risks include the company's ability to manage its growth and integrate new businesses, the company's ability to develop and maintain strategic relationships, the company's ability to compete with other media, data, and internet companies, technology risks and risks of doing business over the internet, the company's ability to maintain and obtain sufficient capital, its ability to realize anticipated revenues and cost efficiencies, governmental regulations, volatility of stock price, and other risks described in Hollywood Media's filings with the SEC including its Form 10-K report for 2004 as amended. The Form 10-K for 2004 includes a listing and discussion of various risk factors in the business section in Item One of Part One, and can be accessed through the investor relations section on Hollywood Media's website at hollywood.com or from the SEC's EDGAR database as sec.gov. Because forward-looking statements are subject to such risks, we caution you not to place undue reliance on any forward-looking statements. Forward-looking statements during this presentation speak only as of the date of this presentation. All oral or written forward-looking statements by Hollywood Media or persons on its behalf are qualified by these cautionary statements. Mitch: Mitchell Rubenstein: OK, thanks, Brian. The third quarter of 2005 was successful on a variety of levels. First, we recently introduced our completely redesigned Hollywood.com site and the response from consumers has exceeded our most optimistic expectations. We expect this will benefit our ability to drive future ad sales. Second, we continue to grow revenues and announced strong, double-digits results. It's important to note that the third quarter is traditionally slower than the second quarter and certainly slower than the fourth quarter as the second quarter includes the Tony Awards, which is the driver for our Broadway Ticketing position, and the fourth quarter holiday season always drives stronger Broadway ticket sales. Finally, we began to see the initial benefits from our efforts to reduce expenses. The company had positive operating cash flow during the third quarter 2005 of $127,000 versus negative operating cash flow of $1.9 million in third quarter 2004, and the 17.5% narrowing of our operating loss. In the second quarter's call, we discussed our ongoing initiatives to reduce our SG&A. We expect to accelerate this positive trend as our other cost reduction initiatives come online, and this should be evident in our fourth quarter results and our results in 2006. As an example of our cost cutting, we are estimating that expenses for accounting services and consulting fees in fourth quarter 2005 will be approximately $1 million less than those same expenses in fourth quarter 2004. Our goal for our Broadway Ticketing division was to generate more than $80 million in ticketing revenue for 2005. For the first nine months of 2005, we have $60.9 million in ticketing revenue and are on pace to achieve and surpass the $80 million revenue goal for this division, especially since our fourth quarter is typically one of the strongest in terms of ticketing revenue. Already through September 30, 2005, our ticketing revenue is up 54% year-over-year. On a consolidated basis, our company-wide revenue through nine months of 2005 is 99.7% of the total revenue for all of 2004, putting us on pace for a record year in revenue. Let me provide some specifics on our third quarter results. Net revenues for the three months ended September 30, 2005 increased 52.7% to $23 million compared to $15.1 million for the same period of 2004. Total operating expenses increased 40.5% to $25.4 million from $18.1 million for the same period last year. The company's SG&A expenses decreased 11.8% to $2.6 million compared to $3 million last year, a benefit from improved efficiencies and cost reduction initiatives. Total operating expenses as a percentage of revenue decreased 9% quarter-over-quarter. The company's positive operating cash flow in the quarter was $127,000 compared to negative operating cash flow in Q3 '04 of $1.9 million. The net loss for the third quarter of 2005 was $2.5 million or $0.08 per fully diluted share based on 32 million weighted average shares outstanding, compared with a net loss of $4.8 million or $0.17 per fully diluted share based on 28.3 million shares for third quarter of last year. The loss included depreciation and amortization expenses of $600,000, our burn on Hollywood.com Television of approximately $200,000, and $100,000 on a new accounting system which we expenses this quarter. Now I'll discuss the financial results of our different business segments. During the third quarter of 2005, our Broadway Ticketing business delivered a 63% revenue increase to $18.9 million compared to $11.7 million last year, driven by 87.2% growth in Broadway.com and 1-800-Broadway Ticketing revenue, and $309.3% growth in high margin hotel package sales. We are very pleased with these results. We continue to see strong conversion rates which measures the ratio of visitors to purchasers of tickets. Deferred revenue relating to Broadway Ticketing, a leading indicator of future Broadway Ticketing revenues, was $15.8 million as of September 30, 2005, up 82% as compared to deferred revenues as of September 30, 2004 and up 39.3% compared to the $11.4 million on December 31, 2004. Our third quarter 2005 gross margin in the Broadway Ticketing division was 12.9%, up from the 12.3% for second quarter 2005, and also up from the 12.5% for third quarter 2004. Now I'll discuss the financial results of our different business segments. During the third quarter of 2005, our Broadway Ticketing business delivered a 63% revenue increase to $18.9 million compared to $11.7 million last year, driven by 87.2% growth in Broadway.com and 1-800-Broadway Ticketing revenue, and $309.3% growth in high margin hotel package sales. We are very pleased with these results. We continue to see strong conversion rates which measures the ratio of visitors to purchasers of tickets. Deferred revenue relating to Broadway Ticketing, a leading indicator of future Broadway Ticketing revenues, was $15.8 million as of September 30, 2005, up 82% as compared to deferred revenues as of September 30, 2004 and up 39.3% compared to the $11.4 million on December 31, 2004. Our third quarter 2005 gross margin in the Broadway Ticketing division was 12.9%, up from the 12.3% for second quarter 2005, and also up from the 12.5% for third quarter 2004. Now I'll discuss the financial results of our different business segments. During the third quarter of 2005, our Broadway Ticketing business delivered a 63% revenue increase to $18.9 million compared to $11.7 million last year, driven by 87.2% growth in Broadway.com and 1-800-Broadway Ticketing revenue, and $309.3% growth in high margin hotel package sales. We are very pleased with these results. We continue to see strong conversion rates which measures the ratio of visitors to purchasers of tickets. Deferred revenue relating to Broadway Ticketing, a leading indicator of future Broadway Ticketing revenues, was $15.8 million as of September 30, 2005, up 82% as compared to deferred revenues as of September 30, 2004 and up 39.3% compared to the $11.4 million on December 31, 2004. Our third quarter 2005 gross margin in the Broadway Ticketing division was 12.9%, up from the 12.3% for second quarter 2005, and also up from the 12.5% for third quarter 2004. Our internet ad sales division recorded $874,000 in sales during third quarter 2005, a 69.7% increase from $515,000 in third quarter last year. Most importantly, the top to bottom redesign of the Hollywood.com website successfully launched last month, and we expect it will further drive additional ad revenues in this division as the much expanded functionality enhances the user experience, including the ability to access detailed information on movies, TV shows, and entertainment events. Time spent on the site per average user has increased substantially since this launch, and with the additional page impressions, we will have more add placements available to sell to advertisers. And with more available ad impressions, we'll have greater capacity to participate in more and larger ad campaigns. The new Hollywood.com website offers consumers a variety of new functions and improvements, including exclusive broadcast and user blogging, intelligent search, deeper database information, and vastly expanded editorial content, news and features. Turning to Hollywood.com television, we added Bresnan Cable as the new regional MSO during the quarter, bringing the total number of MSOs carrying Hollywood.com Television to seven. The channel is being offered to approximately 14.5 million subscriber homes or approximately 80% of the total universe of cable TV, free video-on-demand enabled homes within the U.S. as compared to 7.8 million subscribers as of September 30, 2004, which is an increase of 86%. We are on track to meet our stated goal of reaching approximately 15 million subscribers by year-end, and over 20 million subscribers during 2006. Our intellectual property division had revenues of $317,000, down 42.8% from $554,000 in third quarter last year. The publish industry has been sluggish lately, and this has affected our growth since this division creates book projects, which it then licenses to publishers. Regarding company-wide results for the nine-month period ended September 30, 2005 net revenues increased 47.7% to $72.8 million compared to $49.3 million for the same period of 2004. Total operating expenses increased 45.3% to $80.6 million from $55.5 million for the same period last year. The net loss through September 30th, 2005 was $7.5 million or $0.24 per fully diluted share, based on 31.3 million weighted average shares outstanding, compared with a net loss of $7.7 million or $0.28 per share for the same period in 2004, based on $27 million weighted average shares. Turning now to the balance sheet, Hollywood Media completed the quarter with $2.9 million in cash and cash equivalents, and $2.5 million in accounts receivable compared sequentially to cash and cash equivalents of $3.2 million and accounts receivable at $2.4 million as of June 30, 2005. Shareholders’ equity was $43.1 million compared to $47.1 million as of December 31, 2004. Our cash position was only slightly less at September 30, 2005 compared sequentially with our cash position on June 30, 2005. The small reduction in cash relative to our net loss is partially a function of advanced sales of Broadway tickets, which occurred during the third quarter of 2005 but are not yet booked as revenue as we recognize revenue once the before it occurs. Our cash position has historically increased in the fourth quarter and we believe our current cash position will be sufficient to fund operations throughout 2006 based on anticipated financial and operational results. I'll now turn the call over to Laurie Silvers, the President of Hollywood Media, who will discuss some of our many operational developments. Laurie. Laurie Silvers: Thank you, Mitch. As I discussed last quarter, we are focused on several initiatives to streamline our business operation and reduce expenses. These are well underway and I'd like to provide an update now. First, as the information systems reason out the following on October 1st we installed a new accounting system which will enhance our internal controls. Also, we have licensed the new Broadway Ticket information system. This new and advanced system is being deployed in a test environment and it will substantially improve the efficiency of our processing while eliminating a signifireducing labor cost. Our next major initiative involves replacing significant aspects of our data entry and IP services through offshore outsource providers. We now have an outsourced IT team in place in India and this is already starting to show cost benefits, which, when combined with off-shoring parts of our data entry processing for our data business, is anticipated to result in approximately $1 million in cost reductions during 2006. This will also have the added benefit of enabling our businesses to scale more quickly and cost effectively to meet future expected growth both in the U.S. and abroad. The IT team in India contributed significantly to the back-end development of our new Hollywood.com website. Finally we have greatly reduced our auditing and SarbOx consulting fees and the full effect of these statements will be evident in our fourth quarter results. As Mitch noted, we are estimating that expenses for accounting services and consulting fees in the fourth quarter of '05 will be approximately $1 million less than those expenses in fourth quarter of '04. Turning to Movietickets.com in which we own a 26.2% equity interest, we now have agreements to handle online move ticketing on an exclusive basis for 61 exhibitors, up from 32 a year ago, an increase of 90%, and we continue to explore strategic opportunities for the Movietickets.com. Looking at Hollywood Media as a whole, we have demonstrated continued strong growth so far in 2005, and we're poised for a record fourth quarter and a record year of revenues. Coupled with our cost reduction initiatives, we are excited about the company and its future earnings potential. « Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »

EarningCall_233904

Here’s the entire text of the Q&A from Sony’s (ticker: SNE) Q2 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. Ladies and Gentlemen if you wish to ask the question please keep on your touch tone telephone. If your question and answer has been answered or you wish to withdraw your question please press “*” follow by “2” please press “*1” to begin the end and gentlemen please stand by for your first question. First of all, we would like to an email question to start proceeding, the question is about the PS3. How many video game consoles are currently in development for PS3? First party Sony and third party? Well as we know the given little of things you know varicose varies from time to time. So I would like to just introduce the Japanese market. Sony Computer entertainment of course internally developing several titles for PS3, a new title for the Gran Turismo series. As you may know in the Tokyo game shows that we had about 500 titles in our developments for the Japanese market. And also about 70 software maker companies committed to develop for the Japanese market for the moment. So when those figures are available for other market and of course I would like to introduce you from. Thank you. Thank you very much Mr. Yuhara. I would like to move to one more email question, this is the question regarding restructuring of Sony BMG. The question is, when will the restructuring charges at Sony BMG come to an end? We had a very successful integration between the BMG Music Company and Sony Music Entertainment with accumulating over $400 million worth of cost savings that we enjoyed over the next year. In terms of restructuring I think, this fiscal year for Sony the vast majority of all restructuring cost would be behind us, there could be a small amount next year but predominantly the bulk of it will be done this fiscal year. With respect to MGM, the integration between MGM, MGM operating as a virtual studio leveraging the Sony Pictures, that is the infrastructure for theatrical distribution and home entertainment. Distribution is going very well and we are very excited about the progress we’ve made there. Again like as with Sony BMG, we would expect that the vast majority of that restructuring be behind us in terms of cost by the end of the fiscal year as well. Hi, thank you I have a couple questions actually and I just can’t ask them all at one time. (1) I was just wondering if you could elaborate on the comment that you are airing on the cautious side, for the second half, just wondering if you are seeing anything in market condition in terms of pricing in electronics that makes you cautious and do you think you can hold your current market share and (2) the network Walkman launch, if that product is successful can that return the audio business to profitability and maybe just for more question for Rob, just wondering that with the marketing expense in the second quarter impacting the film division, will there better profitability in the third quarter a result of those firms being in the market and are having the market cost behind you? Thank you very much. I just answering your first question about the year end focus. And you know as we just announced this list in Tokyo, we have the second quarter results was better than what we anticipated in a global as well as the disclosure of the favorable difference. However, and we are just looking out to consolidate on the second half business particularly the Christmas and the year-end sales is a very weak, the business as far as cover on returns very important. Therefore we are very much anticipating those this season sales, however and we just can see those results, they are coming in January, so therefore this is just our collective look in this business for the third quarter onwards. If there was a question about marketing cost this year for the quarters and Sony’s Picture performance, was below our internal expectations driven largely by the wish dealt in a couple of films that we did not, get to where we really hoped it to be, while all of those the marketing cost are behind us, we really do have a full slate ahead so I don’t think there is going to be necessarily a breather in terms of expenditure but hopefully these films performed better, we are very excited about “Memoirs Of A Geisha”, “Zorro”, “Zathura”, “Fun with Dick and Jane”. So on the cost side we will, I think there will still steady marketing costs and we will do our best to make sure that these films perform their best as possibly can, next quarter though we will also, I mean during this quarter we will have difficult comparison for the next quarter due to the fact that we have Spider-man 2 last year which obviously was an outstanding performing film. That just keeps in mind as well. Your question about Walkman A series, we are going to launch this in November in South East Japan and then this is just a start therefore it is too early to say for this product to contributing (1958) this year. However the audio business is, because of our personnel effort the differential efforts and I anticipated that this business will be profitable toward the end of this year. I was wondering if you could reconcile the cash flow statement where you have a large increase in amortization of film cost and then you have this big increase in film cost is a negative. I’m not sure, I understand that you had drop in your profit of films but it seems like the numbers seems a lot a larger here than, what is showing for the cash flow. I wonders sir, if there anything else? You kind of broke up towards the end of your question, the second half if you can repeat it again, we are just having trouble hearing it here. I wonder if you can reconcile the cash flow statement on film cost with your profits on film. Could you have lost film for the quarter. On your cash-flow statement you have a big increase in amortization of film cost of 127 to Yen170 billion and then blowback in networking capital, increase in film cost, shrinkage from 127 to 218 I just sort of wondering how do you reconcile that with your loss? Well it is actually what you doing as your taking a right up, in the way the film accounting works is that when the film is not performing you really got to take that hit right as incurred. So that jump in the amortization is really a right off associated with the under performing films of that quarter. Just one last one. You are not covering your dividend, when do you think, what time would you decide to cut your dividend? There’s been a dividend policy in place for this company for quite sometime, we have strong adjustment in great credit, we’ve full access to the capital markets and the bank markets, there is no plans to make any changes to this dividend right now. It is also included in our cash flow statement. As you can see the almost bottom line of the cash flow business -- I think we better move on with this, we have other questions available and at this time I think we’d like to re-prompt to call. Ladies and gentlemen, once again if you wish to ask a question please press “*” followed by “1” on your touchtone telephone. Okay. We have one more email question. This question is about the restructuring meeting in September. At the restructuring meeting it was promised that you would give quarterly disclosure of KPI progress. This has not happened this quarter, why not? We planned to update the financial community on our decision over KPI progress from the third quarter. So therefore we will report you the progress in the January announcement, for the third quarter. Couple of good questions. You outlined the reasons for the losses in LCD TVs, you pointed that was a positive product for growth, your sourcing channels internally now seems like you should be well into profits there. (2) Can you breakdown the restructuring charges between redundancies, asset right-off or at least indicate what the key portion of restructuring charges are. And maybe a more strategic question, given the troubles in the pictures business understanding that there is a sub-comparable out there, but do you think there might be room for more industry consolidation, there? I just like to kind of reiterate your question just to check we are understanding it here, your first point is about reason loss in the LCD business right? And then second question is about the kind of mix and the breakdown for the restructuring and your third question was about the pictures business? Well it’s more strategic, regarding consolidation within film businesses overall and whether strategically you see more room for industry consolidation there? Sure. In terms of, obviously it’s been difficult market for many of the studios in terms of box office revenues and pressure obviously in the home-video market and DVD in unit pricing. Obviously in the past there has been some consolidation in terms of our joint acquisitions of MGM, I really don’t see, in terms of large cap film studios, any real consolidation coming there. There are couple smaller studio is there like Lions Gate that are independently trading, that possibly could be sold at some point. But in terms of the big guys like WARNER, UNIVERSAL, ourselves and MGM and FOX, my bet is the over the mid-term, you are really going to see that, including Disney, remain with there corporate parents. Your question about LCD TV and up until now, particularly the learning size, earlier 40 inches, and though priced to be placed is a much, much faster than our cost reduction speed. So therefore currently we are, infact loss on this LCD TV. As we noted that the new series of Bravia TV and that we are expecting more—voice blurred We this Bravia and we just anticipated the cost reduction modalities and that there are channel from FLCD. And also there are more quantities are expected. So therefore the more the growth of Bravia LCD TVs into the market place, but there is Cluster DVD , that currently goes, but though the operation. In the fiscal year ’05 and we are trying to spend Yen140 billion, of which Yen 130 billion is retro mix. And Yen 10 billion for other assignment. But in total Yen45 billion is from the restructuring expense and the Yen95 billion low sense of improvement. So that is the detail of restructuring expenses in this quarter. Thank you very much for your question, thank you Mr. Yuhara. With that I would like to move to another life like partition. Hi. I just had a quick question about your guidance for production of hardware and software for PS2 and PS3. Can you talk about why you are raising the hardware guidance and not the software guidance? I was just wondering talking about the PS 2 and PS 3 looks like you raised guidance for hardware, but not for software. Can you talk about why that is and what’s your production goals are? We are in the fifth year we have already announced our forecast as around $270 million in this fiscal year. So this quantity stays unchanged for the momentum. So that is the reason why I didn’t mention about the software. Thank you very much for your question. With that I would like to move to an email question. And that question is about “Blu-ray” “HD DVD”. Several former generations of “HD DVD” have not decided to sport both next generation formats. Why is this and can Sony and its partners now deliver on the single standard for the industry? We are very excited about the August report that has come out in recent weeks from all the studios. I think we’ve really had made more than tremendous progress, I think there is really been really a recognition of the superiority of the “Blu-ray” format with respect to level of interactivity provides the higher capacity. There is now an understanding out there that this is PC-friendly format and we now have Paramount Fox, Time Warner, Disney, Lions Gate, ourselves, our family of studios. So on a constant side we are clearly there in terms of why we can’t talk with a single format fro the industry, obviously we would like that and given that, that “Blu-ray” is an integral part of Playstation 3 and that is something that we’re obviously intending to come out in short order. It is very difficult to continually change the specifications. At some point you have to kind of locked in. And that being said, we are very open and obviously understand the necessity and how good it would be for the consumers to have a single format. Right now we think the best format out there is ours and we will continue to work with all our partners in the hardware and the software businesses to ensure that we have a success on our hands. And so far we are very pleased where we are in this process. Okay. If that is the case then I would like to end our second quarter conference call. And thank you very much for joining us. We thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_233905

Here’s the entire text of the prepared remarks from Blue Nile’s (ticker: NILE) 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. My name is Paige and I'll 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. Operator Instructions Good afternoon and thank you for joining us on our conference call today to review our third quarter 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 outflows for purchases of fixed assets including internal use software and Web site development. We report this measure to provide an additional tool to evaluate our operating results and financial condition. Please refer to our Web site 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 or balance sheet items as well as statements about future plans and objectives, beliefs, expectations, targets, goals, outlooks or predictions for the future. These statements are only predictions based on assumptions that we believe 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. I would like to start the call by reviewing our third quarter financial performance and discussing our business priorities for the remainder of the year. Blue Nile posted excellent results again this quarter which speaks to our compelling consumer proposition. We delivered strong sales and earning growth and expanding gross margin and operating margin. We achieved net sales of $42 million, up 23.9% from the prior year and net income growth of 49.1% to $2.5 million. Earnings per diluted share totaled $.013.3 and were up 51.9% from the same period a year ago. At the end of the quarter cash and marketable securities totaled $81.1 million. These results add to our history of growth and consistent profitability. Our performance reflects the appeal of Blue Nile brand, the power of business model, our disciplined focus and our ability to execute with excellence. Our sales growth during the quarter was driven by strength across all product categories with growth in our non-engagement business continuing to be even more rapid than in engagement. Products in this category include customized diamond jewelry, such as diamond earrings and pendants as well as non-diamond products, such as pearls and gemstones. We are experiencing tremendous consumer acceptance in the customized non-engagement jewelry category as our customers continue to embrace the selection and value that customization allows. In addition, we continue to drive non-engagement sales with new product introductions and expanded product assortments. The third quarter is generally the period in which our engagement product line is expected to be at its highest percentage of our overall product mix, reflecting the fact that Q3 does not contain a major gift-giving holiday. As a result, we typically expect our average order size to be at its highest in Q3 as engagement products carry the highest ticket of all our product categories. In the third quarter our average order size was $1,773 compared to $1,777 a year ago, and $1,441 in the second quarter of this year. A primary driver for growth in the current quarter was 24.2% increase in total orders compared to a year ago. While we saw unit growth across all categories we were especially pleased with the growth in our wedding band business, which had the highest unit growth of any product category. This growth was driven by the return of our base of engagement consumers during the summer wedding season. Overall repeat revenue growth continued to be very strong. As we acquire new customers we are focused on delivering an extraordinary consumer experience. If we do this successfully we will secure valuable lifetime customers. Overall, our selling, general and administrative expenses grew by 20.2% year-on-year in the third quarter while supporting sales growth of 23.9%. Our SG&A expenses in Q3 contain public company costs including expenses associated with complying with the provisions of Sarbanes-Oxley Section 404, which Diane will discuss in more detail later in this call. While our financial results for the quarter reflect significant operating leverage, the leverage was even greater excluding the additional Sarbanes-Oxley costs. This speaks well to the scalability of our business model and our ongoing ability to drive gains and profitability. Wholesale prices of diamonds have risen moderately in 2005 and are up approximately 5% year-to-date. For the year 2004, wholesale diamond pricing increased as much as 25 to 30% with the most dramatic increases occurring in Q3 a year ago. As a result of the moderation and wholesale diamond prices increases this year we believe that our competitive pricing position relative to offline retail, has reached a normalized level in which our retail pricing is typically 20 to 40% below what a consumer would pay at a traditional jewelry store. In merchandising we have had a number of promising product launches that build upon the success of our diamond jewelry customization capability. We have expanded our Build Your Own Diamond jewelry categories to include 3-stone cluster pendants, 6-stone cluster earrings and 5-stone rings. In anticipation of the holidays we have expanded our offering of higher-priced point extraordinary jewelry held in stock and available for shipment the same day as ordered. These products retail for up to $70,000. In the marketing area repeat and referral sales continue to show solid growth in the third quarter. We invested in some marketing tests in the third quarter and we will test additional vehicles in the fourth quarter to leverage the Blue Nile brand over the longer term. Throughout all of our marketing efforts our focus is on the maximizations of gross profit contribution in keeping with our overarching objective of free cash flow generation. While the U.S. market remains the main growth engine of our business, we are beginning to develop our presence in international markets, specifically in Canada and the U.K. On September 28th we began offering customization tools for diamond jewelry on U.K. Web site 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. This launch is off to a very promising start and we're optimistic for the U.K.'s performance during the upcoming holiday season. We believe that our value proposition to consumers is even more compelling in the U.K. market than it is in the U.S. During the third quarter we repurchased 199,975 shares for an aggregate purchase price of $6.5 million. From the start of our share repurchase program in February through the end of Q3, we have retired approximately 2.7% of the outstanding shares of the Company for a total purchase price of $13.9 million. Since Q3 of 2004 we have reduced the number of diluted shares outstanding every single quarter. This is in keeping with our stated intention to maximize free cash flow per share over time. We are very pleased with our performance for the third quarter and year-to-date 2005, and we are confident that we are well-positioned to achieve our 2005 goals. Our operational focus is dedicated towards executing with excellence for our consumers during the upcoming holiday season and beyond. We are focused on building our brand and expanding our market share in order to further extend our leadership position in online diamond and jewelry retailing. I believe we are still very early in the process of developing a dominant brand in the retail jewelry category. We plan to continue to grow our international business. While this part of our business is small today we believe the potential exists for this to be a significant contributor to sales and profit over time. We're very pleased with our results for the quarter, which reflect continued strong growth. Net sales for the quarter were $42 million, a 23.9% increase over last year's third quarter. It is important to understand that the third quarter is generally the lowest volume quarter of the year for Blue Nile on a seasonal basis, reflecting the fact that there's no major gift-giving holiday in Q3. We're especially pleased with our 23.9% top line growth given that our engagement business, which is lower growth as compared to non-engagement, is at its highest level of the year as a percentage of net sales in the third quarter. Gross profit for the quarter was $9.2 million compared to $7.4 million in the third quarter of 2004. This represents gross profit growth of 25.5% year-over-year. Our gross margin is typically expected to be at its lowest level of the year in the third quarter based on product mix with engagement representing a higher percentage of net sales on a seasonal basis. Engagement products carry the highest ticket and accordingly the lowest gross margin percentage of all of our product categories. Gross margin for the quarter increased to 22% compared to 21.7% a year ago. This year-on-year expansion in gross margin of 30 basis points is a result of two factors, product mix and slightly higher margins in our core engagement business. With respect to product mix, our Q3 2005 mix consisted of a higher percentage of non-engagement items as compared to the product mix a year ago. These products carry a higher overall gross margin as compared to engagement products. Our net income grew 49.1% in the third quarter to $2.5 million from $1.7 million in the prior-year period. Earnings per diluted share were $0.13 compared to $0.09 per diluted share in the third quarter of 2004. On the cost side, we maintain a disciplined focus and have a very efficient cost structure. Our selling, general and administrative expense, or SG&A, as a percentage of net sales is one of the lowest in all of retail. For the third quarter SG&A expenses as a percentage of net sales declined 50 basis points to 14.4% compared to 14.9% a year ago. SG&A expenses totaled $6 million in the quarter, an increase of 20.2% from the prior year quarter. Marketing costs increased approximately $360,000 in Q3 compared to a year ago, as a result of higher sales volumes and an increase in investment spending on new vehicles. Costs associated with being a public company also increased during the quarter primarily related to corporate governance and the implementation of Sarbanes-Oxley Section 404. Because the year 2004 was Blue Nile's initial year as a public company, we are required to implement Sarbanes-Oxley Section 404 in the year 2005. Costs associated with being a public company increased approximately $180,000 for the quarter as compared to the third quarter last year. Operating margin, or operating income as a percentage of sales, was 7.6% for the quarter, an expansion of 70 basis points from 6.9% in the prior year. We achieved this operating margin level despite the addition of significant public company costs in the third quarter of 2005 as compared to the third quarter a year ago. Interest income was $663,000 for the quarter compared to $241,000 in last year's third 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 $6.2 million grew 106.3% from $3 million in the prior year. Due to the seasonality in working capital, we also believe that trailing 12 months free cash flow is a meaningful metric. At the end of the third quarter our trailing 12 months free cash flow increased 76.6% to $23.1 million compared to $13.1 million for the trailing 12-month period ending October 3, 2004. The ability to generate strong free cash flow is fundamental to what we believe is a special business model and we therefore focus on free cash flow generation as a key financial goal throughout our business. Turning to our balance sheet as of the end of the third quarter inventory totaled $9.1 million. Our average inventory turnover, which we view as an important measure in the business, increased to 16.8 times for the trailing 12-month period at the end of the quarter compared to 16.2 times for the trailing 12-month period at the end of the third quarter a year ago. Our financial position remained strong at October 2, 2005. We ended the quarter with $81.1 million in total cash and marketable securities and we have no long-term debt. Before I review our sales and earnings guidance for the remainder of the year, I would like to note that we anticipate higher public company costs in the fourth quarter as this will be the most intensive period for our Sarbanes-Oxley Section 404 work. We expect that public company costs will total up to $2.8 million for the year 2005. These costs are reflected in our financial guidance for the full year 2005, which I will review now. On a seasonal basis the fourth quarter is generally our highest volume quarter of the year as a result of the holiday season. In addition, we expect our sales mix to be at its richest level of the year in Q4 with non-engagement jewelry representing a larger percentage of our net sales compared to other quarters. For the full year 2005, we are maintaining our net sales guidance of 205 million to $212 million. Based upon our Q3 and year-to-date performance, we are raising our earnings guidance for the full year to a range of 70 to $0.74 per diluted share. It should be noted that our guidance for 2005 does not reflect any impact from the expensing of stock options under the new rules of FAS 123R share-based payment. Blue Nile will begin expensing stock options under 123R in the first quarter of our fiscal year 2006 in accordance with the SEC's guidelines related to implementation. We project capital expenditures for the year 2005 to total between 1 million and $1.5 million. The effective tax rate for financial statement purposes for the full year 2005 is expected to be approximately 36%. As a reminder, Blue Nile is not yet a cash taxpayer as a result of net operating loss carry forward. We expect to begin paying cash taxes for federal income tax purposes in 2006. In closing, I want to thank our investors and analysts for participating on today's call. We are committed to building value for our shareholders by executing our strategy and realizing the tremendous growth opportunities that are available to Blue Nile. In our first employee meeting back in 1999, I told our employees, who numbered less than 10 people at the time, that our goal was to one day be to be the largest jeweler in America. I'll admit that's a very ambitious goal but I believe that we are firmly on the path to achieving that goal over time. This is the end of our formal presentation and we will open up the call for any questions you may have. Operator, will you please 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.

EarningCall_233906

Here’s the entire text of the prepared remarks from Time Warner’s (ticker: TWX) 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. Hello and welcome to the Time Warner Third Quarter 2005 Earnings Call. At this time all participants are in a listen-only mode. During the question and answer session please press “*”, “1” on your touch tone phone to ask a question. Today’s conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the call over to Mr. James Burtson, Vice President of Investor Relations for Time Warner. Sir, you may begin. Thanks and good morning, everyone. Welcome to Time Warner’s 2005 third quarter earnings conference call. This morning we issued two press releases. The first, detailing our third quarter results. The second, reaffirming our 2005 business outlook. Before we begin there are a few items I need to cover. First, we refer to non-GAAP measures, including operating income before depreciation and amortization, or OIBDA and free cash flow. We use these measures when we analyze year-over-year comparisons. In order to enhance compatibility, we eliminate certain items such as non-cash asset impairments, gains or losses from asset disposals, legal reserves related to government investigations, and securities litigation. We call this measure adjusted operating income before depreciation and amortization, or adjusted OIBDA. Schedules setting out the reconciliations of historical non-GAAP financial measures to operating income and cash provided by operations are included in our trending schedules. These reconciliations are available in today’s earnings release and on our Company’s website at www.timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the press release that is now available on our website. Next, today’s announcements include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein, due to changes in economic, business, competitive, technological, and/or regulatory factors. More detailed information about these factors may be found in Time Warner’s SEC filings, including its most recent annual report on Form 10-K and quarterly report on Form 10-Q. Time Warner is under no obligation to and, in fact, expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. And, finally, today’s presentation will include an update on certain discussions that the Company is engaged on, engaged in regarding its AOL business. In the future, we do not plan to update you on or comment on rumors regarding the status of these discussions, until we have something definitive to say. Thanks, Jim, and good morning, ladies and gentlemen. We appreciate your joining us today. Here’s the morning’s agenda, just so we all start off together. I’ll share my perspective on the Company and where we’re headed. And then, Wayne Pace will take you through the quarter’s results in his usual level of detail. And then we’ll have plenty of time for your questions at the end of those two presentations. Don Logan and Jeff Bewkes will join Wayne and me for the Q&A session. So let’s begin. I believe our third quarter results and expansion of our stock repurchase program to $12.5 billion underscore the fundamental operating strength of our businesses and our growing momentum. In short, our Company is strong and getting stronger. Creating shareholder value has always been the cornerstone of how we run our businesses, and our ongoing operating performance gives us a solid foundation and the flexibility to enhance our capital allocation to deliver greater value to our shareholders. Going forward, we will build on our operating by focusing on a few key priorities that I’ll discuss shortly. Those priorities are completing the Adelphia transaction and growing the value of our cable operation, increasing the return of capital to shareholders by expanding our share buy-back program, and accelerating the transition of AOL. Let me first review our third quarterly results. In a word, they are good. As you may have seen in our earnings release this morning, we grew our revenues by a healthy 6% and delivered impressive 9% growth in adjusted operating income before depreciation and amortization. Just as importantly, we’ve generated $3.3 billion so far this year in free cash flow. This amounts to 42% of our adjusted OIBDA. This performance puts us firmly on track to achieve our full year outlook, which we reaffirmed this morning in a separate release. For the full year, we continue to expect adjusted OIBDA growth in the high single-digits and a convert between 30% and 40% of our adjusted OIBDA into free cash flow. We’re particularly pleased with the results at Time Warner Cable, where we’re benefiting from continuing powerful subscriber trends. We had our largest third quarter increases in digital video and high-speed data subscribers since 2002. Digital phone now represents 5% of eligible homes passed and we are comfortably on track to have over one million residential phone customers by year’s end. Importantly, three quarters of our digital phone subscribers take our triple-play bundle, which also includes the video and high-speed data services. The strength in subscriptions is also translating into improved financial performance. Wayne will take you through the details, but organic growth of our adjusted OIBDA at cable has improved quarter-after-quarter this year. These excellent results also serve to bolster our confidence in the strategy behind our Adelphia and Comcast transactions, which we look forward to closing in the first half of next year. Let me remind you of why we decided to do these acquisitions. First, they will expand our cable footprint at an attractive price. Second, they will improve the clustering of our cable systems, which will provide us with efficiencies and enable to us better serve and market our customers. And finally, these transactions will provide us with a tax-efficient way to unwind our relationship with Comcast. We will, we look forward to creating value from integrating the acquired systems into our own well-run operations. Obviously, this is the top priority for Time Warner Cable. As you would hope, they are devoting the appropriate focus and resources to get ready to take over the new systems and to become a separate publicly traded company at the time we conclude these transactions, and these efforts will only intensify as that date approaches. There’s been a good deal of discussion about how much or how little Time Warner should ultimately own of Time Warner Cable. We’ve looked at many alternatives before we entered into the Adelphia and Comcast transactions and, again, since then. We continue to view cable as a strategic asset for Time Warner. As I have mentioned, our priority is to complete these transactions as currently structured, and realize the value they will create for Time Warner Cable. Once we have accomplished these near-term priorities, we will then have the flexibility to further modify our ownership structure, in the event that real opportunities to increase shareholder value dictate doing so. This morning we also announced that we are increasing our existing share repacs, repurchase program to $12.5 billion, up from $5 billion. We expect to complete this buy-back over the same period of time as the original program, or about 21 months from today. To date we have repurchased about 800 million of our stocks since announcing the $5 billion program, a quarter ago. We made this change because our board and senior management determined it was the right thing to do. As many of you know, we faced significant challenges over the past three years. During that time, we put a premium on rebuilding and then maintaining financial flexibility to protect the Company’s long-term viability, as well as our shareholders interests. But, with most of those challenges now behind us, we’ve had the opportunity to step back and reevaluate how we can best allocate our capital. We’ve spoken to a majority of our large shareholders and today, like many of them, we see buying our shares as the most compelling use of our capital. As a result, we’re refining our capital allocation to incorporate more leverage. Reinforcing this decision is our continued confidence in our businesses and their ability to generate free cash flow. Importantly, going forward we expect to use excess capital either to fund higher return on investments or to return directly to our shareholders through new share repurchase programs and increased dividends. In our opinion, this increase in leverage will not change Time Warner’s strong investment grade credit profile. At this level, we should continue to have a strong balance sheet, robust free cash flow generation and the earnings growth necessary to deliver near-term returns to our shareholders, while still having sufficient capacity to invest in our businesses to build sustainable long-term value. Before I turn things over to Wayne, I’d like to update you on the status of AOL, which we continue to believe represents one of our most significant opportunities for long-term value creation. We are now working to accelerate the transition of AOL’s business model. We’re moving from a business model based primarily on subscription revenues to one that is more driven by advertising revenue generated from both its network of free websites and subscribers. Once this transition is complete, we’ll have a higher growth, higher margin business going forward. As many of you know, the secular trends in online advertising growth are very compelling. This year, AOL will have one of only four companies to garner more than $1 billion of online advertising revenue annually. And that makes Time Warner the only diversified media company with a major online advertising business. We’re going to maximize the growth in value creation of our audience platform, which is many valuable online properties anchored by aol.com. We can achieve this objective in many ways. With a subscriber base that is still far and away the industry’s largest and its growing web audience, AOL has a substantial asset base required to accomplish this transition and create shareholder value on its own, I do, however, want to update you regarding one matter related to AOL. Over the past few weeks, there have been a great, there has been a great deal of speculation and reporting by the media related to discussions that we are rumored to be conducting with a wide range of significant parties. It is true that we are engaged in a series of exploratory discussions involving AOL with a number of strategic partners, many of who have had a, who have been identified in the press coverage. The discussions cover a range of potential commercial and other strategic relationships and transactions. Because the discussions are fluid, we don’t know that if they, if they will result in any transaction, or what form any transaction would take. I can assure you all; however, that these discussions will result in a transaction only if we determine it can enhance our competitive profile and our prospects for increasing value. In closing, our board of directors and management are confident that we’re on the right course to build sustainable long-term value, optimize our capital allocation and leverage, and deliver an attractive return for all our shareholders. Thanks, Dick, and good morning, everyone. The slides that I will refer to this morning are available on our website, and we’ll start with Time Warner’s consolidated results. Total revenues for the third quarter of $10.5 billion increased 6% compared to the prior year. They were driven by growth at cable networks, film entertainment and publishing segments. Adjusted OIBDA increased 9% to $2.6 billion and our margin improved to approximately 25%. Third quarter adjusted OIBDA reflected strong double-digit growth at the networks and cable segments and also gains at AOL and publishing. This growth was offset partially by an expected decline at film entertainment. Moving to the next slide, this year’s reported diluted EPS for the third quarter was $0.19 compared to $0.10 in the third quarter of 2004. Please note that last year’s results included certain items affecting comparability that are detailed in our press release and the trending schedules that you have. The net effect of these items decreased the prior year’s earnings by about $0.05 per share. Turning to free cash flow. During the first three quarters of the year, we converted 42% of our adjusted OIBDA into free cash or close to $3.3 billion. Included in the year-to-date free cash flow were higher CapEx and product development costs. The increase was driven by the cable segment, due to continued strong demand for its new services. Also, as a reminder, year-to-date free cash flow was reduced by the $300 million payment that we made in the first quarter in connection with our previously announced settlement with the SEC. Moving to the next slide, our strong free cash flow generation led to a reduction in our net debt to $12.4 billion at the end of the quarter, and that resulted in a trailing 12-month leverage ratio of 1.2 to 1. However, going the other way, we did make a $2.4 billion payment after the end of the third quarter, related to our securities litigation settlement. And again, we had set up reserves for this payment in prior periods. With today’s announcement to increase our share repurchase program up to $12.5 billion and our up-coming Adelphia and Comcast transactions, our leverage will increase to a level that we believe should not change Time Warner’s strong investment grade profile. In view of our strong free cash flow and our continuing operating performance, we’re comfortable in maintaining leverage of around three-to-one, going forward. Under our previously announced share buy-back plan, we’ve repurchased approximately 45 million shares from the beginning of August through October 31, at a cost of just over $800 million. Turn to the next slide. Here we’re reaffirming our 2005 full-year business outlook. We continue to expect high single-digit percentage growth and adjusted OIBDA, with gains across our operating segments in the fourth quarter. In addition, we expect to convert 30 to 40% of our adjusted OIBDA into free cash for the full year. I will take you through the results for each of our segments for the remainder of our prepared remarks and then we will go to Q&A. Starting with cable, we had a very strong quarter. We again achieved double-digit growth in revenues, OIBDA and monthly ARPU. Revenues grew 13%, driven by high-speed data revenue growth of 24%, higher digital phone revenues, a 16% increase in revenue from enhanced digital video services, and higher basic cable rates. Average monthly revenue per subscriber rose 13% to $86, the seventh consecutive quarter of double-digit year-over-year growth. OIBDA rose 15%, as higher revenues were offset partly by a 9% increase in video programming costs and higher general operating expenses. This quarter results included a $10 million benefit, which has been reflected in programming costs related to the resolution of terms with one of our programming vendors, as well as an $11 million reduction in accrued expense associated with changes in certain estimates. If you exclude these and certain other very small items, organic OIBDA growth was closer to 12%. Looking at subscribers, basic subscribers grew by 18,000 this quarter, and they are up 39,000 year-to-date. Enhanced digital services continued to perform well. Digital video customers were up 149,000, the largest third quarter increase since 2002, and digital penetration improved 130 basis points to 48%. Residential high-speed data subscribers climbed 234,000 in the quarter, the third consecutive quarter with more than 200,000 net adds and, again, the third, the best third quarter performance since 2002. Demand for digital phone service remains robust, as we added 240,000 new subscribers during the quarter, bringing our total customers to just over 850,000 or 5% of service-ready homes. These results put us firmly on track to exceed one million customers by the end of the year. We also added 134,000 digital video recorder customers this quarter, for a total of 1.3 million or 24% of our digital customers. Moving next to film. Revenues increased 6%, led by the domestic box office success of Warner Brothers ‘Charlie and the Chocolate Factory’ and ‘Batman Begins,’ and New Line’s ‘Wedding Crashers,’ as well as higher revenue from home video and international sources of our television programming. On the other hand, OIBDA declined 30%, as these revenue gains were more than offset by expected difficult year-over- year profit comparisons. As a reminder, last year’s third quarter included significant higher margin contributions from the international theatrical releases of ‘Harry Potter and the Prisoner of Azkaban’ and ‘Troy.’ In addition, the third quarter of 2004 included contributions from the television syndication of the final season of ‘Friends,’ as well as the broadcast network run and syndication of the final season of ‘The Drew Carey Show.’ These too are very high margin products. At our networks, revenue and OIBDA achieved double-digit growth of 10% and 21% respectively. Revenue increases were led by a 38% growth in content revenue, which was due to HBO’s broadcast syndication sales of ‘Sex and the City’ and higher international sales of HBO’s original programming. Subscription revenues rose 5% or about $69 million, resulting mainly from higher rates at Turner and HBO and to a lesser extent, an increase in the number of subscribers at Turner. In addition, advertising revenue was up 8%, with 12% growth at Turner. OIBDA increased 21% led by the revenue gains, which were offset partially by higher programming expenses at Turner, as well as additional costs at HBO related to the broadcast syndication sales of ‘Sex and the City.’ Moving to AOL. Revenues declined $100 million or 5%, as the 28% increase in advertising revenues were more than offset by 10% lower subscription revenues. The improvement in advertising revenue was due to 38% growth in paid search, and an increase of $31 million at advertising.com, which was acquired on August 2, 2004. On a pro forma basis, including advertising.com’s prior year results, advertising was up 20% versus the reported 28%. Adjusted OIBDA increased 7% to $481 million related, in part, to a 23% decline in network expenses and lower acquisition marketing expenses. We expect domestic network expenses in the fourth quarter to decline at a slower rate than they declined in the first nine months of this year. I’d like to turn for a moment to AOL subscribers. AOL continues to exercise discipline in managing the narrow band business, and they’re directing their marketing efforts to adding subscribers that generate positive life-time value. In the quarter, US brand subscribers declined 678,000, versus the previous quarter, due primarily to losses in the $15 and over category. These losses were offset partially by subscriber gains in the under $15 category. Moving to publishing. Revenues grew 3% in the third quarter, benefiting from 10% growth in content revenue, as well as higher other revenues. Subscription and advertising revenues rose 3% and 1% respectively during the quarter. These increases were attributable to the acquisition of ‘Essence’ and recent magazine launchings. Advertising revenues also reflect gains at ‘Real Simple,’ which were more than offset by lower ad revenues by core magazines, including ‘Sports Illustrated’ and ‘Time.’ The negative trends that we’ve been seeing at certain of our significant men’s titles continued to overall, to impact our overall core ad revenue growth. However, several of our women’s titles, such as ‘Southern Living,’ ‘Parenting’ and ‘Cooking Light,’ continued to perform well. The 10% increase in content revenues was driven by Time Warner Book Groups release of James Patterson’s ‘The Lifeguard’ and continued reorders of Elizabeth Kostova’s ‘The Historian’ and Joe Osteen’s ‘Your Best Life Now’ and Malcolm Gladwell’s ‘Blink.’ OIBDA improved 9%, due mostly to growth at Synapse, ‘Real Simple’ and Time Warner Book Group, as well as contributions from our acquisition of ‘Essence. These items were offset partially by lower results at some of the core magazines and higher start-up losses from magazines launched in the past year. 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_233907

Here’s the entire text of the Q&A from Genzyme’s (ticker: GENZ) 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. At this time I would like to remind everyone if would you like to ask a question please press * then 1 on your telephone keypad. Please limit your questions to one per person to allow time to address all questions. We'll pause for just one moment to compile the Q-and-A roster. Your first question comes from the line of Yaron Werber of Citigroup. Q: Hi. Thanks for taking my question, and congrats on the nice quarter. I have a question relating to Hectorol inventory levels. It was about, what I calculate, roughly maybe kind of 11, 12, 13 million, because of inventory reduction, is that reasonable? And what would you, I know you wouldn't want to give guidance here, but, once we discount that would you expect that things would kind of reapproximate the previous trend seen in Q1? And was wondering whether you can give us what actual Q2 sales were? A: Sure, Yaron. I wasn't sure of the first part. I think you were saying that inventory draw down was something like 10 or 12 million. That's high, quite high. The end user sales in the third quarter were approximately between 21 and $22 million. So that's the end user run rate. So you get a sense of the draw down from that. And our expectation is a couple of things. One, we're currently negotiating inventory management agreements similar to the ones we have with Renagel for Hectorol. At that point we'll have very, very good inventory data. Right now our inventories are based on not on 852 data but simply talking to the wholesalers. And, obviously we want to put the same kind of controls in place for Hectorol that we have for Renagel and we're in the process of doing that. And certainly then my expectation is that you'll have a much more normal revenue pattern. A: Yes. It's the problem is that they did not report it last quarter, either. You're a little dependent on strip data in that regard. Q: Another sort of focus here on Hectorol and the integration. Maybe a quantitative and a qualitative part to this question. I guess quantitatively, how many Bone Care reps are now full-time, permanent Genzyme employees? And then maybe the qualitative question is could you maybe give us some sense of how well you executed the integration of Bone Care, maybe alongside some of the other innovations you have in the past? A: In terms of the integration, this was a very, very straightforward transaction, because this was primarily in sales force and the marketing effort with some support staff, and so that went very simply. This product was not manufactured by Bone Care, it was manufactured by manufacturers, as we have done in the past, our tendency will be to bring these product in house, but we visited the toll manufacturers feel quite gratified that they are good people and they can support the product. In terms of the number of people added, John, can you… A: Chris, I don't have the exact number, but they had 100 people in the field, and I believe we kept approximately 60 people. Total we have 200 people in the field now, and since we had about 140 before, I would say we kept about 60. Q: And so this inventory -- I mean, the sales sort of stepped down from the last quarter, for what one might estimate from last quarter, is due 100% to inventory adjustments? Q: Thanks for taking my question. Congrats on another good quarter. I was intrigued in the press release you actually said something about Renagel formula replacement looks favorable. Can you give us any details around that, any specifics? You've reviewed 200 of them, and 100 of them are favorable? Is there any kind of granularity you can provide us with regarding the part D formularies, then the corollary to that is, have these part D plans seen the D-COR data? A: There's some granularity we can give around that. The simplest way is to look at the national plans, which cover all the different regions. And right now Renagel is on formulary at 9 of those 10 plans. Which we're incredibly pleased about, and for a couple of reasons. Those are all plans that will be able to accept dual eligibles, so the Medicaid patients who will be transferred into part D, as of January 1, so nine out of ten of those plans have Renagel on formulary so there will be no break in service for those patients' access to Renagel. And obviously, we'll help inform patients as to which plans are more favorable for patients with kidney disease, not only for Renagel but Hectorol and other products as well. There are clearly a lot of plans that are regional based, and we've been dealing with a number of those, and I can't give you specifics on those, because we don't have it today, but I feel very, very positive about where we are from a part D formulary placement in all of the major regions, particularly if you look at the top Medicaid states, we're in a very favorable position. Q: Hey, good morning. Thanks for take my question, guys. Henri, you mentioned Campath for MS may take up to three to four years to get approval. Would you mind expanding on your assumptions embedded in that timeline in terms of what you anticipate the FDA requirements might be? A: We obviously will have to run this phase III clinical trial, which will start first half of next year. Most MS trials run two years. We expect this to be the same here. So that is the basic assumption and the view time that follows. Dr. Rich Moscicki is here, he's head of our Regulatory Clinical Organization. Rich, any added comment to that? A: No, I think that's a reasonable and conservative estimate. We do know that FDA is looking for two-year data. We will have two-year data from the Phase II trial. I cannot say that given the dramatic efficacy that we've been seeing that it might not be possible for us to move forward with one-year data on the Phase III and supplement it with two-year data from the Phase II. But I think that until those final discussions take place, this would be a conservative way to view that time. Q: Great. So there was nothing in that three to four year time line that would suggest there'd be onerous requirements by the FDA placed upon Campath above and beyond the different Phases upon other MS trials? Q: Thanks for taking the call. Congrats on a nice quarter. Just some questions with respect to the oral Cerezyme. I think first, if you could just talk maybe about developmental time lines? Secondly, any proof of concept that's been generated to date. Third, what's the extent of the data that we should expect to see presented at ASHG? Then, of course, this all goes to the point of any other offensive strategies, vis-a-vis shire GHECB that you could talk about? Thanks. A: Those are lots of questions, and I've, Dr. David Meeker here the President of the division. David, can you make some comments on this one? A: Sure. I'm not sure I got quite all the questions but we'll work through them. So with regard to the developmental time line, let me back up for a moment. You called it Cerezyme in a pill, so this is not Cerezyme in a pill, this is a molecule working through substrate inhibition. It's similar to a currently commercially available product called Zavesca but it's in a different class. The reason we're moving forward with this molecule is that we do have data in vitro and in animal models, which would suggest that the molecule that we have, which gets to the substrate inhibitions through a slightly different mechanism is much more potent than the commercially available product that's out there today. As we go forward, the hurdle we will impose upon ourselves, in addition to the regulatory hurdles to bring this forward will be we will only bring it forward to the extent that it address a true unmet medical need, meaning that it has to do something better than the existing enzyme replacement therapy can do today. So oral is a huge convenience advantage, but it needs to be very effective and extremely safe, and I think the safety component is the part that we'll be very focused on in deciding whether we would continue to move this through development. So, with that said we're optimistic that it could meet that profile. We will start phase 2 trials the beginning of Q1 next year or in Q1 by 2006, and that will be an open label trial and we will follow those patients out for a period of 12 months. The developmental time line beyond that is unclear. To a certain extent it will depend very much on the data that we get back from the patients studied in that first trial. We would anticipate at this point doing a Phase III trial and we're prepared to do that, and at this point we'd get into that trial at some point in 2007 with regulatory filings thereafter. Did I hit all the questions you asked? A: The only date that that's been generated so far internally is related to the Phase I trial. We've done three specific Phase I trials in normal volunteers looking at the usual safety factors. I'm going to have Rich Moscicki make one comment in just a minute here to amplify on that, but we've completed three trials there and they are all reassuring in allowing us to go forward into our Phase II. Rich can comment. With regard to the TKT opportunity, they're developing an enzyme replacement therapy. This is a product which -- depending again on the data, will be used probably not in conjunction with an ERT. We would expect it to be a stand-alone. So whether it's RERT or some other ERT coming into this phase, this would be a product that could be used, for example, in a maintenance population whose default might be one profile for the product. Rich? A: I was only going to add that our Phase I program has already studied over 150 individuals. It's a pretty strong safety package that has been put together for this product already, as we move it into Phase II. So, I think we have pretty clear picture of what to look for and we're quite confident in our ability to do that. Q: One final question, Rich, for you on that. Is the Phase II a dose ranging or do we believe we've nailed down the dose? Q: Unrelated. Could you talk about what drove the diagnostic sales during the quarter? They were a little bit higher than what might have been expected. A: Generally good performance of both divisions, the Diagnostic Products Division did well and the Genetics Division did well, too. So there's no specific product that drove this. Overall pretty good performance of these businesses. Q: Good morning. Congratulations again on another good quarter. My question is actually on Myozyme. You mentioned in the press release that you expect regulatory action in the next few months. I guess the first question is what gives you confidence that there's going to be action in the next few months? Second question, could you update us on your commercialization strategy for Myozyme, which patients are you targeting, and any idea of price and dosing? Thanks. A: Okay. Let me ask Rich Moscicki to make a comment on the action question, and Dr. David Meeker give a comment on the marketing question. A: Well, in the US we're closing in our PDUFA date. That's a mandated date for action. We've had already communication with FDA leading up to this and so I think we're getting quite prepared. And similarly, there are expected time lines in Europe and we've been in close communication with European authorities up to this time that would also indicate that we should be hearing soon in regards to their opinions as well. A: With regard to where we are in the commercial development of this product, a big part of the rare disease population is the early experience with the drug, and Pompe is a disease where we have been able to make the drug available to an expanded access program to a number of different centers in countries throughout the world. So taking Europe, for example, just that number, we're in excess of 100 patients who have been treated through an expanded access program to date. In Europe, a several of the markets have pre approval sales. To date, France is a classic example of that that traditionally is able to make the product available through an ATU mechanism. Where we are focused in terms of specific market segments we've done our trials in the infantile population, and obviously that's an area where we are paying attention and beginning to develop an awareness at the neonatal center level. I think the way we would think about that is that those patients are so severely affected that they are likely to come to attention rapidly, and the need to create a significant amount of awareness in that population is less than it is to create increased awareness in the late onset population, and at this point again we're very focused on that aspect. So approaching neuromuscular centers, working closely with the Muscular Dystrophy Association. And that's a network who treats a population of patients to present very similarly to patients with Pompe disease, in fact, there may be a number of Pompe disease patients who are sitting in that pool of patients misdiagnosed or just not recognized as having Pompe disease. The last piece I'll comment on is that, as we work with these new centers who have not treated a lysosomal storage disease previously, we're working to get the registry set up, we do have the registry available pre approval which is a luxury we have not had with some of our other products, and that's a wonderful tool both in terms of educating both the physician and the patient as to what tests need to be done and preparing them for the possibility of a product being developed. Q: Do those 100patients that you mentioned on expanded access, are all 100 eligible to be transferred to commercial paying patients upon approval, or is it just some subset of it? A: Well, I mean, they're all eligible. Like every product we've launched, the rapidity with which patients transfer from the existing pre approval state to a reimbursed state depends very much on the country and the mechanism in place. There will be a portion of that who will switch immediately. There will be others that it takes several months, and there will be some patients who are in an area where, today I couldn't predict when those patients might get reimbursed. So, I feel good about where we are in terms of the patients who are accessing therapy today and where we are in terms of working with countries and getting them prepared to reimburse. Q: On pricing, given that the dosing here is much higher than any other enzyme replacement therapy, would it be safe to assume that this is going to be priced higher than previous enzyme replacement therapies, including things like Naglazyme by BioMarin? A: On pricing we generally don't comment until we have a label and we have an approval. You can assume the following things safely. A, we will be able to provide sufficient product to treat this patient population, so the manufacturing preparations are all done on the basis of the kind of dose that we expect to need. And B, that we have a lot of experience in terms of pricing of these products, and it's very important that we provide it in a fashion that access is pretty much guaranteed in terms of the experiences. The healthcare systems around the world have experiences in treating these very rare diseases and we want to stay within the criteria that they have now accepted as being the right criteria for the treatment of these kinds of diseases. Those were the two things we kept in mind as we developed our production economics and as we looked at this as a business moving forward. So precise pricing discretion is probably best to wait until we have a label and we have approval for the product. Q: Good morning. One question and one clarification. The question relates to Synvisc. Wonder if you can tell what the end user sales were? I think the sales as represented including some payments of the acquisition cost. And the clarification I was looking for was just, you mentioned earlier on Renagel getting on the formulary. It's on nine of ten plans. What were those plans? Were they the main plans? Were they national plans? Wonder if you would just clarify that. A: On the last question let me clarify. These are national plans, not regional plans. National plans. And we are a little confused about your first question on Synvisc in terms of the costs associated with it. Ann, the President of our surgical biz maybe you can answer that question. A: I'm confused as well. I think you asked first about end user revenue, and certainly there's a lag in time from the end of the financial quarter for us to be able to access all the data to estimate end user for that quarter, so I am only estimating third quarter end user at this point and don't want to share that. Our estimated end user revenue at the time we put guidance out for the product earlier this year was around 235 million globally and we are on track. Everything I see says we're on track to be close to that number. And the acquisition cost question, could you repeat that? Q: Yes, I think I probably was -- maybe I misread your statement but I just felt maybe they were negatively impacted by the acquisition costs, but I guess …. Q: Quick question for John. You may have mentioned it but I missed it, but, the REACH Program, is there an update on the number of patients that are actually on that program to date? And then, just anything qualitative that you can tell us about the differences in compliance for patients in the REACH Program versus patients that are on just regular commercial Renagel? Thanks. A: Yes, Ron. We actually haven't talked about the numbers of patients on REACH. The program is ongoing. At this point we're really preparing for part D pretty aggressively. Since we don't see patient data we couldn't tell you that the differences in compliance because remember the patients get it through an outside Medicare approved drug discount card. So we don't have any patient level information on REACH. They simply kind of send us a utilization report and we pay them back for that. Q: Thanks for taking my call, good quarter. Just wondered if you could give us the latest update on the D-COR presentations upcoming at ASNHA and how and when we might see that information used out in the field? Thanks. A: Sure. There area number of presentations of the data at ASN planned. There's a poster presentation, and I believe that's Thursday. Additionally, we have our Genzyme-sponsored symposia, which is a formal part of the ASN meeting, that's Thursday evening where the data will be presented. And then Friday afternoon there's a late breaking session where, again, Dr. Suki will present that data. So three different, distinct presentations at the ASN meeting, then additionally, the following week it's being presented in the clinical trials section of the American Heart Association meeting in Dallas. I believe that's the 15th. A: It's very hard to say. It's very, very early, and I think most physicians want to see data presented in a peer-reviewed forum before they take action. We have people who have been advocates of Renagel and even just seeing this data in a press release confirms their desire to use the product. If you look at the prescriptions in the third quarter we had over 2.1% growth in scripts from Q2 to Q3, which is the highest growth rate we've had since the fourth quarter of 2003. So we're encouraged by that. Whether that's the result of D-COR or just having a couple hundred people in the field now, it's hard to delineate that. But obviously, we're very, very pleased, as Henri said, with the results, and once they're presented in a peer-review forum we expect them to have impact. Q: By your rep, how soon do you think you can get the information for the reps for their use in the field. A: The reps of course are as you are, just twist up the press release and it will be extremely _____ per rep cost and to have to this represented at the ASN in a peer-view situation and also have it published in a peer-view journals and that’s a preparation as well. But this is part of what the reps have in their package but it is very much top line in the way you have read it as well, so they are a little bit limited in what they can say. A: I think we could add that the manuscript has in fact already been sent and with significant interest reflected back from a high impact journal.

EarningCall_233908

Here’s the entire text of the Q&A from Royal Philips Electronics’ (ticker: PHG) Q3 2005 conference call. The prepared remarks are here. The first question comes from Mr. Bram Cornelisse from Merrill Lynch. Please state your company name followed by your question. Bram Cornelisse - Merrill Lynch - Analyst Hi, good morning. Yes, that's Merrill Lynch. I was wondering if you can update us a bit more on MedQuist, because I think in the last quarter conference call an expectation was raised that maybe more was known in Q3 as to what the total costs were going to be and how long the sale would take. Can you just update us on that please? Yes. Good morning Bram. I think what I can say on MedQuist is that we are continuing to make some progress. Actually more customers have been talked to. Some agreements have been reached. But the end result is that it's too early to say more, beyond the fact that we continue to make progress. On this particular quarter, I would say that MedQuist is impacting us to the tune of 13m, which is not obviously good news. But the good news is that we are continuing to make some progress. I can't really say much more beside the fact that we are making progress, Bram. Bram Cornelisse - Merrill Lynch - Analyst Okay, and just one more question please on other activities. It seems to me that the progress there has been a bit slower than expected. I was wondering if you feel the same way, and if you can talk to us why nothing has been announced yet on Mobile Display Systems and Optical Storage, please? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Why? Well, actually I think to be -- to give you my opinion, it's always a little slow. Actually these are businesses on which decisions have been made strategically a while ago. So by definition it's going to be too slow. I think on this particular quarter, yes, we were indeed hoping to announce a few things. Nothing is lost. I think we are still working on those projects. Actually we have a couple of projects which go beyond the two particular that you mention, which is MDS and POS. We have a couple of others which are boiling, and we hope to be able to announce something in the coming months. So yes, it's too slow but I think we making progress on all accounts.Bram Cornelisse - Merrill Lynch - Analyst I just have -- just one question first on licenses. We had a big drop this quarter in the licensing income. I just like to understand what we should expect it will be for the fourth quarter and foreseeable future? And as a follow-up, you had a nice margin increase in the Semi division. Given the growth rate that you are talking about in the fourth quarter, similar to Q3. Should we expect margins already above 10% for Q4? Okay. Good morning Didier. I think on licenses, I think you're right. We had a decrease but I'm sure you're fully aware that in 2004 we had a bit of an extraordinary quarter, which was linked to the fact that we actually collected quite a lot of backdated income. I think now looking forward, we had that 40 to 45m guidance I think, the third quarter. I think we're probably looking now at something which is closer to 40m. I think that's probably the number to look at for the future. We have a few new products which will start a new stream of royalties in -- certainly in the months to come. But I think 40m per quarter is probably a good number for the license. To go to your question on Semi. Yes, we did get 7.5%, a full percentage on this particular quarter, and I believe that we have given the sales increase. I think you know about that. I hope this sales increase enables you to make the calculation precisely for Q4. I won't give you a number right now. The one thing I will tell you though is we see Q3 probably as the beginning of the illustration of the payback of the plan that we presented to you in Amsterdam a couple of weeks back. I think that plan was detailed. I won't go through it now. I think it still is but I don't want to waste your time now. But my reading of this, the revenue was nothing to write home about. If anything it was a bit down, comparing things with exchange rates and the like, we actually down 1%. We are -- The book-to-bill is positive, 1.07 versus 1.0. So a bit of a hope there but nothing -- no conclusion that we can reach on the cycle at this point. I think it's as dull as it was when we talked to you a couple of weeks back. The only thing, as I said, is a little bit of good news coming from the industrial performance. Didier Scemama - ABN Amro - Analyst Just one question and to clarify. If you don't answer and you don't want to make a comment on the margins, can you talk about capacity utilization in Q4? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Yes, I think we -- I think the capacity utilization has gone from 77 to 81% sequentially, and that capacity -- I think we usually don't forecast the capacity -- well, we don't disclose it. But I think we should increase beyond the 81% in Q4. In particular, if you look at our book-to-bill. You have to realize that in these days and age in Semi we have a very, very limited backlog, so it's difficult to be precise. But if anything the activity is bouncing back a bit. Didier Scemama - ABN Amro - Analyst Yes, hi Pierre-Jean. Nicolas Gaudois from Deutsche Bank. First question on Medical revenues. You had a meaningful increase in year-over-year growth, more in line with your order rate recently. Do you start to see -- Have you started to see the benefit in Q3 of the product launches in China with [indiscernible] [JV], first of all? And secondly, do you start to see any revenue contribution from the Epic alliance, or is it more Q4 and '06, '07? And I have a follow-up. Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay. I think on Medical -- Well, first of all, good morning Nicolas. I think on Medical, yes, indeed I think we start seeing, certainly in Asia, the benefit of our new range of products. If you look -- And you see from two different particular perspectives. First of all in terms of revenue, we -- I haven't disclosed that to you but you can probably see that Medical is stronger in Asia, by a couple of percentage points in terms of revenue mix in Q3 '05 compared to Q3 '04. That's the first one. Now if you -- you don't see it there, but if you were to look precisely at the split by region of the incoming orders, and you've said that indeed our incoming orders were up by 9% in the third quarter of '05. You will see that there Asia is clearly starting to make a push, and that is certainly on the back of the new products that we have introduced there. Certainly, yes. As far as Epic, you have to bear with me, I think I could not -- I would have to come back to you on that. Your question is very specific. The answer is I don't know. I can come back to you offline on that. But the but the Epic alliance revenue stream, I can't be too specific on that. Okay, fair enough. And as a follow-up on margins, we saw your margins declining year-over-year slightly, on a clean basis for Medical. Would you -- assuming that year-over-year growth in the fourth quarter is not too different, or at least similar or both to what you achieved in Q3. Would you expect to have a level of margins high enough to basically meet, or exceed, your 13% clean IFO margin you achieved in 2004 for Medical Systems? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay. I think for Medical -- Just a quick word first on Q3. I think indeed in Q3 we were -- we had actually a couple of things impacting our margin. One was the purchase accounting of Stentor, and I think we disclosed that to you, and that's for 6m. The other thing which impacted the margin of Medical for this particular quarter, was that we get a couple of customers actually postponing revenue, because they now want to see the product of Stentor, rather than the previous product of Philips. And that is having an impact, and probably will continue to have a bit of an impact on Q4. Now to your question on Q4, if you remember we had a very strong quarter in Q4 last year for Medical. I don't think a quarter for Medical would be as strong in percentage as it was last year. Last year was really, really strong. As far as missing the 14% for the total year, I think that there we should be not too far. Well, I think what I understand was that last year was 12.6% EBIT. So that reference point IFO margin percentage. Now that's the reference point I am using and I think that we should be able to be, I would say, slightly above that. I think that's the reading I have right now, in the vicinity anyway. I don't think we should be too far from that. But as I said, Q4 we will see some more, I would say, adjustment related to the integration of Stentor. That's going to affect us one more quarter. One more thing about Medical which I think I need to tell you about, is that the margin in Asia is -- because the growth there is quite strong, is turning to be slightly less profitable than the average of the rest of the world so far. So that's something we will work on in the fourth quarter to bring it at par with the other region. The next question comes from Mr. Uche Orji from JP Morgan. Please ask a question, sir.Uche Orji - JP Morgan Chase & Co - Analyst Good morning. Just a couple of questions on CE. If I look at the Q3 revenues it's actually very strong. How much of that was underlying market demand, and how much of that was market share gain? And if you can an insight into what you expect in the fourth quarter for CE -- mainstream CE? Pierre-Jean Sivignon - Royal Philips Electronics - CFO I think, as you know, the market in which we operate, and CE is a fully global business. It's present everywhere - Latin America, U.S., Europe and very much Asia. I think in none of those territories -- the economic conditions were fantastic actually. Beside Asia the rest is quite dull. Maybe Eastern Europe is a bit exciting but the rest is actually not very exciting. So all-in-all I would see that our revenue growth this quarter is market share. I think you have to realize that we've introduced new products. We have introduced in particular a new range of flat panel, LCD televisions, and that seems to have an impact. And if I take the example of United States, I think there we've gained some market share. So I would say probably more market share than anything else for this particular quarter. If I look into Q4 at this point, you would expect some [indiscernible] in the fourth quarter? What are you getting from your retail channel partners? Pierre-Jean Sivignon - Royal Philips Electronics - CFO I would say 5%. I think a growth of 5% probably on a year-on-year on the fourth quarter. That's what we are currently looking at as an average across, of course, the various regions. Along this line, your inventory in the third quarter was fairly low, also the impact means CE inventory is also fairly low. Do you see any constraints? As you mean we have –Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, that's a good question actually. You remember we were on the same [telephone] at the end of Q2. We had an abnormally high inventory, and you were concerned with your, and we told you, yes, it's lower than May. But we told you we'll address it and it's been addressed. Now the next question comes up - could we be in a situation where we could be short of product in Q4? I think the question might be on maybe on LCD. Flat panel displays might become an issue in the fourth quarter. We're not suffering from it right now but, given the strength of the market right now, it -- I'm not saying it's an issue but it could become an issue. And we certainly have no fat in our inventory right now as you can see. But as of today, I have no information to tell you that we are suffering from it, it's fine. For that particular product it's fine. And finally on this topic, if you don't mind, just one more question. If I look at the underlying margin for CE going over, should we expect it to be going up or --? Yes. Actually if you look at -- If you take away incidentals, which I would call essentially restructuring. And if you take, of course, as well the revenue stream coming from license which we touched on a minute ago I -- You won't see that margin of CE for this particular quarter is around 1%, and it's a bit below 1%. We have actually confirmed to you guys the objective of 4 to 4.5% for next year, and at this particular point of time, we believe that we should be able to make it. And we certainly hope that the fourth quarter should be on its way to reaching that. And, of course, you realize that the seasonality of the fourth quarter should be there to help. Uche Orji - JP Morgan Chase & Co - Analyst Yes, good morning. Just to follow-up on the previous question. Your Q3 sales trend in Consumer Electronics was quite strong, with a 12% growth quarter-on-quarter, 11% up year-on-year. Would all of that be primarily attributable to flat panel TVs, or is -- would other products like set top boxes and -- ? No, we -- no flat panel TV certainly helps but I think home entertainment played a role as well. I think people are -- they very often see us as a television company, but if you really pay attention to the new products which have been actually recently launched in home entertainment, you'll find that the range is now getting quite complete there. And that particular segment certainly helps us as well in the third quarter. And we count on it to continue to do so in the upcoming quarters. Yes. We -- In particular we've introduced a couple of wireless products which we believe are quite innovative and should play a role, yes. So it's not really -- set top boxes certainly helps. There was a story pretty much of the second quarter, but home entertainment helps us beyond television in Q3. Janardan Menon - Dresdner Bank - Analyst Okay. But how do you -- What do you attribute the fact that, despite seeing such a strong sales increase in Q3, you didn't really see much margin leverage come through in CE --- mainstream CE in the quarter? Is that because some of the flat panel TVs are lower margin products or is that --? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, I think we have to see where we are coming back from. We are coming back from losses. I think this quarter, if you take away from this quarter restructuring and licenses, and I think you will see that we have a positive quarter in terms of IFO. We have -- Just to give you one additional piece of information. North America has become profitable which for Philips is a real milestone. I'm new to Philips but when I talk to people around, they really see that as a major achievement. So it's obviously not going to be enough. It could have been better. Consumer Electronics is a work-in-progress. As you know, we have completely reconstructed there the business model, and will continue obviously to benefit from what we are doing there. And I think improvement actually is to come. I wouldn't call that a disappointing quarter. We're profitable in the U.S., we're profitable all-in-all, and we've been able to grow. So quite frankly, definitely not enough. We gave our target, 4 to 4.5%. We have reiterated them, so I think frankly we see that as a good quarter for CE. Janardan Menon - Dresdner Bank - Analyst Of course, congratulations on that. But just one last follow-up from me. Your -- You've raised your guidance a bit on Semiconductors. You were earlier guiding at 5% and now you're getting more like 7% in the Q4. Do you see much of the upside coming from Consumer Electronics, or would it be things like handsets, etc., which is driving some of that up? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, actually in the first quarter what helped Semiconductors was home and mobile. So it's hard to -- it's a bit hard to predict because, as I said, we have such a short backlog there. But I think these two particular segments should continue to perform. The -- In terms of growth, not much I can elaborate on. The only thing I can say, the 1.07 book-to-bill - that's good news, right. Coming from 1 to 1.07, that's the first quarter where we have a little bit of something happening on the revenue side, and we would like to actually benefit from that in the fourth quarter. Just one correction, I mention 1.07. I see the book-to-bill improved, as you like -- as you've seen in the press release by -- it's to 1.09. Sorry to -- for that mistake. It's 1.09 not 1.07 book-to-bill sequential. Janardan Menon - Dresdner Bank - Analyst The next question comes from Mr. Matthew Gehl from Goldman Sachs. Please ask your question, sir. Matthew Gehl - Goldman Sachs - Analyst Yes. First question relates to Semiconductors on the margin side. You noted in the press release that the up-take in margins was driven by a combination of the business renewal program. But also you mentioned a higher foundry utilization. I was just wondering if you can give any more detail on what exactly has been going with SSMC in the quarter? Whether that's now fully utilized, and you can expect any further margin up-take as you go into Q4, driven by that holding? It's fully consolidated. Yes. I think today -- I think we explained that today our policy between what we keep internally, and what we basically outsource, is still at 80/20, with an objective of course to go -- to bring the 80% much lower. I think figures like 50% have been mentioned. For this particular quarter the utilization, as you've seen, has improved from 77 to 81%, definitely higher foundry utilization. Those figures should continue to increase in Q4. I don't see I can give you any prediction. I don't think we've ever communicated that moving forward. I don't have that figure by the way. So the only thing I can say is that those percentages should continue to improve in the fourth quarter. And of course, these should support an improvement of the margin in that quarter for Semiconductor. But it is a number - I have to be honest with you - it is a number which was a pleasant surprise for us, and certainly a bit higher than what we presented to you a couple of weeks back here in Amsterdam. Matthew Gehl - Goldman Sachs - Analyst Because in the press release, when you're referring to the higher foundry utilization impacting your income from operations, you're in fact talking about your own ability to outsource more to the foundries benefiting your margin. I'm just trying to understand where that comment came from. I think it's our -- I think the comment is really related to our utilization. But as I said, I think the model - because that was part of your question as well - the model 80/20 was between us and what we put outside. Whether it's at core or whether it's TSMC. What I'm telling you is that that 80%, we'll try to actually bring it more to the outside obviously. So we're trying to make an effort as well as to increase the utilization of our third parties as well. So we're trying to work on both, and hopefully our backlog will enable us to do that. Okay, and just a quick follow-up on the brand campaign. You noted that it's going to be around 60m spend in Q4, as the second phase moves forward. Do you have any initial comments on 2006? Whether we can expect this level on spend on a quarterly basis, for each quarters of '06? Well, I think it's a bit early to talk about that. I think we'll keep that comment for probably the year-end numbers. What I can say that we -- several ways to look at this campaign. We have a certain number of internal indicators, and offline I could go through those if you are interested, which seem to show that it -- something is happening. And if you look at the inter-brand indicator, we've actually made some quite -- quite deal of progress there in ranking of -- 100 most valuable companies in terms of brand. We've actually gained 12 places. Now the next question is, could you link this -- the campaign of '05 with revenue growth? That's probably -- That would be easy to do that. It's probably a bit early to say that for us internally at this particular point of time. We will link the increase of revenue probably more to innovation. I think we certainly have introduced a number of new products in most of our product divisions. So I think we attribute that to the -- to that growth through the innovation. As far as the impact of the brand campaign, we see it a bit longer-term. I think that this is an up-front investment, and you know well the new business model we have in Consumer Electronics. It's based on three things. It's based on the product, it's based on the logistic chain, and it's based on the brand. And certainly for the longer term, probably CE in particular, that investment of the brand is important for us. So a bit too early to say what we'll do in '06, but certainly a good feeling about what we've done in '05. Matthew Gehl - Goldman Sachs - Analyst The next question comes from Mr. Antoine Badel from CSFB. Please ask your question, sir. Antoine Badel - CSFB - Analyst Yes, good morning. Two quick questions, please. One is, looking at your operational expenses, the G&A spend has been down 10% sequentially this quarter. Could you please give us a little bit of detail as to what's happened there? And second question, on your CapEx for '06 could you please detail what you're expecting to spend in Semiconductors and non-Semiconductor CapEx, please? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay. I think on the operational expenses, I think it's largely seasonal. So I wouldn't draw any particular conclusions. We obviously try to keep those expenses tight but I wouldn't add anything specific beside the seasonality to report to you. Yes, I think we -- Yes. We will just keep it under pressure, we'll continue to do that to start of next year but -- Okay, I would love to tell you that we've done a good job but, frankly, I would like to attribute that more to seasonality but it's something we are careful about. But as you know, we have launched a big initiative a couple of years back. We still have, I think, the aftermath of the plan we launched a couple of years back, and we'll continue to keep pressure there, certainly for it not to go up. But that 10%, I would say, more seasonal than anything. So let's leave it at that for the time being. For the CapEX, the spending of this particular quarter is 240m. I think in Semiconductor an amount of 70 -- I think 77m for Semiconductor, which obviously is showing some discipline compared to last year. And that amount should continue to come down next year. It's hard for me to guide you right now for next year, but this number should continue to come down as we enter 2006. Good morning. It's Francois here from Cazenove. You said on Bloomberg TV earlier that you were likely to spend around 5b on acquisitions, going forward. Given the state of your balance sheet, you've got only 4.3b of cash and you've got the Lumiled acquisition going out this quarter. So basically do you think you will be able to gear up your balance sheet going forward? Well, I think -- Let me correct. What I -- If I gave that impression to Bloomberg, I think the question was related to capacity and I would like to leave it at that for the time being. In terms of capacity, given that this quarter and we should enjoy it because, as you've said, it won't last for long because we have committed 2.5b of spending in the course of Q3, between the two acquisitions and the share buyback. So this debt-free situation developed Q3 is a bit notional. So what I was trying to tell at Bloomberg is that, in terms of capacity, if you have a debt-free balance sheet, and if you want to stay where we want to stay, which is an A rating which one of the two agencies has attributed us so far - we would like the second one to do the same, that is with S&P we are A rating, we are one notch below for Moodys. We would like to pretty much stay at that A rating, and for that the 30% of gearing is pretty much acceptable. So if you look at equity, which is 15 to 16b, then 30% of it gives you the 5b capacity which I was trying to refer to during the Bloomberg interview. So that's the point I was trying to make. Okay. So you're ready to take on more debt on your balance sheet basically?Pierre-Jean Sivignon - Royal Philips Electronics - CFO If we had the right project with the disciplined approach that you know that this Company is accustomed to, this is the kind of thing, yes, we could do. I think leveraging the Company up to 30% is doable, yes. Francois Meunier - Cazenove - Analyst I think on the tax rate for the year we can expect a rate of 16%. I think that's the kind of rate we can expect for the year. Francois Meunier - Cazenove - Analyst Yes, 16 all in, including all the impact of all the non-taxable items which obviously is quite important. That's the number we are currently looking at. But if you take away, of course -- let me just make sure everybody understand that, if you take away the impact of the non-taxable items, then the tax rate of the Company is in excess of 30%. I think we are back to the 30% that you traditionally use for Philips. So keep in mind the impact of the non-taxable items for the particular year, 2005. Yes, good morning. I have two questions on Medical, please. First, I'd like you just to confirm maybe what I've heard as an answer to the third question, I think. That Medical margins IFO as percentage of sales this year would be at the same level as last year. And my second question would be on growth rates for 2006. We've seen a nice growth in order intakes in Medical equipment. I think in Q1, Q2, and Q3 close to 8, 9%. Does this indicate that we are heading towards a year with something like at least 7, 8% growth? Okay. I think on the IFO margin I said that we grew year-on-year in Q1 and Q2. In Q3, for the reason I mentioned, we have actually a margin which is slightly below Q3 of last year, even though in absolute terms, in absolute euros, it's above. I think on Q4, the way I can see it now, is we should be I think probably a little bit below then. Because, as I said earlier, the combined effect of the growth in Asia combined with the integration of the two product lines, between the one at Philips and the one of Stentor. For the year I think the margin all-in-all should be in the vicinity of the one it was in 2004. For -- But we will obviously do what it takes to resume the improvement of that margin, certainly next year. Now in terms of growth, yes, we basically have nice incoming orders of 9% in the third quarter which I think is a good number. That includes, as I said, a strong Asian growth. It's a bit early to say what's going to be our growth of revenue for next year. So I am bit reluctant to give you a number right now. But I think it should -- if anything it should be a strong number. I think Medical has a very important backlog, and right now if anything the issue is our capability to deliver that backlog more than anything else. So I would see Medical growing nicely next year, yes. Particularly, to give you a precise number, I think I should be able to give that to you later during the quarter. Thank you for that, very helpful. Can I just add a very small one on Consumer Electronics? I'd just like to know roughly what's the share in value of flat panels, that is, LCD and plasma, within your TV sales, please? Can you just hold on for a second? I think the share is about 50% of the total of connected displays. That's about the weight of the LCD flat panel. The next question comes from Mr. Luc Mouzon from BNP Paribas. Please ask your question, sir. Luc Mouzon - Exane BNP Paribas - Analyst Hi, good morning. I'm just coming back on a couple of questions about the IFO trend in Consumer Electronics, and mainly on the mainstream products. Do you have now a view about the impact on the TPV deal? Is there any kind of automatic effect that we could expect on the fourth quarter? And what the size of the sale that will be deconsolidated on the back of this deal? And I've got a follow-up.Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay. I think the TPV deal, as you know, has been closed just recently. To be totally transparent, it's a very complex deal. It's not totally old news, has been closed very recently. Actually we're still integrating and finalizing the accounting entries, so it's a bit early to say what's going to be precisely the impact. What we could say, we have disclosed to you in the press release. Now, certainly it should help on the positive side the margin on the way to go. Because as you've seen, we have actually now exited the low-end displays, and if anything those were the lower margin parts of our portfolio there. So that's definitely a positive impact. A bit early to say what's going to be the impact on us. I think at the end of Q4 we will have one full quarter of operation with MDS -- sorry, with the TPV deal in our pocket. And I think we will be much more capable of telling you what the impact there. So definitely we can already say it's positive. Luc Mouzon - Exane BNP Paribas - Analyst Okay. Just a little technical question. Could you maybe update us about the number of shares that you currently own on the first and second share buyback waves, at the end of September, and that might be cancelled next at your shareholder meeting, please? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay. I think we have the amount -- the precise amount of what we have bought I think is 306m -- 345m of value. And if I remember correctly, in terms of the quantities of shares, this represents 15.9m of shares. That's what the purchase of Q3 represents. The total of this share buyback should be completed for the total 1.5b. That should be actually completed by August, and yes, indeed, at the next -- as you know, we can only cancel technically those shares once a year at the General Shareholders Meeting, so we will get a vote for further cancellation of shares at that particular meeting next year. In the meantime, the cancellation is purely an accounting one, as you know, in our books. Luc Mouzon - Exane BNP Paribas - Analyst Hi, I'm wondering about the sources of sales growth in the Lighting division and the likely change in the product mix following the Lumileds acquisition. Is most of the sales growth coming from the shift to solid-state lighting or are we talking some other trends going on here?Pierre-Jean Sivignon - Royal Philips Electronics - CFO No, I think in Lighting several things are happening at the same time. Right, let's take them one by one. In terms of the margin, and certainly a little bit in terms of the revenue as well, I think as you know, and we didn't try to hide last year the disappointment on UHP, the year was actually counting strong on UHP and UHP -- the market was not exactly where we thought it would be. There were other technologies actually coming on the market at the same time, so if anything, UHP is in fact up both in terms of revenue in a way, as well as in terms of margin. Now, what is helping Lighting, if anything, is Lamps and Luminaires. I think in this particular quarter these are traditional product lines of Lighting, it did pretty well. Ironically, I would mention that in the Netherlands we had an extremely strong quarter in those particular domains so I would say that the traditional revenues of Lamps and Luminaires did help. To your question on LED and solid-state lighting, that is still today a very small portion of the revenue of Philips. Some growth will come there, in particular now that we have acquired Lumiled, but I wouldn't call that today real stream of major revenue growth for Philips as at today, and the last thing I would add is that we have introduced some new products which are not often referred to. We have a product called T5 which plays a role in office lighting, and don't forget as well that in the domain of Automotive we have a Xenon light which as well playing a pretty major role. So we have new products in Lighting which I am looking at as we speak. Lastly, in the beginning of next year, you will see production of new [end-year] products as well, and one of the important points for next year will be a strong focus on products which are energy savers. Obviously with what's happening with the price of oil, we will put a particular emphasis on that, and given the existing product range of Lighting, we are confident that this should help the growth of Lighting next year on the back of that energy-saving constraint. Thank you. Can I have just one follow-on? Dividend policy, you're now back to net cash positive or zero. You're focusing on the non-cyclical cash generative divisions. Are you likely to be more generous in your dividend policy going forward? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, actually, that's a question which we debated at length around August 15 when we announced to you the share buyback. Obviously we knew we had to do something for shareholders. We discussed it. We went for the share buyback. The reason is that the share buyback is a very strong message. It's not something that Philips has done very much in the past and the fact that we launched that 1.5b certainly gave us the feeling that we were sending a strong signal to our shareholders. In terms now of dividends, I think we had had that policy of distributing 30 to 35% of -- sorry, 25 to 30% of our regular income stream. I think it's the policy which was presented to you a couple of years back by Jan Hommen. We stuck to it. The reason why I am somewhat reluctant to change that is that in Philips we are often criticized for a lack of predictability and which I'm sure doesn't always help you. We would want to be now perceived as [growing real] as a predictable company and if anything, our dividend distribution policy has been predictable, and we would like to leave it at that. Hi, good morning. I think you mentioned earlier in the conference call that you did a good performance in the Semiconductor within the context where you see some weakness in some of the markets you are serving. Could you please give us some details on where you see some weakness? Well, I think -- I gave you the two strong ones which I said were mobile and home. Obviously the other two, which as you know, because I think you are familiar with the way we have re-orchestrated Semiconductors, the other two product divisions which are Automotive and Identification and the other one which is called Multi-market, were probably a bit weaker. I think that's probably the best answer to your question. But again, this is a quarter. It's hard to really predict because for those businesses as well, the backlog we have is extremely short, so those things could change in the course of the fourth quarter. Jerome Samuel - CDC IXIS Capital Markets - Analyst Well, we are looking at this. We had actually moved into cash on deliveries on Delfie ahead of what happened last week. I'm sure, because Delfie is a customer for us, I'm sure there will be some impact, but it will be - I don't think it will be material for Philips. But we are currently looking at this. As you realize as well, that Chapter 11 is purely U.S.-related. As you know, the laws on Chapter 11 are strictly U.S.-related in terms of having an impact on the receivables, and I think we are a customer to -- we are a supplier to Delfie in the U.S. and out of the U.S. But at this particular point of time, it's a bit early to give you a number, but eventually probably not material. Jerome Samuel - CDC IXIS Capital Markets - Analyst The next question comes from Mr. Eric de Graaf from Petercam. Please ask your question sir. Eric de Graaf - Petercam - Analyst Yes, good morning. I have two questions on the CE business. First of all, could you give an impression what sort of price pressure you have seen in the third quarter? Yes, okay. And the other one is have you seen or heard anything about inventory-building again in the CE business? It looks like you at least offloaded your inventory but I was wondering if it ended up in too large quantities at your retailers? Pierre-Jean Sivignon - Royal Philips Electronics - CFO I think on the first point, it's hard to comment on pricing pressure for us because as you know, our business -- we have actually reconstructed our business model in order precisely to try to as much as we can isolate ourselves from that. As you know, we very much -- the vast majority of our manufacturing is now totally outsourced. I think we're down to, I believe, to four factories now, I think in Consumer Electronics, actually even down to three factories, I understand. We basically only focus on, as I said, the brands, the product -- the development of the products and obviously the distribution channels, so that particular model has put us in the position where we are somewhat sheltered as much as we can from that so it's hard for me to comment on that. I don't think we, like ourselves, pick up much as some of our competitors. That's really the best answer I can give to you. As far as now inventory is concerned, no, I think I answered that. I believe the inventory is at a record low. The inventory of Philips is just at about 4b at the end of Q3 for 13.2%, our lowest ever, I understand, in the history of Philips. And as far as CE is concerned, it's a low inventory going into the selling season and as I said, if anything, I would say rather than excess hopefully we don't see a bit of a shortage, in particular, on LCD televisions, because, as you might have read, on the LCD, in particular for the larger screens, the supply is relatively tight. Eric de Graaf - Petercam - Analyst The next question comes from Mr. Jan Berghuis from Kempen. Please ask your question sir. Mr. Jan Berghuis, please ask your question. Jan Berghuis - Kempen & Co - Analyst Yes, I'm sorry. On the unallocated line, I think excluding brand euros, you're around 100m run-rate so that's corporate and regional overheads and the pension costs, basically. So for '06, do you feel, excluding your branding which is still difficult to determine, would you say a 100m run-rate is reasonable to assume? Yes, I think the brand -- let's talk about the brand. I think I said I would select it through the brand. I think here the corporate is around that 70m. That should be -- we'll continue to work on it and try to, if anything, bring it down. I think our pension -the good run-rate, and you realize that the pension, on that particular line, this is a pension for the people who are already retired. I think just to clarify, it's an important point there. I think 30m is a good number, so if you add the 70m and the 30m, yes, I think 100m is probably a good number going into next year. Thank you. Operator We have a follow-up question from Mr. Didier Scemama from ABN Amro. Please ask your question sir. Didier Scemama - ABN Amro - Analyst Yes, just a follow-up on the division, Other Activities. If I look at the comments that were made in the previous conference calls regarding resolution of MDS and possibly Optical Storage, you said earlier in the conference call that it has been slower to operate. At the same time I see you have 21,000 employees in Other Activities. Isn't there a risk that this situation is going to carry on for some time, simply because those businesses are very difficult to sell at this time? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, let me tell you that I think, as part of the focus I have had ever since I joined, and not to say that will not be looked at, but I think that's worth being looked at but it's taking quite a bit of my time because those businesses are managed essentially. What I can tell is that we are making progress on all fronts. I really -- I would like to be able to tell you more. I am sure you would like to hear more, both on POS as well as on MDS, plus a couple of others, as I said in a previous question. What I can tell you is that we are making progress. I could not drop forever. I certainly could not expecting all attention in Optical Storage to its -- it's 5,500 people, in MDS it's 1,900 people. So those are large chunks of the headcount that you just mentioned, but let me tell you that we are working very, very actively on it and I will continue to update you on the coming quarters. Didier Scemama - ABN Amro - Analyst Sorry to dwell on that, but what are the options that are considered because I imagine that a sale is very difficult at this time, given the operating performance of those units, so what are the other things that you --?Pierre-Jean Sivignon - Royal Philips Electronics - CFO No, I think the sale is very much a preferred route, and at this point of time, I don't have a reason -- I don't have reason to believe that we shouldn't be able to do it by ourselves. That is certainly, at this particular point of time, our preferred route. Didier Scemama - ABN Amro - Analyst Okay, and a last question on that issue. Can you just give us an idea of the operating losses in both Optical Storage and MDS within Other Activities? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, I don't know. I don't think it's a number we really disclose. I can give you -- I think if you combine the two together on the quarter, right, then it's even. It's the sum of the two will total break-even. Obviously, of course, if you compare to last year, it's down significantly, I think, so if anything, it's not really hurting us. It's putting down the average IFO of Philips but more importantly, it's lower than last year. That's probably where it really hurts us the most right now. But as you've said, it's something that is important and it's taking, I can absolutely guarantee you, all of our attention right now, and I should be able to give you more at the end of Q4. Didier Scemama - ABN Amro - Analyst Brilliant, thanks very much. Operator [OPERATOR INSTRUCTIONS]. The next question comes from Mr. Guenther Hollfelder from HVB. Please ask your question, sir. Hi, Guenther Hollfelder. I have one question with regards to Medical Systems business. GE acquired IDX a couple of weeks ago and on the other hand, Stentor had a cooperation with IDX concerning the PACS business and so I just wondered whether you have already made any conclusion about this program, or this co-operation? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay, two comments. I think, yes, GE has acquired IDX. I think I won't comment on that move besides the fact that IDX is a company that we had looked at and I think I will comment more and I will leave it at that. Now, as far as the relationship between IDX and Stentor, actually the agreement between IDX and Stentor has been renewed for a period of 10 years just prior to the acquisition of IDX by GE, so I think that leaves us, I would say, with something which should not impact Stentor. Now, that being said, we are [working with] Stentor, I understand, ways to partially at least make us somewhat independent from IDX. So I think we have a range of possibilities. We could keep the two companies pretty much working together or if they are to do differently, we might decide, actually, to take a bit of independence, in terms, I think, as far as Stentor [costs] is concerned we are pretty much [blocked]. The next question comes from Mr. Niels de Zwart from Rabo Securities. Please ask your question sir. Niels de Zwart - Rabo Securities - Analyst Good morning. My question is relating to MDS. Could you please give us the demand for which it is on your books currently, given that you indicated you might see some impairment charge in Q4? That was my question. Yes. Indeed, I think the book value of MDS today, at the end of September, is around 150m. I think that's a number we can use. Niels de Zwart - Rabo Securities - Analyst The next question comes from Mr. Sean Murphy from Nomura. Please ask your question sir. Sean Murphy - Nomura Securities International - Analyst Hi, can I just open it out to a broader question at this stage? For me, the number one feature of these results was sales growth ahead of expectations. And that seemed to be quite broad across all the divisions. I'm wondering to what degree is that affected by currencies or market share gains, and really, I suppose, what I'm asking is, if you exclude currency and market share gains, what's your general impression of the state of the end markets right now? Okay. I think we have communicated to you actually two levels of sales growth, the so-called nominal, which actually is excluding -- I mean, sorry, is not correcting for the impact of exchange rates. But you have the so-called comparable, and that essentially is very much correcting for that, so the 4% growth which is made of 7, 13, 8, 5 and -1 respectively for the five product divisions, that is very much eliminating the impact of currency. So now to the second part of your question, whether that says for the strength of the end consumer market. I think the end consumer market has been pretty much the way we described it to you at the end of Q2, meaning pretty dull in Europe, a bit more exciting in Eastern Europe, the same -- still strong in Asia, as we all know, and probably a bit lower than before in the U.S. and strong if anything in Latin America. So why then did we grow? I think we grew essentially as a result of the innovation that we have introduced. You need to realize that besides DAP which introduced a new line of shavers, they introduced a PerfectDraft which we just launched in Germany, Senseo continues to do pretty well, that's for DAP. As far as CE is concerned, we have the new range of LCD flat panel displays, as well, as I said, as a couple of products you should check on in the Home Entertainment, and all that which is essentially new products, have helped us to grow. But all in all, the market is probably as dull as it was when we discussed that issue at the end of Q2. Sean Murphy - Nomura Securities International - Analyst We have a follow-up question from Mr. Nicolas Gaudois from Deutsche Bank. Please ask your question sir. Nicolas Gaudois - Deutsche Bank - Analyst Just a clarification on what you said previously on Semis, when you were talking about strength in mobile and home, and weakness in Automotive and Multi-markets, this is year-over-year comparison versus sequential? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Okay, thanks. And have you started seeing lead times expanding a bit in your Semis business with lead times starting going up, and if that's so, would you expect the level of turns in Q4 to still be similar to Q3, or actually start coming down, and what was the level of turns business in the third quarter? Thank you. Well, I'm going to say I -- I think I will stay very prudent on Semiconductors. You will say that we were over-conservative when we talked to you a couple of weeks back. I will take the risk of being over-conservative again when I talk to you today. I think it's really too early to say anything. The backlog is so short that it's really hard to reach any conclusion, and I wouldn't do that now. Maybe at the end of Q4 I will tell you a bit more. Our absolute priority now is, in order to keep that level of margin in the right direction, is to absolutely focus on the operating excellence. That's what we've started doing, and we'll continue to do that in the fourth quarter. It's hard to say anything else today. It's just too early. We can't see anything else. No. I think it's still as, I would say, as a short-term and keeping us on our toes as it was at the end of the previous quarter. Nicolas Gaudois - Deutsche Bank - Analyst That's a number I don't have. I think we'll have to come back to you offline on that particular one. I don't have the answer to that one. It's a specific one. I would have to come back to you. Nicolas Gaudois - Deutsche Bank - Analyst Yes, good morning sir. Yes, just one question. I was wondering if you can give us an update on the building up of the new business of Consumer Health and Wellness, and if you still expect the revenues of this new business to be around 750m to 1b at the end of next year. Can you give us an update on that please? Okay. I think in this particular domain of Consumer Health and Consumer Wellness, Health and Wellness, I think what we started doing is two things. We have entered an initiative which should start generating revenue as early as next year and these are either actually products which we have re-assigned internally or existing technology that we had internally that we will start really promoting, pushing and investing on to generate revenue streams for next year. So the first part of your question, yes, we do have internal initiative. I can't say much more. I think we will communicate about that a bit more, probably, at the end of Q4, so yes, these will be there and we'll start adding a bit of traction. The other thing we've done is that we've looked at actually a few acquisitions. It's too early to talk about it because just like in Medical there, we apply the same kind of discipline. If it doesn't make economic sense for us it's not because it's part of that new domain we want to push, that we are going to do it. So we've looked at a few things. We are continuing to do so, as we speak. We might have things to say come next year, but right now, I can't say much more, but we are looking at a few targets in that domain, yes. But would you still expect the revenues to maybe reach the 750m that you stated earlier? Is that something still possible or --? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, that -- yes, that is our target. We gave that target, so that target doesn't change, but obviously we can predict certainly the initiatives based on the incoming -- on the revenue for incoming from internal products, or internal technologies. I think that we can do business plans and feel good about it. As far as acquisitions are concerned, until a deal is done, it's not done, so – I think the target is confirmed. The initiative is there. You would have to get the first acquisition to really firm up the timing of that specific number that you just mentioned. Bert van Dijk - Het Financieele Dagblad - Media And maybe as a last question, can you give us a little more detail about what kind of product categories you're thinking of to --? Pierre-Jean Sivignon - Royal Philips Electronics - CFO Well, I could but I will not. I have two answers, but if you don't mind, I would wait one more quarter to do that. Actually, we have started to focus on two, if you don't mind I will keep that news for -- as part of our fourth quarter communication. But the answer is, we have started focusing on two, and we'll talk about it in the quarter from now. Okay, thank you very much all of you. I think there are a couple that we need to come back to, and we'll do that. I think Alan and his team will come back to you, but anyway, thank you very much to all of you. This concludes the Royal Philips Electronics third quarter results [indiscernible] conference call on October 17, 2005. Thank you for participating. You may now disconnect.

EarningCall_233909

Thank you for standing by and welcome to Lexmark International Fourth Quarter 2005 Earnings Conference Call. During the company’s opening remarks all participants will be in a listen-only mode, afterwards we will conduct a question and answer session. At this time if you have a question please press “*” “1” on your touchtone telephone. As a reminder this conference is being recorded on Tuesday, January 24, 2006. I would now like to turn the call over to John Morgan, Lexmark’s Director of Investor Relations. Please go ahead, John. Okay Ashley, thank you. Good morning and thank you for joining us today for Lexmark’s fourth quarter 2005 earnings conference call. With me today are Paul Curlander, Lexmark’s Chairman and Chief Executive Officer; and John Gamble, Lexmark’s Executive Vice President and Chief Financial Officer. After their prepared remarks, we will open the call for your questions as time permits. Following the conclusion of this conference call, a complete replay would be made available from our Investor Relations website located at http://investor.lexmark.com. Currently, in the upper right-hand corner of this website you can access supplemental information slide that we hope you will find useful. As a reminder, any of today’s remarks that are not statements of historical facts are forward-looking statements that involve certain risks and uncertainties that are disclosed in the Safe Harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements. Lexmark undertakes no obligation to update any forward-looking statements. With that I will turn it over to Paul. Thank you John. Well today we are announcing fourth quarter results, which our revenue was in our range of expectations for at the low end and our earnings per share were significantly stronger than expectations. Finance results for the fourth quarter were weaker than a year ago reflecting the year-to-year price declines and weaker at near-term supplies revenue we spoke about in October at our Analyst meeting in November. Fourth quarter revenue was 1.365 billion, down 12% year-to-year, and at the low-end of the guidance range due to less than expected hardware sales. Hardware revenue for the quarter was down 25% year-to-year driven by a high single-digit decline in units and further impacted by year-to-year declines in price and a continued mix shift among products. Supplies revenue for the quarter was down 1% year-to-year as we continue to see year-to-year channel inventory changes in both laser and inkjet supplies and weakness in end-user demand. Earnings per share of $0.71 significantly exceeded our expectations but still were down from $1.18 that we delivered in the fourth quarter of 2004. Earnings per share exceeded our guidance range due to less than expected operating expenses and less than expected inkjet and unit sales in the quarter. Net cash flow from operating activities was $213 million in the fourth quarter, and although this is down year-to-year, it represents a 62% improvement over our third quarter 2005 results. For the quarter, supplies revenue was down 1% year-to-year with both laser and inkjet supplies being flat to down year-to-year. On a high level, we have been negatively impacted in the third and fourth quarter by a year-to-year channel inventory changes in both laser and inkjet supplies. We expect to see additional negative year-to-year impact in the first quarter of 2006 but less that what we saw in the third and fourth quarter of 2005. Underneath these impacts we believe that end-user demand for laser supplies continues to grow year-to-year approximately inline with the model we have been projecting through 2005. However, for inkjet in the near-term, we project an ongoing decline in growth rate and end-user demand for supplies due to weak sales of branded hardware over the last 18 months, the change in inkjet sales we are announcing today and the slowing growth we are now seeing in OEM sales. Looking forward, year-to-year negative channel impacts reduce, in the near-term we project that improvement will be offset by erosion in inkjet and user demand. The net effect in the first quarter 2006 is that we currently expect overall supplies revenue to be about flat year-to-year. Now lets talk about the consumer market segment. For the quarter, consumer segment revenue was 672 million, down 11% year-to-year. Consumer segment income in the fourth quarter was $43 million. This is a decline of 50% year-to-year as the consumer segment continues to be impacted by significant year-to-year price declines and weak supply sales. Inkjet unit shipments for the quarter were down 8% year-to-year as strong growth in branded all-in-ones including big growth in the key segments on Four all-in-ones and inkjet four-in-ones was more than offset by declines in branded single function printers and OEM unit sales. In the US, for mid-year we had lost inkjet share in the retail channel. Fourth quarter inkjet retail sales were up strongly year-to-year. According to the latest MTV US data, in the fourth quarter Lexmark gained back the share we lost earlier in the year, we finished 2005 with 21.5% of retail market share for the year, essentially the same share as in 2004. In the business market segment, revenue for the quarter was $693 million, down 12% year-to-year. Segment income was 158 million, down 24% year-to-year as the business market segment was impacted by mixed changes and price declines as well as weak supply sales. During the quarter, laser units declines 7% year-to-year with strong growth in color lasers and good growth in branded low-end mono lasers being more than offset by declines in branded workgroup lasers and OEM sales. In the US, color laser unit sales doubled year-to-year in the fourth quarter. Sales out reporting by the three major distributors in the US in the case of Lexmark would see the 10% share of their total color laser unit sales for the quarter. For 2005, revenue was 5.222 billion, down 2% from the prior year. For the year, sales to Dell were 782 million and represented 15% of our revenue. This compared to Dell revenue of 570 million in 2004, which was about 11% of our total revenue. Earnings per share for 2005 were $2.91 and would have been $3.33 without the tax impact of repatriating $684 million under the American Jobs Creation Act. For the year, laser hardware units were up 15% year-to-year and inkjet units were about flat year-to-year. In 2005, hardware revenue declined 10% and supplies revenue was up 5% year-to-year. For the year, net cash from operating activities was $567 million. During the second half of the year, we saw a significant erosion in our profitability due to year-to-year price reductions, weak supply sales, and mixed changes among products. For the second half our operating income margin was 7.6%. Now currently these operating results were not reflective of where we want to be, we are announcing today two actions to drive improvement in profitability and our costs and expense structure. First for 2006, we are implementing a more rigorous process to improve a lifetime profitability and payback on inkjet sales. A major impact of this change will be a significant reduction in low-end inkjet single-function bundle sales of both branded and OEM products. As we made this determination in 2005, we needed the deal with existing commitments represented immediate implementation. We had commitments to suppliers and business partners that stand in the early 2006, a negotiation to require for 2006 products and retail shelf space. In 2005, the affected sales mostly was for granted represented about 4 points of Lexmark’s 20 points of worldwide market share. Now as we move forward, this focus will not preclude us from pursuing bundle sales that generate adequate lifetime profitability or make financial sense in the context of the customers overall portfolio of offering. However, in general, this change is expected to lead to a higher mix of all-in-ones standalone sales and more profitable sales channels. And second, we are also announcing today a restructuring plan to improve our costs and expense structure. And prior to this we will be consolidating manufacturing capacity in our supplies facilities, which will include the closure of our site Scotland inkjet manufacturing facility. We are also reducing our costs and expenses in the areas of supply chain, G&A expense as well as marketing and sales support functions. We are also announcing today plans to freeze our US Pension Plan in April 2006, and enhance our corporate 401-K contribution. In total, our restructuring will eliminate our transfer about 1350 positions overall with approximately 825 positions being eliminated and about 525 positions transferring to primarily low cost countries. We project the cost of implementing these actions to be approximately $130 million in 2006, of which about 80 million will be cash and expense. Annualized full year savings from restructuring are expected to be about $80 million, with 2006 savings of approximately $50 million. Now once the improvements driven by these actions are realized we believe our operating income margin will fall into the range of 8-10% including the impact of FAS 123R. Now while we are taking these important steps to reduce our costs and expense structure, at the same time we are continuing to invest to better position ourselves in the growth segments in the market. Our strategy continued to be centered on three strategic initiatives: expand the number and the penetration of product segments in which we participate including low-end mono laser, color laser, laser all-in-ones, photo all-in-ones and inkjet four-in-ones. Secondly, to expand our penetration in key market segments including solution from services, small EMEA business and parts of the retail channel where we underrepresented. And third, we want to continue to build Lexmark’s brand awareness and brand position. Now we are already seeing the impact of their increased R&D investment. Looking back to 2005, we introduced a number of new products that had improved our position in low-end mono lasers, color lasers, photo all-in-ones and inkjet four-in-ones. Now as we look forward to the first quarter we are not expecting significant improvements in business conditions in the near-term. In the first quarter we expect revenues to decline in the high single-digit to low double-digit range, and earnings per share to be in the range of $0.60 to $0.70 excluding the impact of restructuring costs and entering curtailment gain but including the impact of FAS 123R, which we estimate would be $0.06 per share in the first quarter of 2006. Now as we looked for longer-term, the distributed output in market is growing and presents a number of attractive growth opportunities in segments where we are currently underrepresented. We had unique strength in this market and continue to strengthen our competitive positions to investments in R&D and branding. We have a strong financial position with a strong balance sheet and good cash flow. This coupled with the strength of the products we announced in 2005 to pipe on the products on the way, the steps we are taking to focus on more profitable opportunities in inkjet and to restructure our operations, to make that optimistic about the longer-term. Now with that, I will turn the call over to John Gamble, who would give more detailed remarks on the financials. Thanks Paul and good morning. Consistent with previous calls, I will first discuss our results of the fourth quarter relative to the prior year, then relative to the third quarter of 2005. Next, I will indicate our full year results relative to 2004. I will also provide you a quantification of variances for margins as well as explanations of selected changes on the balance sheet and certain items of cash flow. Finally, I will finish with more detail regarding our guidance for the first quarter. In addition, at this time of the year we typically provide an update on our estimate of the install base of laser printers and inkjet printers. Going forward as opposed to providing this estimate, we will be providing you with historical data on actual annual unit shipments for laser and inkjet products. In the supplemental information slides posted to our website, you will find three years of historical annual data. For 2005, inkjet units were 18.4 million, about flat from last year. Laser units were 2.0 million, up 15% from 2004. Now let me start with the P&L. Total revenue for the quarter was $1.365 billion, down 12% from last year and up 12% sequentially from 3Q. Total revenue for the full year of 2005 was $5.222 billion, down 2% year-to-year. Geographically for the fourth quarter US revenue declined 13% year-to-year, revenue in EMEA declined 13% year-to-year, the remaining geographies were down 6% versus a year ago. Geographically for the full year US revenue declined 2% year-to-year, EMEA revenue declined 4% year-to-year, and the remaining geographies increased 2% year-to-year. Laser and inkjet printer revenue in the fourth quarter was down 25% from 2004. As Paul indicated earlier, inkjet hardware shipments declined 8% and laser unit shipments declined 7% year-to-year in the fourth quarter. Inkjet, hardware, average unit revenue, which reflects changes in both pricing and mix was down just over 15% year-to-year reflecting price reductions in excess of this amount, partially offset by richer mix. Laser hardware AUR was down about 20% reflecting the impact of both unfavorable mix and pricing. Full year 2005 hardware revenue of $1.799 billion is down 10% year-to-year. Inkjet hardware units of 18.4 million units were flat from 2004. Inkjet AUR was down just under 15%. Laser hardware unit shipments of 2 million units were up 15% year-to-year. Laser AUR was down almost 20%. Laser and inkjet supplies revenue in the fourth quarter was down 1% from 2004. Supplies revenue accounted for 59% of the total revenue in 4Q. Full year 2005 supplies revenue of $3.117 billion is a 5% increase year-to-year. Business segment revenue for the quarter was $693 million, down 12% from 2004 and up 7% sequentially from 3Q. Revenue for the full year was $2.775 billion, down 1.5% versus 2004. Consumer segment revenue for the quarter was $672 million, down 11% compared to a year ago but up 18% sequentially. Revenue for the full year was 2.447 billion, down 2% versus 2004. Gross margin for 4Q was 28.3%, down 370 basis points from 2004 and down 110 basis points sequentially from 3Q. The decline from prior year was driven by lower product margins, principally in inkjet and laser hardware of 820 basis points. The hardware margin decline is principally due to aggressive market pricing in inkjet hardware and to a lesser degree laser hardware. The product margin decline is somewhat offset by a 460 basis point improvement in mix, mostly from a decrease in the percentage of inkjet hardware. The 110 point sequential decline is driven by the mixed decline of 170 basis points, mostly from an increase in the percentage of inkjet hardware, offset by a 60 basis point improvement in product margin mainly driven by a reduction in combined lower of cost from market and advanced purchase charges in the quarter. Full year gross profit margin was 31.3%, down 240 basis points from 2004, driven primarily by product margin decline of 520 basis points principally due to aggressive hardware pricing in both inkjet and laser markets, offset by a mixed improvement of less inkjet hardware and more supplies. In the quarter several product transition to supply our managed inventory agreements that were not previously under such agreements. The benefit to Lexmark of this transition was $19 million, which is reflected as lower advance purchase commitment charges. The full year impact of transitioning the products to supply our managed inventory agreements in 2005 was $49 million. Total operating expense was $273 million, a decrease of $24 million year-to-year driven primarily by lower SG&A expense. Sequentially operating expense decreased by $2 million versus the third quarter. Excluding costs of workforce reductions, operating expense increased $6 million compared to 3Q driven by spending to build the brand. Full year operating expense was $1.102 billion, an increase of $43 million, excluding workforce reductions operating expense increased $32 million driven by our investment in R&D as well as increased marketing and sales. The operating expense to revenue ratio in 4Q was 20%, an increase of 70 basis points from 2004, and a decrease of 260 basis points sequentially from 3Q. The increase from prior year was primarily the result of lower revenue. The sequential decrease was primarily due to higher fourth quarter revenue. Full year operating expense ratio was 21.1% or 20.9% normalized without the workforce reduction, an increase of 100 basis points primarily driven by our investment in R&D. Operating income was $114 million, down $83 million from the fourth quarter of 2004 but up $31 million sequentially. The decrease in operating income versus last year was in both of our operating segments. Business segment operating income of $158 million was down $49 million versus last year. Consumer segment operating income of $43 million was down $42 million versus last year. Full year operating income was $543 million, a decrease of $198 million versus 2005. Excluding the impact of the 2005 workforce reduction, operating income declined $188 million. Business segment operating income was 661 million, and down 12% versus 2004. Consumer segment operating income was 232 million, and down 30% versus 2004. Other expenses consisting primarily of costs related to centralized supply chain, IT and other operating expenses primarily G&A were $359 million, an increase of $6 million from 2004. Operating income margin was 8.3%, down 450 basis points from 2004 and up 150 basis points sequentially from 3Q. The decline from prior year was primarily attributable to our gross profit decline. The increase sequentially was in 90 basis points improvement without the workforce reduction impact. This favorability was primarily driven by the improvement in operating expense ratio. Full year operating income margin was 10.2% or 10.4% normalized without workforce reduction, down 340 basis points driven primarily by the gross profit erosion. Concerning financing and non-operating costs, the interest in other was a net income of 4.5 million, a decrease of 2.1 million from 2004 and a decrease of $0.3 million sequentially from 3Q. For the full year our investment income was $20 million in 2005 versus 14.4 million in 2004. The tax rate for the full year of 2005 was 35.6% including an impact of 51.9 million tax paid related to funds repatriated in 2005 under the American Jobs Creation Act. Excluding this impact our 2005 tax rate was 26.8%. This was higher than the 25.6% tax rate we had expected, as the tax benefit due to the income we generate in low tax rate countries and foreign tax credits applicable to US taxes were lower than we had previously expected. The increase from the full year rate to 26.8% results in the fourth quarter tax rate of 30.4% versus the 25.6% we had expected this fourth quarter rate resulted in tax expense being higher than expected by 6 million or $0.05 per share. Net income for the quarter was $82 million, down $73 million from last year. Net income in 2005 was $356 million. Earnings per share for the quarter was $0.71, down from $1.18 last year, a bit stronger than the $0.40 to $0.50 we indicated in our October earnings call. This difference was due to lower operating expenses and higher gross profit due to lower than expected sales of inkjet hardware units. Earnings per share for the year were $2.91 excluding the $0.42 per share impact of cash repatriation related to the American Jobs Creation Act, EPS was $3.33. Now moving to the balance sheet, cash and marketable securities in the 4Q was $0.9 billion, down $43 million since September. Cash decreased due to continued significant share repurchases which I will talk on later. Accounts receivables decreased $5 million from September, inventory decreased $58 million in the quarter reflecting improvements in inventory management and coverage of products and supplier agreements. Accounts payable increased $39 million since the end of September. Cash flow from operations for the quarter was $213 million, a sequential increase of $82 million. Full year was $567 million, a $209 million year-on-year driven by lower earnings. Capital spending for the quarter was $48 million and $201 million for the year. Depreciation for the quarter was $48 million and 159 million for the year. Currency of the Euro was accounted for at $1.19 compared to $1.29 in 4Q ’04. During the fourth quarter, the company continued to repurchase shares relatively aggressively. In 4Q we repurchased 4.3 million shares at an average price of $46.16. Total cost was 200 million. At quarter end we had $331 million of share repurchase authority outstanding. On January 20, the Board approved an additional $1 billion repurchase authority. For the full year of 2005 we repurchased $17 million shares of $1.1 billion at an average price of $63.04. On December 20, the Board of Directors retired 44 million shares of the company’s class-based stock held as treasury stock. There was no effect on the company’s total stockholders equity. Now Paul indicated the restructuring plan announced today will have a total implementation cost of $130 million, all of which we expect to incur in 2006. Now I will take a moment to outline how these costs will impact the income statements. Approximately $65 million of the total $130 million cost was due to the closure of Rosyth, Scotland, inkjet cartridge facility and other facilities of which approximately $50 million will impact cost of sales and $15 million will be reflected as restructuring and impact operating expense. The cost of sales charge is principally accelerated depreciation, which is non-cash. The remaining $65 million of the $130 million will be reflected in operating expense primarily as restructuring charges. Charges will be incurred in each quarter of 2006 concurrent with the timing of the employment reductions. Approximately $80 million of the full year impact will be a cash cost. In the first quarter approximately $50 million of the $130 million cost of the restructuring will be incurred, due to facilities closures $25 million will be in cost of sales and the remaining estimated $25 million impacting operating expense. Approximately $25 million would be a cash cost. This restructuring is expected to generated approximately $50 million in savings in the full year 2006. The $50 million savings in 2006 includes a $10 million curtailment gain in the first quarter related to the freezing of US pension plans. The first quarter savings including this curtailment gain is approximately $15 million. On an annual basis going forward in 2007 and beyond, we expect approximately 80 million in savings, approximately 70% of which will benefit cost of sales and 30% operating expense. Now my forward-looking comments concerning 1Q. As Paul mentioned, we expect first quarter to have revenue decline in the high single to low double-digit range versus the first quarter of 2005, we expect EPS to be in the range of $0.60 to $0.70 per share excluding the $0.33 per share impact of the cost to the restructuring and facilities closures, and excluding the $0.06 per share curtailment gain related to the freezing of our US pension plans. GAAP EPS, which includes these restructuring and facility for your cost and the curtailment gain is expected to be $0.33 or $0.43 per share. Included in our guidance as we estimated $0.06 per share impact of FAS 123R option expense. GAAP EPS in the first quarter of 2005 was $0.96. In the first quarter we expect gross profit margin percent excluding the impact of the facility closure cost discussed earlier to be lower year-over-year due to continued product margin erosion and higher sequentially due to favorable product mix. Operating expense to revenue ratio excluding restructuring expense and curtailment gains in the first quarter is expected to be up year-over-year as marketing and sales and G&A reductions mostly offset both the impact of higher development spending and option expenses and the impact of lower revenue versus the fourth quarter of 2005 operating expense to revenue ratio excluding the restructuring expense and curtailment gains will be up reflecting option expense and lower revenue. Operating income margin in the first quarter excluding the cost of the restructuring actions and curtailment gains is expected to be lower compared to a year ago due to product margin erosion versus the fourth quarter of 2005, operating margin excluding the cost of the restructuring actions in curtailment gains will be about flat. For the full year of 2006 we expect the pre-tax impact of FAS 123R to be approximately $36 million with the impact being similar in each quarter. The effective tax rate in 1Q ’06 and for the full year of 2006 is expected to be 29%. Capital spending for 2006 is expected to be approximately $230 million and depreciations is expected to be approximately $160 million. At this point actually we will go ahead and open it up for questions. Yeah good morning, thanks. Paul, can you comment on channel inventory with regard to major products and where we are exactly with supplies both inkjet and laser? And actually if I could before Paul answers that question, its John Gamble, my comments, I indicated full year operating income was $543 million, it was actually $534 million, sorry I transpose two numbers. Okay, then relative to channel inventory on major products, part of that will sound in the fourth quarter with some erosion in channel inventory, particular in the US, we approved laser products as you know we want to transition laser products in the middle of the year. And on the workgroup side, given the slowness we have seen in the market and slowness we had in that category, we had luck in inventory and the channel as we go into the fourth quarter and we had some erosion with that inventory. On the supply side we continue to see year-to-year negative changes or impact as went through the fourth quarter or so, in both inkjet we saw, then laser as we go into the first quarter we expect to see some more year-to-year changes in channel inventory, but less than what we have seen in the third and fourth quarter. Okay and then with regard to the trends in the business market, when do you think you will see the benefits on the top and bottomline from your color laser foray? Well I think that right now in the business market, I mean if you look at 2005, I think the unit growth was really pretty good, there is a 15% unit growth for the year, and you know on the fourth quarter we were down but the reality is we had a good year on low end mono lasers, we had a good year on color lasers, and now with some would offset by what happened with their workgroup lasers in the year as well as OEM sales. You know I think that the key for us as we look at growth, you know obviously we are seeing some significant revenue declines because there’s some of the unit things but really even more so because year-to-year pricing and mixing, I think the whole thing, the growth for us starts with getting the unit growth going in the right direction. I think in lasers we had a good year, we hope to have a good year in 2006, I think we are already seeing impact in the unit growth numbers for what then becomes our R&D particularly in low-end mono, and particularly in color lasers. I think we are growing in the inkjet size, again, I think it starts with gaining the unit growth going in the right direction. The product what we announced today is that we have a more rigorous progress focused on lifetime profitability and payback. We would expect about 20% of 2005 volume, not to be anniversary, you know in terms of the deals that we are doing in 2006, so that’s going to impact us certainly in terms of inkjet units. Our focus there will be on more standalone sales, our focus would be on all-in-ones, our focus would be on the photo all-in-ones and the business inkjets, we would also refer to as inkjet four-in-ones. And, you know I think that we have seen some impact in those product announcements as well in 2005, and we saw some good results in the fourth quarter and I highlighted some with the inkjet sellout in the US reflecting MPD data we have gained back share for the quarter and the year and finished the year slide up with share year-to-year, which is certainly less farther where we were in the middle of the year, and obviously strong fourth quarter in color laser as we capture 10% of the distributor sellout units in the US. Yeah thank you, I have a few question please. Firstly, just on the supplies growth, Paul you keep referring to year-over-year changes in channel inventory, were there sequential changes in channel inventory in Q4 and are you forecasting sequential changes in channel inventory in Q1? Yeah there were sequential changes in channel inventory in Q4. Again, taking these role estimates in par to say exactly but we did use shrinkage in laser supplies in the fourth quarter, we did see a little bit of uplift in the inkjet supplies in the fourth quarter but you have to moderate that by looking at what uplift we had in the inkjet supplies in the fourth quarter last year. So on year-to-year basis, we were down in both inkjet and laser pretty significantly. Yeah we expect to see a little bit of shrinkage in inkjet as we went up a little bit here in fourth quarter, which gives you a little bit of shrinkage there in the first quarter, I think we expect a little bit of shrinkage in laser but the overall year-to-year impact should be much less than what we saw in the third and fourth quarter. I mean what I am trying to get a handle on is from your peak channel inventory levels to lets say the end of Q1 where it sounds like you think most of the channel inventory brought down will be done, are we talking about three weeks less inventory from peak to the end of Q1? Given that you are mentioning a three straight quarters, you got to believe its material and if it’s a half a week, its not material in my mind, so should we be thinking about a 3-week brought down from peak to the end, I think in your estimate that you said, no one knows for sure but you know what comfort can you give us that there is something material happening here and there isn’t something fundamental happening here? Well first of all, we haven’t quantified it, and I don’t tend to quantify the estimates we have on the channel inventory. I would think relative to what’s material here, I think clearly three-year channel inventory changes had been material for us in the third and fourth quarter, I think they will still be there in the first quarter as we indicated, but I think much less so. I think from a fundamental’s perspective, that’s underneath this, what’s much more important is around the sell-through of the channel and in this case, the fundamental issue for us is that we are seeing an erosion in the growth rate including chip supplies growth. And that’s a fundamental thing, you have to material thing, I think that the investment perspective should be aware of that. What’s happening we believe as a result of the weak branded sales of the last 18 months as we go forward, we will see impact from what we intend to do with the improved profitability focus that we are bringing into, that’s the royalty anniversary in some of the 2005 deals, which will hurt us there, and there’s some supplies associated with those units, which will be a little bit of a drag on the end-user demand. And then, you know the other aspects in here is that OEM had been a strong area of growth for us, we are now seeing slowing in the OEM arena, and so what we are current seeing right now is an erosion of inkjet end-user demand in terms of our supplies growth. And so as we start to recover from these channel impacts that we talked about, and as indicated in the first quarter with respect in the channel impact, we must seduce it wasn’t third and fourth quarter, that improvement is being offset by what’s going on with end-user demand on the inkjet side. So that’s why we are talking about overall supply sales for Lexmark for sales in, we expect it to be about flat in the first quarter. On the laser side as indicated, we think as we look at our estimates and look at the market, we believe that we are about on the model that we had projected through 2005, if not for sales it’s not from pockets where there is some end-user, and not what we thought but overall as we looked at it, its within the range as you would expect for the model. So I think the fundamental thing underneath is your erosion in the inkjet end-user demand for inkjet. Thank you. Paul on the restructuring that you have announced, why do little back of the employee John, 850 employees, you know little less than 100,000 employee gets you pretty close the 80 million without any help from the transferred employees. Can you help us understand what you are expecting in terms of savings per employee for the transferred employees versus the positions that are being eliminated? And why there wouldn’t be a greater than 80 million total benefit? Richard, we haven’t thought of breaking down in terms of savings in employees versus savings from the other aspect of what we were doing. But I would say it just kind of help gauge it, we looked at 1350, about half is coming from Rosyth closing, so we have a lot of manufacturing employees in there, what’s obviously would be a much lower number. Secondly, as we look at the transfers, you don’t so much get elimination of people but you obviously get a reduction typically in the run rate of expense. Third, as we consolidate manufacturing we are going to get some improvement in cost of the manufacturing side, so we have a lot of different moving pieces in there, not looked at what the savings if current employees for say. But I can tell you all that aggregated to about an $80 million savings, so unfortunately we are moving pieces in there. Okay thanks, and if I could one more, just to clarify and elaborate on the factors driving the erosion and the end-user demand that you mentioned, you talked about weak branded sales and its long in the OEM arena, could you just go over, have you completely listed in the fact that he believe that are effecting it with those two, you know what are the others if they are material? And then particular the idea of install base churn and the average lives of the printers either increasing or decreasing in the install base, what is your data telling you about that variable in particular? Thanks. Okay, couple of things, Richard, I think that the way that we think about it, the major factors are really in the category of the weak branded sales, the slowing that we are now seeing in OEM supplies growth, and as indicated looking at store as we implement this more rigorous process focused on profitability over life and payback on inkjets. If we were to take, you know our current set of assumptions, and prices, and whatever applied back against fields what we have done in 2005, we can see if there’s about 20%, you know that’s an estimate and that 20% of that business won’t be anniversary into 2006, and they’d also become a little bit of a drain on that end-user demand. But the specific question, I talked about branded sales, you know this is all about, what’s happening in the install base. And, as we look at the model in inkjet and what caused us to not have a right view of where things were going forward is that we really think that the usage pattern over life is different than what we had assumed previously, and as we always have that wrong, or whether this going to change its hard to say, but obviously what we find best model of the data we are seeing right now is the difference in the usage over life, and what we see there is its very difficult to differentiate between the usage over life and average life. You know you can have usage changes if someone stop using the product effectively its hard from the install base, or someone who just keep it and use it less, so what we are seeing is much more of that usage being front-end loaded. So in some ways you could say yes, that’s a good short of life out there in the install base extensive usage is more frontloaded, but we had a change in that curve over life. And as we made that change on our models to reflect that its happened to us here in 2005, we now are getting the view in 2006 given what we see for sales, that we are going to have a declining growth rate, we are going through a period of declining growth rate in end-user demand, and so that’s an underlying fundamental here, that’s going to offset some of the improvement we will get from the channel, year-to-year channel impact being behind us, so what I would tell you is that the after through this is that we need to go get our hardware sales moving in terms of units particularly the branded units and particularly the higher usage products likely all-in-ones, the photo all-in-ones, the four-in-ones and that’s a focus that we are bringing to the business as we go in 2006, and obviously we’ve got a pretty good fourth quarter 2005 in all-in-ones, photo all-in-ones and four-in-ones. Thanks, a couple of questions, following up the conversation about the inkjet model, really demand changing, do you feel that at this point its still influx or do you think you’ve settled in for the new demand patterns? We think from a model perspective, we have something that is going to be good to us going forward, I mean the only way you know that, not through this find data doesn’t match which we model projects but so far we are tracking against that, you know I think that the key thing here is that OEM appears to be slow in force and so that’s something that will continue to drive our reduction I think in growth rate as we go forward. I also think that the change we are making again the profitability and the more rigorous process we are using on payback with our life for the inkjet, we already know that 20% of the business we did in 2005 approximately is not going to be anniversary so that’s also going to be a drain. So I would say clearly we are going through a period of declining end-user demand on inkjet and I think that’s going to continue here certainly as we go through 2006. Then the offset to that is what we can sell, typically focused around higher usage products of all-in-ones, photo all-in-ones, business all-in-ones, and again that’s what we are trying to drive the business. And then talking about this new process on the inkjet it sounds more like you are curtailing some sales that you didn’t feel worked in 2005, are you looking at making any sort of additions to the sales channel, the sales prospects or is it more eliminating things that weren’t working? Really what we are doing Cindy is, we are looking at profitability over life, and in addition to looking at price, which we’ve always done, we are using the current usage assumptions and usage assumptions obviously have changed some as we’ve gone through 2005 here. We are also taking a hard look now and including in cost to sales, which really reflect difference between sales channels and differences between countries and geos. And that obviously has given us a little bit different deal looking back at the business. I would say in terms of sales channels we are not happy with where we are in our retail distribution, and we think that we can make improvements so as we go forward in time and that’s again a focus for 2006. Okay thank you, couple of question. First of all, for John, I know its difficult to say but do you have any idea of how much of the restructuring benefit you expect to hold-up the bottomline for the company and how much you expect to be reinvested in price and other initiatives? Secondly, I guess for Paul, you said you expect 20% of ’05 inkjet unit shipments not to be anniversary in ’06. Can you give us a sense of how much of that is only OEM versus the branded side? And does it take it into account the supplier diversification at Dell that you are coming in at the Analyst Meeting was probably inevitable and we shall be expecting? Thank you. In terms of how much of the restructuring savings fall through the bottomline, I think the best way to answer that is as we’ve talked about our operating profit model we have indicated we would be in the 8 to 10% range and that’s where we would be operating and what we need to do in order to operate in that range is execute the restructuring and deliver the savings. And to the extent we do that will operate in that range? Its relative to the 20%, if you look it excludes OEM versus branded, majority of that is branded and relative to Dell, I can’t comment on plans with Dell and what they may do with their suppliers but again I would say that the majority of the 20% that we are focused on is branded sales, not OEM. Okay, and just a quick follow-up, Paul, I was hoping if you could give us a little bit more color on the laser shortfall in the quarter? You went from strong double-digit growth last quarter to a high single-digit year-over-year decline this quarter, I know you talked about some inventory correction, was that a primary factor that caused you to not have seasonality, seasonal benefit in that business during the quarter? Or could you give us maybe a rank order of the factors that negatively affected that business in the quarter? Thank you. One thing I didn’t say in my prepared comments is if we look at overall, although we were down 7% in inkjet, so we were about flat in branded, and down pretty significantly in OEM, so one of the first factors was a decline in OEM sales. I think beyond that as you look at the branded side, we had good growth in low-end mono, maybe not quite as strong as in the earlier quarters but the volume level is very good against a very tough compare, as they had a terrific fourth quarter of 2004 in the low-end. We have a very strong color laser sales in the fourth quarter and it starts out gaining share in the US what we see in the market numbers, you know I think in workgroup, I think you know on year-to-year basis, certainly hurt by the erosion but I think the market has been weak in workgroup, now I tell you overall the US market was particularly weak as far we could see in the fourth quarter, you know if we look at the – to me the best metric on that is when we look at the distributor sales out from the top three distributors: Tech Data, Ingram, and Synnex where we get sales out reporting. Overall lasers, mono and color together were down about 10-11% year-to-year in terms of units in the fourth quarter was really it’s a very weak quarter. As we look at color growth in the fourth quarter, on that sellout data it was the weakest that we had seen all year with about 15% year-to-year color unit growth from distributor sellout. We clearly saw sales in large accounts, big deals slipping out in the fourth quarter into 2006. So I think the market was somewhat weak in the fourth quarter but obviously OEM I think was a big factor and I think that erosion in the channel in our working place has hurt us, but I think workgroup has been weakening as we went through the year. Yeah thank you. Paul, could you just first of all define what you mean by 25th will be not an anniversary? I think I get it incorrect, but are you simply saying that those units will not be supportive is that the point or clarify that? Think of it this way, I mean it’s a little bit of a difficult thing to say but as we look at where we currently are with our usage rates and prices and looking at the cost of sales and different inventory in sales channels. When we take that data and we go back and look at say deals that we did in 2005 or we look at products that replaced in specific channels in 2005. Given this current set of data, current prices, current usage, current your cost of sales, that stuff wouldn’t pass our profitability test. So we are in the process of stopping those deals to the extent that they are annual type of things won’t do those deals anymore, the extent that there is certain products and certain channels, we don’t want to do those anymore. So that’s the sense of it. Its obviously very difficult to say what we are going to sell in 2006 if we haven’t done it yet but we can say looking back we had about 20% of the stuff we sold in 2005 in not going to get anniversary. And thinking of it again in terms of deals what we are done or products placed in specific channels. To experiment, could you comment on the extent to which they already will have a test in Q4 results? Or was that long up in? Well I think that there was not a lot of that reflect, I think maybe some of it was in Q4 but what happens to it is as cling to this determination, the commitments we have with our business partners, the supply chain of products coming in, we just had a follow through with that and even into 2006 here some of that is still continuing because the commitment to remain supply chain products that are already in the pipeline. So really I think this is a more of a going forward factor for us than the fourth quarter factor. Good morning, just a couple of questions, Paul, what do we think about in terms of percent of revenue from that, you know 20% you are not going to anniversary? And also as we think about manufacturing leverage, it sounds like your kind of significant number of units, what are your manufacturing partners saying? Shannon, we haven’t given a specific revenue number offset 20%, we would just characterize as a percent of revenue in terms of the percent of the market share that we have out there. From manufacturing perspective obviously this puts up cost pressure on us but we are working very hard with our manufacturing partners, we have certainly have kept them informed of where we are and what the situation is, and we are looking to take a lot of cost out of the business this year, certainly with the restructuring we talked about as well as our normal cost reductions that we would bring in the year but obviously it puts pressure on us when we take all of them out. Okay, and then a follow-up, actually two. One is, what percent of inkjet manufacturing capacity is in your Scotland factory? And secondly, do you expect any additional benefits from Ingram’s commitment during the first quarter? Relative to Scotland, I am not sure I exactly know what sort of percent of our inside capacity is there, but what I would tell you is that as we work through that this year we believe we can absorb that into our Mexico and our Philippines facilities, so we are able to absorb it. Relative to APC, I don’t know exactly, John… On terms of the transition, our transition was prior then as inventory agreements, I think we believe that transition is principally complete so we are not expecting benefits to the magnitude that we saw in 2005 to refer again. Yeah thanks guys, just want to follow-up on the restructuring because if I look at the increased R&D and advertising investment that you made last year, not really just maintain that then it grow hardware market shares, so why wouldn’t you take a good chunk of the 80 million restructuring savings and invest that more aggressively in pricing and in R&D for some of the higher growth, higher usage segments? Well, I think that’s a good - I think that we’ve put together an aggressive set of R&D plans here in 2006 and we feel like we are putting a lot of amount of money into R&D and we are really undertaking pretty broad initiative right now to expand our product segment and I think if you look at where we had come from, where we have historically not really this strong in single function inkjets or rather call entry all-in-ones, and workgroup lasers to really broaden the portfolio like we are trying to do to get into very aggressively low end mono lasers or I think we had picked up market share in 2005 to get into color lasers to get into laser all-in-ones, to get into photo all-in-ones, to get into business inkjet all-in-ones, its an aggressive set of stuff. I think we have got a lot of investments planned on that. As to pricing, its always have to call how much will go into pricing, its always more than what we think and its always more than we would like, but I feel like we have been aggressive in selling the right price points for the products in the marketplace, but obviously its something we continue to look at as we go forward in time. Thanks, and just quickly on CapEx, it looks like it will be up again in 2006 even though you are rationalizing some of the inkjet business, can you just talk about where the focus of that investment will be? Well again CapEx depends, the investment tends to continue to be around new products and then in our manufacturing facilities and that’s where the investment will continue to be. Yes good morning, this is Mimpark for Laura. Couple of questions, first, and by the commentary not too long ago that Lexmark really need to invest more in R&D and marketing to catch up on the product side and move out of the low end market. Apart from the cuts in the manufacturing side, why won’t the restructuring announcements happen after Lexmark’s left competitive longer-term? Well, I think throughout with what we are doing with restructuring is getting more cost and expense and business that we can then reinvest in the R&D and the brand side. So we shouldn’t be so much thinking about that as hurting with what they are trying to do on the investment side, its actually helping to fund what we are trying to do on the investment side. And a quick follow-up, Lexmark lost two things I guess from the last few months, one to retirement, the other one to HP, what are you doing to improve attention? And how do you look to prevent disruption of your strategy as you bring new people along to rebuild them? You know, I mean this has always a focus not just for Lexmark but for every company, and we have an extensive set of ways that we focus on retaining our executives and I think if you look back overtime we have done a very very good job of retaining our executives. Obviously, retirements are going to happen, I am not quite sure that will offset that, was any retention in mechanism. And from time to time, people do believe, but I think overall we are very focused on retaining our executives and we’ve had great continuity in the management team here in Lexington in Lexmark. Hi two quick questions if I could. No. 1, not sure I heard where the 1350 position start coming from, are those all in the supply chain or is there any are in the R&D or even the sales and admin side? Primarily they are coming certainly from supply chain, they are also coming from our focus in G&A, the expense from our focus also and what I would call sales infrastructure and support, and so what you are seeing is nothing coming out of R&D. We are trying to minimize what we are taking as sales but what we are seeing is in terms of sales structures of what supporting you know beyond the sales that’s not direct customer facing, we try to take some there. Obviously we put a big focus on G&A and we put a big focus on the supply chain. Okay thanks, the follow-up question, if you are going to reduce your focus on the bundling side, particularly in the inkjet area, how do you think that might impact overall pricing, have you seen any signs that bundling maybe you reduced effort by any of your competitors, we haven’t seen any signs of that but curious as to what you are seeing and therefore what might be the impact particularly on the pricing sign? Well I think what we then expect from pricing in general, we are going to continue to see more aggressive pricing out there in the market, I mean obviously, we are looking at a market that you know if I just look at the US, you know grew in units maybe 5 or 6% in the fourth quarter looking at the latest market data, we have not seen data from around the world but recall inkjet is moving low to mid single-digit kind of unit growth rate. With that four major competitors out there, you get people like Kodak, who say they are coming in, you know this is going to be a very, very competitive market situation and you are going to see a lot of price. You know in terms of the bundles, we had great confidence, you know as we pull out that somebody going to step up and do it, and you know we think that life will go on from that perspective, all I would say is that we think that the vast majority that’s not good business for anybody but there’s never shortage if somebody want to do it, think so. Thanks, two quick questions. First, can you talk about in terms of unit percentages in the higher growth or higher usage segments in the inkjet space, in other words –in terms of total units shipments what percentage were in four-in-one, three-in-one and photo. And then secondly what kind of cartridge yield do you expect that percentage of units that you are getting yields. In other words, what kind of supplies impact should we expect going forward? Thanks. Chris, I would tell you that we don’t read specific split between the different segments, but I would tell you that, that certainly a minority of our products would be in those higher usage segments that you would refer to. We also don’t split out the differences in the usage between those different things, but I would say that its not too extreme usage, you know in some cases if you get a good step up, you might get a 30 to 40% improvement over which you might see in an entry level product, but again we don’t split that out points. In terms of the products that you are exiting, the 20% of the volume that you are more or less exiting, what kind of cartridge yield does those products tend to generate? And again, most of those – the majority of that would be single function bundled products, and we think that’s kind of the low end of the usage range. Thank you, at this time I would like to turn the floor back over to John Morgan for any closing remarks.

EarningCall_233910

Here’s the entire text of the Q&A from Homestore’s (ticker: HOMS) 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, good quarter. A couple of quick questions for you. In the 20% Media guidance I believe you gave, what total assumptions are you making for the new initiatives for that for next year? The 20% guidance we're referring to, Aaron, is what we have consistently shared in our investor presentations that for the overall goals for Homestore is to build a company that could reliably produce 20% topline revenue growth and 20% margins, and that's what I was referring to as the overall Homestore corporate objective. Okay. And then, it looks like so far for most of this year, you've underspent a little on some of the new investments you're planning to make. Then I guess that Q4 guidance implies you're going to be increasing those investments. What area could we expect to see an increase from? This is Lew. We have been making the investments, the only thing that has been deferred has been the data center, which we'll take later into the 2006 than we projected. We continue to invest in sales and marketing. You will see an increase in product development expense in all three segments and so the actual initiatives have not changed from what we talked about earlier. One final question. Any more on brokerage kind of deals that we should expect to see over the next six months or so? Yes. We are. We call it the Company Showcase Offering. And we have been adding on a fairly regular basis a number of brokerages around the country. However, NRT is the largest possible sale that we could make and we've already made that one. None of the scale of NRT. Good afternoon guys. A couple of questions from you. Looking at the Print business a little bit more specifically. I know you have gone to a color format now. Could you walk us through a little bit what could look like for next year and specifically if you've been doing anything in terms of driving traffic back to the website, and really what we could expect to see out of that segment of the business, because it's the one that continues -- to improve, but it continues to be, you know, in the form of investment and possibly presents some upside opportunity. Yes. Yes. Mark. There's three areas I'd point you to. One is that in improving the kind of existing business model, we have improved the quality of the book and made it far more attractive as you've pointed out. It's now a four-color promotional material book and it's -- so it's much more attractive. The second thing is that we are, we're accelerating the time from the move occurring to the actual receipt of the book and we've added national advertisers, which have allowed us to double the number of potential books that we could mail. And we hope to realize the benefits of that during 2006, because the national advertisers help us cover the costs of distributing the book into territories where we may not, as of today, have a strong, local advertising sales force. And as to the website in driving traffic to the website, we have not formally launched welcomewagon.com and will not do so until the first quarter of 2006, and at that point you will see us accelerate our efforts to drive traffic to that site and we think it will be a very positive consumer experience. The final point is that, as I said in my formal comments earlier today, we are -- we look forward to announcing a new business model and early in the 2006, which integrates our offering with our realtor customers and we're very excited about that, so they can leverage the Welcome Wagon brand. Just so I understand a little bit better, when we think about the print business in terms of the book, you're basically generating CPM or revenue per book. So hence, you're able to ship more books, does that directly tie into more revenue? It does. And that's where the benefit of the national advertisers came in. We didn't have -- we do not have today, you know, on the ground salespeople covering all local advertisers in the country and as we -- so the national advertisers will cover, basically give us a national footprint for the book on the traditional Welcome Wagon model and then by moving that en brand and that model online with welcomewagon.com and moving more towards a self-service advertising model, that should lower our distribution costs and increase our revenues as well. Hey, guys, this is actually, Zelman (ph) for Jeetil. Two questions. On -- given, you talked about earlier how you think the fundamental business is doing well despite some of the weaknesses in the real estate market. Can you talk a little bit about where you're seeing any weakness in spending from realtors, but more particularly from home builders and sort of what you're seeing in that area. And the second question is, with regards to the investment from Elevation Partners, should we expect to see you guys move into some sort of ancillary businesses to real estate, maybe other verticals offline or should we expect, when you talk about those new growth opportunities, that they're going to be still pretty much in the real estate industry? Okay. I'll take the last question first. That is, we want to maintain and focus on the real estate sector. We think it's a very attractive market opportunity and it's very large and at this point in the development of our Company, we do not want to be distracted or lose focus on that opportunity. As to any softness in willingness to spend among real estate practitioners, that has not been our experience. As I said in my formal comments, we think that the effect of a potential slowdown of the real estate markets is a big plus for us. We've had an incredible, almost twelve-year uninterrupted seller's market where all product in the real estate industry sold and it sold pretty close to listing price. So effectively marketing that product was -- maybe helped sort of out who actually got the buyers, but it didn't really determine whether a property sold and what price it may have been sold at. Now we're entering a buyer's market and the winners and losers will be chosen, I think, by those that are very effective at marketing and in other words, we're going to have to roll our sleeves up and become very effective marketers of homes. The online venue has proven and is proving to be where the consumers are and where the opportunity is. So far, such a small percentage of the advertising spend has moved online, any reallocation of the advertising spend, which is almost $20 billion total, creates a huge market opportunity for us. We're quite optimistic about online real estate advertising, even in a soft real estate market. Okay. And just one last follow-up on your sales force, can you talk about how that's going, whether it's tough to be hiring new workers or whether everything is going fine on the ramp-up? We're trying to be very selective as far as the quality of salespeople that we're bringing on. We're not experiencing a shortage of qualified candidates, no. As we look ahead and your 20% growth for the Media Services business, is that -- is there implied price increasing with the agents or is that more of breadth of agents? That's question one. The 20% you're referring to, I'll go back to the earlier question. My comments about 20%, we have established that had some time ago, actually well over a year ago, we've established that as Homestore's growth target of 20% top line and 20% margins, so my comments were not specific to the Media Services segment. Irregardless of the growth rate, I guess, do you expect any growth to be driven more by pricing or increased breadth of agents or a combination of both? Actually, I think both. We believe that the value of our advertising and the channel that we offer to real estate practitioners, that the value is going up. Just like we've experienced, for example, the increase the traffic costs, we think that is an overall indication of the value of internet marketing. Also we think the migration of offline spend to online spending is in its very early stages and the number of practitioners are effective at online advertising is still quite small and we expect that number to grow. This is all very early in the development of this online real estate advertising opportunity. Okay. My second question is, just kind of a point of clarification, Mike, did you say you expected to reach 20% EBITDA margins, your long-term EBITDA margin target next year? Okay. I was mistaken. I thought you said 2006. Finally, I notice that operating margins and software were down a little bit sequentially, could you elaborate on that a little bit? That's a direct result of the Top Marketer investment. All the dollars that were pouring behind that product which is now a trial with almost 2000 Realtors, that cost is being absorbed in that division. So there's zero revenue coming from that cost structure at this point. Okay, we would like to thank everyone for participating in our call this afternoon and we look forward to speaking with you again with our fourth quarter results early next year. 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_233911

Here’s the entire text of the prepared remarks from Sohu’s (ticker: SOHU) 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. Ladies and gentlemen, thank you for standing by and welcome to the SOHU's Third Quarter 2005 Results Conference Call. At this time all participants are in a listen-only mode. Operator Instructions As a reminder this call is being recorded today, Tuesday, November 08, 2005. Thank you. Thank you everyone for joining SOHU.com to discuss our third quarter 2005 results. On the call today are Charles Zhang, Chairman of the Board and CEO and Carol Yu, Chief Financial Officer. Before the management presentations, I would like to read you the Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates and projections and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Potential risks and uncertainties include but are not limited to SOHU's historical and possible future losses, limited operating history, uncertain regulatory landscape in the People's Republic of China, fluctuations in quarterly operating results and the Company's reliance on on-line advertising sales, mobile phone related wireless revenues, on-line games and e-commerce for its revenues. Further information regarding these and other risks is included in SOHU's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. First, I'd like to highlight one of the most significant events in our Company's history. We at SOHU are all very excited in the first official Internet content sponsor for the 2008 Olympics. This will provide SOHU exclusive access to the 2008 Olympics official Web site content and also give the Company exclusive cross marketing and cross selling opportunities with the other Fortune 1000 corporate partners and sponsors such as Coca Cola, GE, McDonalds, Adidas, Lenovo, China Mobile and Air China. The magnitude of what this means for SOHU is enormous for the future of our on-line advertising business. This was a heavily sought after project in China and the environment in which we won was highly competitive and the one that we view as a testament to the strength of SOHU brand. Our reasons for this investment are simple. As we move closer to the 2008 Olympics we believe we will see accelerated growth opportunities in leveraging the sponsorship program and drive more advertising revenue through customers looking to capitalize on the 2008 Olympic event. We believe it will serve as a platform to showcase our superior technology and a brand presence. There are two core messages that I want to emphasize on our call today. First, we firmly believe that having been chosen as official Internet content sponsor for the Olympics Web sites puts us at the head of the pack amongst our peers. This endorsement is one of the most exclusive events that can happen in the Chinese Internet market. With the full support of the Beijing Organizing Committee of the Olympic games and the Chinese government we are now well positioned to lead our Company down the path of strong success through seamless execution of the Olympic Web site launch. Second, we will continue to drive our business through continued development and the roll out of our own innovative products and services to drive increased traffic and the usage of our sites. We believe the combination of these two events will not only shape the way SOHU sells to its customers, but that it will have a large impact on the Chinese Internet market as a whole. Now I would like to discuss the other highlights for the quarter. First, we reported revenue of $28.3 million growing 9% sequentially and coming in again at the high end of the Company guidance. Now let me discuss the progress of each of our business lines. Advertising revenue was $18.8 million and exceeded our prior Company guidance. Brand advertising revenue was $15.6 million and sponsored search accounted for $3.2 million, an increase of 13% and 2% respectively. Overall we have seen a strong quarter in advertising business. For the first nine months of 2005 we have grown 27% year-over-year similar to our closest competitor. In brand advertising the 13% sequential revenue growth was mainly driven by heavy spending sectors such as real estate, information technology and automobiles. Number of advertisers in the quarter grew from 420 to 450. Our fastest growing sectors were on-line games, financial services and FMCG, fast moving consumer goods companies. On-line games came back stronger than expected mainly due to World of Warcraft having a lesser than expected impact on the launch of other games enhanced our business. On the product side we will continue to launch new products that will drive new users to our sites. For example, we have successfully built the largest community of users in the Chinese Internet space such as PBS (ph), the number one message boards in china and the China Alumni Club and the China message boards. We also launched several new products including our Picture Bar, which allows users to download pictures through various content on our Web site and SOHU's blog. All of these new products are contributing to increased traffic. The goal is to continue to provide more targeted marketing through this platform and to sell our products and services into that user base. Overall, we remain confident that we will be strong, there will be strong growth for our advertising business over the next few years. Branding effect from the Olympic sponsorship will have a significant impact on our ability to drive our advertising business. Our reach will be much broader, especially in areas such as sports, news and in many other channels. We also strongly believe our leadership position allows us to continue to provide clients with unique branding advertising opportunity reaching both the mass population and the targeting communities via our numerous sector specific on-line channels. Turning now to the outlook for advertising for the remainder of the year. Year-to-date our advertising revenue are up 27% growth over the same nine months of 2004. We see continued healthy growth in brand advertising and, as you can see from our guidance, we expect to meet our overall advertising revenue growth target for the full year of 2005, which is 25%. In sponsored search we saw modest sequential growth, which was largely due to several reasons, first, an increasingly competitive search environment, 2) an adjustment to our distributor structure as we strive to position sogou more competitively by using multi-distributors rather than relying on sole distributors. To our satisfaction our own internal beta shows the sogou traffic has grown 50% from Q2 to Q3. Developing a successful search business is based on getting the right technology and the products to increase penetration. Our efforts toward strengthening our search business are heavily focused on these areas. A good example is our recent upgrade of the sogou version 2.0 to sogou version 2.5, which is targeted to be launched later this month. This enhancement will lead to increased traffic over time. We are confident that our investment in developing the right technology and getting the necessary products, the right and necessary products to make sogou a leading search engine for the Chinese language are focused in the right direction. Finally, turning to our largest business where our focus remains on our core advertising business we are very happy to see a continuing cautious recovery in our wireless business with a 6% sequential growth to $6.8 million. We are particularly pleased that the exchange on our 6% growth we did not have to spend heavily on advertisements or other marketing efforts to achieve that growth. We are pleased that our wireless business, although small, has become very stable. Additionally, our Olympic sponsorship should also have a positive impact on our wireless business. China Mobile is also a member of the Olympics Sponsorship program and we view this as a potential catalyst for enhanced cooperation in the future, particularly around the coverage and the related program services of the 2008 Beijing Olympics. Thank you, Charles. I would like to take this opportunity to discuss some key financials to enhance your understanding of our business operations. 1) Revenues, we are pleased to report strong revenues of 28.3 million for the third quarter, which came in at the high end of our guidance. 1) advertising, with advertising revenues of 18.8 million we experienced a healthy 11% sequential and 21% year-on-year improvement. Year-to-date we're on track to meet our target advertising revenue growth of 25% for the full year of 2005. 2) Wireless, we are very pleased to note that our wireless business is continuing to show healthy signs of recovery. Let me give you a breakdown of the third quarter wireless revenue. Our SMS service grew 23% quarter-on-quarter to 4.2 million. Our wire services declined a marginal 2% to 2.1 million. Our MMS, IBR and ring back tone services contribute only very small amounts at this stage. Going forward we believe we will continue to see modest recovery for this business line. 2) Turning to our gross margins overall gross margin for the third quarter was 65%, down from 67% in the previous quarter and 68% in the third quarter of 2004. Advertising gross margin was 74% in the third quarter down from 76 in the second quarter and 79% in the same period last year but still higher than that of our closest competitor. Both advertising profit increased to 13.9 million from 12.9 million in the previous quarter. Non-advertising gross margin was 47% for the third quarter compared to 51% in the prior quarter and 52% in the third quarter of last year. The decrease was mainly due to an alleged penalty of $241,000 charged by Unicom as a result of Unicom's investigation carried out at the previous quarter and such was recorded as a cost of revenue in the third quarter. Although we do not believe SOHU had mistakenly charged users that did not prescribe to our services, the possibility of this penalty being reversed is remote and we would like to prefer to move forward with our business relationship with Unicom and put this behind us. 3) Operating expenses for the third quarter of 2005 SOHU's operating expenses totaled 11.1 million increasing a modest 3% quarter-on-quarter and 15% year-on-year. The year-on-year increase in operating expenses was mostly due to investment in long-term growth opportunity, primarily in the area of research and development. 4) Operating profit margin, operating profit margin in the third quarter was 26%, largely unchanged from the previous quarter but down from 31% in the same period last year. 5) Balance sheet, let me now make a few comments on the balance sheet. Our DSO for Q3 is 82 days compared to 81 days in Q2. Advertising DSO for Q3 is 105 days, up from 89 days in Q2. The increase was due to our biannual payment settlement as agreed with advertising agencies coming in at the end of June, which made the June quarter DSO shorter than the September quarter. Our September 30th net accounts receivable balance was 23.3 million compared to 21.5 million in Q2 including 17.5 million related to our advertising business and 4.5 million to our wireless business. As of September 30th our bad debt provision amounted to 1.7 million as compared to the 1.6 million provision as of June 30th. While we consider this level of bad debt provision to be relatively low as compared to our overall level of advertising sales, we continue to pay close attention in remaining prudent in our credit extension policy. We also continue to strengthen our credit extension and revenue recognition policy. 6) Stock buyback program, SOHU today announced its Board of Directors has approved a stock repurchase program and wish the Company to purchase up to $15 million of its outstanding shares in the open market. During previous stock repurchase program from May 2004 to February 2005 the Company purchased a total of $37.8 million worth of stock or roughly 6% of the shares outstanding. Further, since May of 2004 Charles purchased 550,000 shares in the open market totaling approximately 9.8 million and exercised 566,000 options. Also in February this year I purchased 15,000 shares too. We are firm believers in our Company's future and worked hard to drive value to our shareholders. 7) And finally our business outlook. You will find detailed guidance for the fourth quarter in our Earnings Release but I would like to highlight 1) we are on track to meet our full-year advertising revenue growth target of 25%, 2) for the fourth quarter we expect advertising revenues to be in the $19 to $20 million range and non-advertising revenues to be in the $9 million to $10 million range. 3) We will start advertising the sponsorship cash fee paid for the 2008 Olympic games and recording expenses relating to the construction, operation and hosting of the official Olympic Web site starting in the fourth quarter of 2005. We also expect to incur one-time marketing and promotional expenses in relation to the announcement and launch of this event. Our fourth quarter EPS guidance of $0.19 to $0.22 has already taken the above into consideration. In summary, we are pleased with our overall results and believe we are well positioned for growth in 2006. Our multi dimensional strategy of increasing advertising revenue while growing a strong and steady search business is one we believe will have a lasting effect on development as a company. We view the Olympic sponsorship as a strong growth catalyst that will accelerate our current business model. We are very confident that our positioning and go forward strategy is the right mix of what is needed to do to drive results and increase shareholder value. That concludes my presentation. Thank you for your attention. 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_233912

Here’s the entire text of the prepared remarks from Univision Communications’ (ticker: UVN) Q3 2005 conference call. The Q&A is here. [[ more ]] November 2, 2005 5:00 PM ET Some of the information discussed today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties, including those relating to Univision’s future success and growth. Actual results may differ materially due to risks and uncertainties described in Univision’s filings with the Securities and Exchange Commission. Univision assumes no obligation to update forward-looking information discussed on today’s call. On today’s call we have Ray Rodriguez, President and Chief Operating Officer; Andy Hobson, Chief Financial Officer and Chief Strategic Officer; and Diana Vesga, Vice President. Thank you, operator. Good afternoon, everyone, and thank you for joining us today. We’re pleased that our third quarter performance exceeded our expectations. More importantly, we see improving results in the fourth quarter and have great momentum into 2006 with a strong Upfront and record revenues for the World Cup. We ended our Upfront with impressive growth in the mid 20s percent range over the previous year, and as Andy will tell you in a few minutes, we expect to start feeling the positive impact of our strong season in fourth quarter of this year. In the third quarter, our television and radio businesses turned in improving financial and operational performances, and continued to prove to the marketplace the unmatched reach of our properties to U.S. Hispanics. In a quarter that included the start of the fall season, the Univision Network grew its audiences more than ABC, CBS, NBC or FOX to reach record highs, and our radio group saw growth in key markets as well as at our new Reggaeton-formatted stations. Earlier today we announced that Univision has obtained the exclusive Spanish-language broadcast rights to the 2010 and 2014 FIFA World Cup tournaments, in addition to 26 other popular FIFA soccer events through 2014, for $325 million. As you know, the World Cup tournaments bring tremendous ratings and revenues to our Company. In fact, our sales of the 2006 World Cup have already reached $180 million, and we still have inventory left to sell. The sport of soccer is experiencing tremendous growth and popularity in the United States, and we’re thrilled to be part of it. Thirty-five million people watched our World Cup broadcast in 2002, despite the fact that because the games were live from Korea, most of the broadcasts were in the middle of the night. In 2006, we’re expecting more than 50 million fans to tune in. We have been the exclusive U.S. Spanish-language broadcaster of the World Cup since 1978 and we’re pleased to be able to continue our exclusive coverage into the next decade. Before I provide you with additional third quarter highlights from each of our businesses, I’d like to briefly discuss the actions we are implementing to enhance our financial performance going forward. As most of you know, our Company has gone through a period of very significant growth in recent years. Since 2000 we have added significant depth and breadth to our brand, growing Univision Communications into the multifaceted media company it is today. Just five years ago Univision Communications owned one broadcast television network, one cable network, and 19 television stations. Today, we own two broadcast television networks, one cable network, 62 television stations, a radio company with 71 radio stations, an AM radio network, a music business with three record labels, a music publishing division, and an Internet destination, all of which are leaders in their segments. In the wake of this tremendous growth, we see many ways to benefit from increasing synergies among our businesses and enhancing efficiencies, while at the same time driving sales and marketing efforts. To realize cost synergies, we are increasing efficiencies in our administrative and production functions and we’ll reduce our current headcount by approximately 5.9%, while at the same time reinforcing our sales and marketing structure and ensuring no negative effect on our ratings and production quality. We view this headcount reduction as a difficult but necessary step in the continued growth and development of our Company. By refocusing resources to our sales team, we are confident that we will further improve our financial performance, continue to grow our businesses and reduce our overall cost structure, thereby providing a solid foundation for financial performance. Andy will provide additional detail on the financial impact of these actions as well as our financial results for the third quarter shortly. In the meantime, I will now give you a brief overview of the third quarter performances of each of our divisions. The Univision Network maintained its impressive trajectory in audience growth in the third quarter, attracting record primetime audience levels and ranking as the #2 network in the country in primetime among all Adults 18-34 years old, Hispanic or non-Hispanic. Here are the details: while we have been out-delivering at least one of the traditional ‘Big 4 for several quarters now, securing the #2 spot was a terrific first for us. Said another way, for the entire quarter among all 18-34 year-old viewers in the U.S. – not just Hispanics – FOX was #1, Univision was #2, CBS was #3, ABC was #4, and NBC was #5. Who would have ever believed that the #2 network in the U.S. would be a Spanish-language TV network? It says a great deal about the strength and size of this very important demographic group. Now, of course, we have our sights set on #1, and we’re making progress. Out of the 91 nights of the third quarter, we ranked as the #1 network in the country on 25 nights in primetime. In total, we beat at least one of the Big 4 on 71 out of 91 nights, or 3 out of every 4 nights. Now, switching to Adults 18-49, we turned in another quarter of unmatched audience growth. In fact, in the third quarter, Univision was the fastest growing network in the country. We increased viewership by 19% compared to the same quarter last year, while the Big 4 English-language networks’ average audience decreased 17%. Locally, during the July Sweeps, Univision was the #1 station in primetime and had the #1 ranked local newscast, out-delivering the local ABC, NBC, CBS and FOX affiliates among all Adults 18-34 in 10 out of the 19 major markets in which we own and operate stations. As for our second broadcast network, TeleFutura continued to beat Telemundo and maintain its rank as the #2 Spanish-language broadcast network in the third quarter, behind only Univision, in early morning, weekday daytime and weekend daytime among Hispanic Adults 18-49 and 18-34. While TeleFutura experienced audience declines consistent with those of Telemundo in total day in the third quarter, the bigger picture looks very good. In the recently ended 2004-2005 season, TeleFutura either maintained or grew its total day audiences, while Telemundo’s audiences decreased, compared to the previous season. TeleFutura’s total day audience was up 3% among Hispanic Adults 18-34 and remained constant among Hispanic Adults 18-49. Telemundo was down 13% among 18-34 year-olds and 16% among 18-49 year-olds. Looking at the new ’05-’06 season and the fourth quarter, TeleFutura is showing some promising progress in primetime with our new, first-of-its-kind, live weeknight primetime news and information program, “En Vivo y Directo.” After only 2 weeks on the air, our Adults 18-49 audience has increased 46%, compared to the previous 4 weeks, and we are confident that as the only primetime news program of its kind on Spanish-language television, “En Vivo y Directo” will continue to grow and bring momentum to TeleFutura’s lineup. Turning now to Galavision – our cable network had a truly phenomenal quarter. In primetime, our 18-49 Hispanic audience grew 53% compared to the third quarter last year, once again making Galavision the #1 cable network in primetime with more Hispanic viewers than all other 34 Spanish-language cable networks, in addition to all English-language cable networks. Now moving on to our radio business. Univision Radio maintained its momentum into the third quarter, growing ratings across the country in Arbitron’s Summer 2005 book. Out of the 17 markets in which we operate, Univision Radio has the #1 Spanish- language station in 11 markets. In Los Angeles, Univision Radio increased its Adult 25-54 audience share by 9.5% in the Summer book, compared to last year. We continue to hold the #1 spot among all Spanish-language stations, and the #2 and #4 positions among all radio stations in Los Angeles. Our recently converted La Kalle Reggaeton-formatted stations performed extremely well during the quarter in their target Adult 18-34 demo, increasing audience share by 84% in New York, 141% in Chicago, and 46% in Las Vegas, compared to the Summer 2004 book. We’re excited about the results of La Kalle and expect continued long-term growth in our other markets. Our Music Group, the Latin music leader, also had a very good quarter, with albums by artists under our three record labels – Univision Records, Fonovisa and Disa – accounting for an average of 20 of the Top 50 Latin albums sold, according to Nielsen Soundscan. We’re looking forward to tomorrow night’s Latin Grammy Awards, where UMG artists have 12 nominations. As for our Online division, Univision.com increased page impressions by 45% and unique visits by 34% in the third quarter, compared to the same quarter last year. Also, during the third quarter Univision.com announced that it has acquired the exclusive Spanish-language Internet and mobile telephony video rights for the 2006 FIFA World Cup. Thank you, Ray. Univision delivered third quarter net revenue growth of 4% to $497.5 million, exceeding our guidance. Operating income before depreciation and amortization increased by 7% to $180.5 million, also exceeding our guidance. Net income increased 8% to $79.2 million and diluted earnings per share increased to $0.23, exceeding our guidance of $0.21 to $0.22 per share. Television net revenues grew 5% in the third quarter and operating income before depreciation and amortization increased 4%. Our Television Network business grew revenues by 5%, and our TV Station business grew revenues by 5%. Univision Radio generated strong net revenue growth of 8%, while the radio industry grew by 1% in the third quarter as reported by the Radio Advertising Bureau. Univision Radio delivered strong operating leverage by growing operating income before depreciation and amortization by 19 %. Our Music business revenue decreased by 7% and operating income before depreciation and amortization for the quarter decreased by 1% versus last year. During the third quarter, Univision Online continued to be profitable, increasing revenues by 43% and delivering operating income before depreciation and amortization of $0.1 million. Income tax expense for the quarter was $54.1 million, of which $12.9 million represented deferred tax expense. Cash taxes were $41.2 million. Capital expenditures for the quarter totaled $26.3 million, of which $3.9 million was related to facilities expansion and upgrades, $14.1 million was related to construction projects, and the remaining $8.3 million represented normal maintenance expenditures. For the year, we are lowering our capex guidance to approximately $105 million. At September 30, 2005, outstanding indebtedness, including capitalized leases, totaled $1.46 billion. Excluding $29.1 million of cash from our VIE, our cash position totaled $56.7 million. Univision is taking actions to drive improvements in financial performance. We are focusing resources on our sales and marketing efforts while increasing our efficiencies in our administrative and production functions. As a result, in the fourth quarter we will be reducing our headcount by approximately 5.9%, primarily in our television business, and will record a pre-tax charge of approximately $25 million. As a result of these actions, we are reducing Univision’s overall cost structure without negatively affecting our sales and ratings, and we expect to achieve annual savings in excess of $50 million. In compliance with regulation FD of the Securities and Exchange Commission, we provide guidance on our conference call such as this one. The fourth quarter guidance excludes the charge related to the cost reduction plan. We estimate that consolidated net revenues for the fourth quarter will grow in the high single digit percentages, and operating income before depreciation and amortization will grow in a range from low double digit to low teen percentages. EPS is expected to range from $0.23 to $0.24 per share, compared to $0.19 in last year’s fourth quarter. Our guidance reflects the improved trends of our business due to the success of our recently closed Upfront and our continued ratings growth. These factors, coupled with our cost reduction initiatives, will drive an improved financial performance into 2006 and beyond. As you know, in February we announced a plan to repurchase up to $500 million of our outstanding Class A Common Stock during 2005. The share repurchase plan ended on October 24th as we completed repurchasing 19,096,600 shares at an aggregate price of $500 million. During the three months ended September 30th, we repurchased 6,686,400 shares at an aggregate price of $176.5 million. Today we announced that our Board of Directors has approved another share repurchase plan of $500 million, which will expire on December 31, 2006. The Board of Directors’ authorization to repurchase shares reflects the confidence in our future and our prospects for continued growth, and the belief that, at current market prices, our shares represent an attractive investment for the Company. Our strong balance sheet position combined with the expected future cash flows allow us to continue to repurchase our common stock while pursuing acquisition opportunities, and maintain credit ratios deserving of BBB or Baa2 credit ratings.

EarningCall_233913

Here’s the entire text of the Q&A from Rite Aid’s (ticker: RAD) 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. At this time, I’d like to remind everyone if you would like to ask a question press “*” then the number “1” on your telephone keypad. Hold off for just a moment to compile the Q&A. Your first question comes from John Heinbockel of Goldman Sachs. Hi, with respect to expenses, kind of, as you guys both mentioned in your remarks, it looks like the expansion program in your pharmacy investments are causing a fair bit of expense pressure at least they were during this quarter. It’s just something that guys are expecting to persist kind of until pharmacy comp momentum picks up a lot from where you’re today, and I guess secondly is there anything that you guys are doing proactively to mitigate the expense pressure in the interim? Let me give you a brief response here. We’ve always been very focused on containing cost overall, and yet we feel though it’s important for us to spend dollars on the important initiatives. We have continued to emphasize overall what we call spend management initiatives in our company. We really identified some new areas across the company where we can look for expense savings as we move forward to help mitigate some of the expenses we know are going to spend. And I would like to add Eric the, the sales lift that you get, like say in the fourth quarter has that significant impact on the SG&A percentage. So, we expect things to continue being added to SG&A in connection with support of our new and relocated store program as well as continued dues of the accounts receivable securitization facility for example and, tactical promotional activities, but nonetheless with the sales lift the rate overall will start you to settle down. Okay, and then secondly, I think this is the question for you Kevin, could you give us the sense for the, of the amount of EBITDA dollars that you are attaching to the extra week during the quarter, and how much is embedded in the guidance that you’ve given for the year, is that 2% number kind of 12 million to 15 million, is that about right? I think we’ve talked about that in earlier, our call and basically we have no better information to change that at this point in time, and we will update you when we complete our fourth quarter. Okay. Okay and then lastly, can you give us an update on what’s happening with the Federal Medicaid Legislation in Washington, and then what stage they are in the process then how do you see this, how do you see this eventually playing out? Well, there is a lot going on, and I think this is probably one area where the industry is pretty united too in. The message that we’re giving to both house and senate and to any of the legislators that can have an impact there. And it still and heavy discussion, where we are focusing the lobby effort along with NACDS is on, the mandating and expensing key on, how pricing calculations are updated timing in particular, and how is your enforceable co-pay, and this effort has been continue to go on and we know that there is going to be a change that, the final answer is, here we are (ph). Okay, and then I guess this is a follow-up assuming, assuming it just past, it seems like, something in someway share perform well, so what do you, to what degree do you think it will be a negative for Rite Aid and is there anything that you guys can do, it kind of mitigate the hit, either as you mentioned through increased dispensing fees, or reducing expenses in stores with, have you Medicaid mix? Obviously we’ll have to look at stores that have, extraordinarily high percentages of Medicaid sale because depending on the degree of change, reimbursement change some of those stores may not be able to fill scripts, I mean, that is something we have to look at. And no matter what path is it, it will have a negative effect not just on Rite Aid, but on the industry in general and that’s an issue that overall industry has to take up. So it will come down to continuing to build incremental volume across pharmacy customer base, and to continue to work on other initiative areas that can help offset some of the margin impact, for instance the focus on growing generics. That’s a key initiative for us where it’s highly successful with it, and we intent to be the most successful in future years. Hi, guys couple of questions. You talked about continuing to meet your goals on pharmacy power buys. Do you anticipate that the advent of Part D is going to provide more opportunity for you guys to buy files? Yes, I expect there is going to be significant pressure on independent as well as from all regional and that there will be opportunities for us to increase our level of purchase activity here. And what’s been happening with the pricing of those files. Is there a lot of competition for the sales or is that lessened at all? There is definitely competition for them, and I’d say over the last several years the cost has gone up, that we’re still doing an ROY on every single file, and it has to meet our hurdle rates and its still is most effective way to grow script base in the store and return to purchase price very quickly. I was also wondering if you could talk a little bit about your PBM, how quickly do you anticipate that the PBM will actually be able to be functioning and covering a lot and then, is there a still a chance for you to get involved in some of what’s going on with Part D, maybe not for this year, but it would be your intention to try to bid to be the PBM for some purchase plans for ’07? Yeah, Meredith, I don’t see that happening for ’07, it’s, we are still in very early stages, but we are actually in contract stages now with at least one new client and in contract discussions with more. So, we will begin to strategically cover live and we are being very focused on how we go about this effort, and I mentioned in my comments that we’ve just recently hired a VP of Sales in addition to our General Mangers, that our marketing programs put together, and so we should begin to make some precarious progress over the next 3 to 6 months. Can I just have one final question about pharmacy, there has been some noise coming out of large PBMs about creating limited networks, or limiting the number of pharmacies that are in their networks. I am wondering whether you guys are seeing any of that, I know way back when, I guess it was General Motors I think we are going out of their network and you, you guys and CDS stayed in it. But I am wondering if you are seeing more of that, is that becoming more of an issue? I don’t know that I’ve seen more of it, I think there has been some amount of that over the past number of years, I think that we’ve had some active participation in some more limited and preferred networks, and I would expect that to still happen. I haven’t really seen that we’ve been eliminated from many networks that I am aware off. Hi, good morning, a couple of questions, it looks like according to the data we have that mail order has really slowed quite a bit. And I know that a year ago, or so guys were citing the UAW contract as a reason, for your pharmacy slowdown. Now that, that’s played out and mail order has evaded. Do you think there is another structural reason why your pharmacy volume numbers appear to be lagging the industry a little bit? As the mail order threat seems to be at least for the moment receding? Yeah, John I see the, quite a single bit of factor is that we have not grown our store base over the last 5 years. We just started back up our growth program this last year, and expect to open about 80 stores between relocations and net new, and then I mentioned the 125 to 150 next year. And our competitors have been growing pretty rapidly and if you factor into account, the impact of new store growth on comps is pretty significant because I see what this is going to do for us over the next 5 years. Okay, and then secondly, obviously your Medicaid exposure is about 700 basis points higher than your peers, and you operate this from States with some presumably pretty high Medicaid reimbursement levels that the other 8 MBT (ph) mono-states with no mac, like Pennsylvania and New Jersey and New York. Are you seeing anything coming out of these PDPs for the dual eligibles that would be kind of a meaningful delta for your generic pricing in those states? Yes. I’m not really seeing anything at this point, you are correct and that we have a higher percentage of Medicaid business. Right. Well, it just looks to us, I mean, just and you don’t want to redo, but some of the states with no mac and no cost plus pricing, the Medicaid prices are significantly higher. So I guess we assume, as you transfer these dual eligibles into the PDPs that the pricing will come back and little closer to market. But, I just didn’t know if you’re see anything specific on any of the price schedule ship? No we have factored that we expect to be the impact from the dual eligibles moving over into our January, February forecast. Because that’s part of our fourth quarter, and we have good data around our dual eligible population by state et cetera and so, we can make some pretty decent judgment from what that’s going to be. And I mean what sort of impact do you think it has, I mean is it noticeable or is it, I mean you are talking about a strong fourth quarter and yet you haven’t absorbed this margin had. So obviously is it less noticeable than the people might think? Well, the dual eligible population is not as a larger percentage as a total Medicare population as I think maybe some people have said at least not for us. And so we believe, it is going to be impact full, but that we have taken it into consideration, if I’ll just go back again and say that, overall the changes that are happening with Medicare necessitates getting incremental volumes offset because of the margin. Because there is no doubt about, if there is going to be any hit to margin on just converting your own customers, so all of our marketing plans have been built around getting new customers into our stores. That another reason we’ve launched the loyalty program for seniors reason for our partnerships with Edna, Coventry Healthcare, Humana. And that we put marketing spend behind that, so that you can get more seniors into our stores. And just so that everybody has the same data to our Medicaid percentage of our pharmacy business is about 18%. And the dual eligible that if you have to break that that 18% down you say its 14% non-dual eligibles and then 4% dual eligible. That I think people have got us higher mix of dual eligible than that. Okay that’s helpful. And just finally we are hearing stories about some fairly low dispensing fees. Coming out of the, some of the PDP contracts can you comment on that, that the generics spreads look like they are okay, but the dispensing fees look fairly skinny. What are you seeing out of that? Could you discuss in more detail your initiatives to gain new pharmacy customers, how much of this is done through far bys versus internal initiatives and could you talk just some more, more in depth in terms of what these internal initiatives are? Power buys is an important keys of our overall gaining new customers that a whole lot of it is really centered around first improving the pharmacy experience in our stores. So we gain a better reputation and can get, better word to mouth out there, if well, we’ve also done with our capital marketing initiatives in particularly priority and strategic markets to get new customers either transfer to us, or bring us a new script and give them incentives to do that. It’s the cost marketing efforts against our front-end customers to become pharmacy customers that doctor detailing initiatives that we also have in place out there. Is that a combination of I say initiatives that are all squarely on it, even what we done with our organization structure to really put more focus on pharmacy so that we give more support to our stores in terms of that pharmacy experience has been key. We invested significant dollars in new technology in the past year, we’ve rolled out a new pharmacy dispensing and management system that’s been a real plus and attracting new pharmacist to our company, it’s a state-of-art system, and that also helps us in terms of just overall staffing initiatives. And, but every thing around customer satisfaction as well as very specific targeted marketing efforts are part of getting new pharmacy customers. And then our PBM down the road to help us feel in terms of being able to work directly with specific plans our employers has been bringing new customers to our stores. I mentioned that also that Take Care initiative was, in those practitioner clinics. Moreover in that is just a pilot they certainly show that you can get new customers into your store. Okay, and is there an opportunity to accelerate power buys as you ramp up new store growth to help these stores, ramp up the profitability more quickly? Hi, can you talk about your acquisition strategy especially along with PBM line. Would you be interested in looking at other PBMs in order to accelerate your development there and also I know that you purchased a few acquired a few drugstores. Please talk about your appetite for acquisitions. We really are focused on our strategic markets in terms of ways to grow. And that includes new stores and relocations, but if something else made sense then it was a good value to our shareholders, we would look at that. As far as PBM goes, we believe that’s a strategy we’ve embarked on, its the best one for us, whether other opportunities present themselves down the road, we would look at those as they came off. Hi Mark Wills with Morgan Stanley. Could you just give us a little outlook on how you think the first half of the calendar year will progress versus the second half, obviously we have some transitional issues with Medicare Part D and in general do you think Medicare Part D want to be in a net positive for you, or moreover like a neutral impact on earnings? Well obviously, I think all of us realized that the guidance will probably come, lower than it was originally forecasted for Medicare Part D. So that would say that you will see more of a positive impact from incremental customers in the back half of the year. All though audit year starts in March, both our first half will end in August. But, you will see more in back half, plus a lot of the Generics kind of, start coming on board in the back half of the year two. Right, and is there any way you give us an overall picture of Medicare in total, one saw the ramp ups in volumes have occurred. So, it means that you have to have strong marketing programs and also be driving growth of Generics to really offset the margin hit you get from it. And in the margin hit, for the dual eligible hits immediately and the volume growth takes a longer period of time. So the answer to your question Mark in some regards is depended upon the timeframe. Okay. And is there anyway you can bracket the gross margin impact, these are the prescription, per prescription basis or basis points impact anything like that, on how much impact you could get from the dual eligibles, switching over? You know, what you are asking is a good question, but it’s requiring us to certainly comment on customer profitability. And we are just not going to do that. Hi. I have a few questions. I guess first for Kevin related to you’re the gross profit margin comments, I think you said pharmacy margins contributed 12 basis points and that’s lower than what its been in the past two quarters I think, it can sequentially decelerate a little bit, but yet your total gross profit of March relative to Q2, improved, can you speak a little more to that, I mean, what was the sequential improvement, in gross, if you can identify that. It’s a, a little less negative impact from the occupancy but a lot less negative impact in fact none for front end. Okay, yeah. Because I think, I don’t know if you had given that before actually, do you have those numbers handy? Why don’t you call me and I can go over some of that with you, I don’t have it handy right now. Okay, that’s fair. Well, I guess more importantly that 10 basis points, you’re store development, accelerates in fourth quarter and then as you said in the next year, what’s that 10 basis points impact that you saw in Q3, I mean what’s that start to look like do you think as you look forward a little bit… Well, I guess in the fourth quarter there is a, 45 stores there, that will be coming out of the ground lot of it in the very, very end of the fourth quarter and, so its going to continue to be more significant especially for new stores which are starting over the very, very slow sales, very low sales base. So we still are, definitely committed to our, our new store growth program whether its relocations are not new because its critical to our strategy advancing up strategic markets. Okay, but I guess we’ve lost, you know that basis point impact I guess its, it’s tough to say what that might be on your gross in Q4? In Q4, the gross margin rate should be combination of, it should be lower because of A) 45 stores coming out of the ground and the occupancy expense and also just because of the dual eligibles that we talked about in and that’s the niche of it. And then last but not least, some of the adjusted sales mix. But your gross margin, our gross margin rate for the fourth quarter will be lower, generally speaking because of those factors but with the higher sales base much, much higher sales base in the fourth quarter, we’re still aren’t showing any increase in EBITDA. Okay, all right second thing, just may be a little bit of clarity on your, your same stores sales guidance. And Mary, did you say that your, at the end of November your script comps had turned positive in units, did I, did I hear that right? So that, that’s pharmacy comp that was up and I guess the 1.4%, are you talking about the end of November or the November comp? Until that November, there is not a lot of inflation in pharmacy at this point in time because, I mentioned that we are very successful with generics and generics especially compared to brands had a very nominal inflation. Okay, and what is, I mean your guidance for the year, you know 0.5% to 2% sales, it’s a pretty, still a pretty wide range? Should we look at November, and what you did in that month and extrapolate that what we should think about for, December, January, February, I would like should that will be a low point. Now I mean, how do you think about it? Okay that’s good. Okay and I guess two last things, did, what is your CapEx, I think you said new stores and relos would be 125 to 150 for FY ‘07. Do you have a sense of what your CapEx spending will look like? Right, but it’s the mix of the stores in terms of whether their eternities versus what we build them and then later on sale, we expect that still very much being developed Steve. Okay that’s helpful and the last thing, I know you will eventually get those, forward EBITDA guidance for FY ’07 but you know so at this point even your fourth quarter guidance and the improvement you are going to see even without the extra week there I mean, is it safe to say that at this early stage that next year will be a an up year in EBITDA? I wonder if you, you can just tell me in view of the 22 closed stores, what’s the run rate of your dead lease or closed store expense? And do you expect that to be about the same with next year in view of the, the impact of Katrina? There is rate of abatements (ph), we’ll just have to wait and see will we end up with our dealings with the landlords, I just, I can’t answer that yet. Okay and then, of the 13 stores closed in New Orleans, is that going to be permanent or do you have plans to open those? No I think, if you look at each one will be a store-by-store decision and it’s really going to depend on how the area is redeveloping. Okay, and then, and do you have the increased sale lease pact, two questions, could you tell us if the 9 stores that were sold on lease pact in 3Q, and those leases reflected on the balance sheet and secondly what can we expect for rent expense going forward next year? They were previously owned and we sold them, and leased them back under operating leases, as far as rent expense for next year, we’re just not prepared to give that to you, we’re not done with our planning. It’s about the same, is what you’ve got for the rent in the 10-K, and remember almost, the vast majority of our new and relocated stores are coming out of the ground in the, those, well, 45 or more coming out of ground of fourth quarter. Okay, also and one last question, I mean, in terms of your new stores plan for 4Q and then next year, can you tell us what the mix is in terms of the new and relocated? For next year, its probably still about half-in-half relocations in that new, a lot of this timing on the project coming to our real estate committee. Once again, I would like to remind everyone, if you would like to ask a question, press “*” “1”. Your next question comes from Jeff Covalars (ph) of Citigroup. Hi, good morning. Sure (ph) can you comment about, you’ve mentioned that pharmacy, as far as pharmacy satisfaction was a, can you elaborate about that? I think we’ve talked before on our call that we have had a road progress on improving customer satisfaction, over I’d say the last 18 months. We have what I would call it a customer phoning survey based on their experience in the store both pharmacy and front end separate transactions but we have really worked to improve those results over these past years, by really focusing on the experience itself and we have still not hit our goal, we’re very aggressive on our goal because we believe this can be differentiator in the future, but we’ve made good steady progress upward and I think its beginning to shown our results. Is the, this satisfaction measurement, is that up versus to the second quarter or is that still just up versus last year? And we have expected to be up even further in the fourth quarter and we use this along with our benchmark survey that we do every year in terms of how we are viewed versus our competitors to really drill in (ph) on stores and areas that we need to help more on improving satisfaction. And we focus a lot on timely delivery of script as well as the overall experience. Okay. Can you comment about your, the new stores you’ve opened so far, and just general comments about how they’re trending as far as ramping up sales and when will they, when will they, in general profitable? Well, they’ve been extraordinarily well-received by the customers, as very customer-friendly layout, easy to get around the store, really features the pharmacy and we are talking about, at least 50+ percent being relocations or generally moving from the script center to a corner with a drive through and so, you’re, you get a nice bump on the pharmacy as well as, just a really nice bump on the front end, so a very strong sales results, very strong customer reception and we expect that to continue. Well, on relocations generally get profitable even within just a little over a year of getting agents on its corner, a new store can take 3 to 4 years and I think that would be pretty typical of the industry, it depends on the side and how old the expanse factors are all in. Yes. I was wondering if you could comment on the impact on the Medicare eligible seniors who currently a cash customers who will be moving perhaps to an insurance program? That will have, it’s going to be another component of what happens with the Medicare program and it will also have a negative impact on margin, so it also set us a gain, that’s why it’s important grow the senior base. And we have taken that into account in our planning as we move forward. I was going to ask one last question on the customer service in the pharmacy department, is that primarily a labor scheduling or software scheduling or what are the key components are there to improve the pharmacy customer satisfaction? As a combination, it’s the overall experience but it starts with timely delivery of the script, so that the customer get the script when they expect it, was it ready when promised. So that for Rite Aid, a key component of it. Then the rest is, just the acceptability of the pharmacists, the ability to talk with the pharmacists, the overall experience and what the customers do to our telephoning survey about their experiences to raid us on each component of the experience and then also give us an overall customer satisfaction rating. And the only rating is that we look at and developing scores for our stores, is what you call a top box rating. So the customer has to be highly satisfied for the score to earn a mark that’s counted in scrolling up their customer satisfaction score. And we have ran incentive programs through almost all quarters of this year, that really reward each and every associate in the store for achieving certain customer satisfaction, those who will continue to do that to. 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_233914

Here’s the entire text of the prepared remarks from China Techfaith Wireless’ (ticker: CNTF) 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 evening, ladies and gentlemen. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Thank you, Operator. And thank you, everyone, for attending China TechFaith's third quarter 2005 earnings call. With us today are the Company's Chief Executive Officer, Mr. Defu Dong, President Bob Huo, and Chief Financial Officer Eva Hon. The format of the call will be Eva Hon reviewing the financial highlights, and then Bob providing an update on the Company's strategy. We will then have time for any questions. The three Company executives will be available for all of your questions at that time. Please also know, however, that there's a PowerPoint presentation that has been loaded onto the Company's investor relations website, and can be downloaded to accompany the prepared comments and for the Q&A. The link is under the Q3 Webcast link. Before we begin the formal call, the Company's attorneys advise that this call will contain forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will", "expects", "anticipates", "future", "intends", "plans", "believes", "estimates", and similar statements. Among other things, the business outlook and quotations from management in this call, as well as TechFaith's strategic and operational plans contain forward-looking statements. TechFaith may also make written, oral, or forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Forms 20-F and 6-K, etc., in its annual reports to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees or third parties. Statements that are not assertible facts, including statements about TechFaith's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Potential risks and uncertainties include, but are not limited to TechFaith's limited operating history; mobile handset brand owners' discontinuation or reduction of the use of independent design houses; TechFaith's ability to retain existing or attract additional international customers; TechFaith's earnings or margin declines; failure of competing against new and existing competitors; and other risks outlined in TechFaith's filing with the U.S. Securities and Exchange Commission, including its registration statement on Form F-1 as amended. TechFaith does not undertake any obligation to update any forward-looking statements except as required under applicable law. Thank you, David. And welcome, everyone, to our third quarter call. As was in our earnings release, it was an impressive quarter for us from an operations standpoint. We continue to leverage our relative low operating costs, while supporting a higher revenue base. On page five, results compare on a nine month basis. One point to note is while turnover increased an impressive 107% over the same period 1 year ago. Turn to page six. You will see we have some analysis on design fee and royalty income combined. This is a more effort reflection of total compensation we’ve received from our customers for a design project. Third quarter's design fee plus royalty income was $20.7 million compared to $19.5 million in the second quarter of '05. An increase of 106% from $10 million in the same quarter of '04. Design fees for the third quarter of '05 was 16.8%, an 82% increase as compared to $9.1 million for the same period in '04. And $15 million in the second quarter of '05. The increase on a year-over-year basis was due to an increase in the number of revenue cost-building models across the life cycle revenue margin. Royalty income in the third quarter of '05 was $4.1 million, which increased 383% in the same quarter in '04, and decreased 9.1% on the second quarter of '05. This increase was due to our customers' shipments of more royalty-contributing handsets. Looking at the composition of design fees and royalty fees, one point to note is that 11% of the revenue from UMTS in the prior quarters was from our first 3G UMTS phone to be launched in Europe. Because we were in progress to achieve the next revenue margin for the 3G project in the third quarter, thus we recognized no revenue. We expect revenue from UMTS in non-China markets to resume in the fourth quarter this year. Total operating expense for the third quarter of '05 was $3.7 million compared to $2.8 million in the year-ago period. And $3.6 million in the second quarter of '05. The increase is primarily due to growth in the Company's business, and higher general and administrative expenses associated with being a public Company, following the Company’s made '05 IPO. Operating margin was $45.1 million in the third quarter of '05, in line with our second quarter's level. This was compared to $33.8 million in the year-ago period. Net margins reached 48.8%, compared to 53.2% in the second quarter of '02 --'05. However, compared to normalized net margin of 46.5% in second quarter by excluding written back of interest expenses. Net margin in third quarter continued to improve over previous quarters. In terms of our outlook, based on the assumption of our continued success in the international market, and stabilization of overall domestic markets, we are reiterating our full year '05 outlook for revenue to be approximately $90 million, with earnings per ADS at $0.93. Based on 43.8 million total outstanding ADS at September 30, 2005. Thank you, Eva. TechFaith continues to expand business worldwide by supporting customers through a bold platform. We are positioned for growth, as operators require more high levels and service and advanced communication technology. We are excited because the faster new technology are adopted by the market, there will be more demand in TechFaith's specialized service from brand owner and operators. We see the handset market is shifting for an open market on 2G and 2.5G GSM products to our operator-tailored markets, or CDMA1X, WCDMA, EVDO and HSDPA. We are 2.5G GSM giants, and in CDMA1X technologies, in a 3G solution on WCDMA/UMTS. We are also developing CDMA 2000 EVDO, TD-SCDMA, and HSDPA, for PDA/Smart Phone technology. We are able to provide a solution based on Linux and WindowsCE operating systems. Page 10. A key requirement of design MMI and UI, essentially is a middle area so far on dual interface. Operators increasingly require customization in the features in the look and the feel. For example, the SimPhone marketed by CMHK and the Vodafone have different customization features in the look and the feel. The handset market is moving from the traditional one handset with one MMI/UI for different operators to an operator-tailored environment. Operators require different MMI/UI software as OEM cannot use this. Resulting in the OEM’s higher, and a higher development cost. Page 11. Our core competency in developing reusable software and the module remain the same. However, new requirements in MMI and UI customizations for the operator, for an owner on developing cost. We can provide a similar MMI/UI for different brand owners for the same operators. And thus shortening development time and reduced costs. Page 12. I can update you on how we see our business geographically. We split our market into three segments. The first column China, India, South America, and other Asian Markets. Secondly, Japan. And third is Europe and America. With regard to our domestic Asia market, we remain with our position to serve this market. We have extensive experience in this market. We have a strong churn record for both domestic and international customers. Handset technology certification is relatively low. We are optimizing on also low cost model targeted for emerging markets such as South America and India. We are positioned to serve the Japan market. We also have a strong track record in working with Japanese brand owners with the main share of the market. This is a more sophisticated market from a technology standpoint. We have to leverage our strong software expertise. We intend to focus on relations for the operator and the brand owner. Finally, we are very active now in Europe and America. We announced our intention to further establish our presence in this imposing market. Europe in particular has relatively high technology sophistication. Operator in both marketing and acquisition, we are uniquely positioned as we successfully launch our first 3G UMTS phone in Europe. For 2.5G GSM handset design business, we estimate contributions for China and other Asian markets to remain stable. We are targeting the Europe and the American markets. Revenue from 2.5G CDMA1X technology contribution in '05, and it had clear growth opportunity in '06 for China and other emerging markets, India and South America. We believe our CDMA1X products will be launched in Japan, Europe, and the American markets in second half of '06. Page 14. About 3G UMTS technology, our first product was launched in October of this year in Europe. We understand our 3G UMTS will be launched in Japan in first half '06. Page 15. We started to provide a turnkey solution to chipset provider. Turnkey solution has a following to value added economize development value chain. And a short time to market, low R&D investment and provide enough flexibility for customers. Page 16. Let me first touch on wireless module. This has been a business focused on some of smaller design house and competitors. These products are based on RF and the base band technology used in handset design. And thus, we have significant cost advantage. We have launched the GSM/GPRS, CDMA1X modules, and expect to launch 3G UMTS modules, and are developing EVDO, HSDPA modules, for settlements of entry barrier for whole design industry. For Smartphone products, we are setting up Company in Shenzhen to provide global service. The business is expected to provide a design solution and provide a one-stop service. Lastly, on application software. This business is under development. We expect revenue contribution in second half of '06. We expect to utilize TechFaith's partners in distribution channel, current customer, and chipset providers to grow the business. Products include WAP, JAVA, MMS, DRM, multimedia software, and so on. 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_233915

Good day ladies and gentlemen, and welcome to the KongZhong Corporation's Fourth Quarter Earnings Conference Call. My name is Latisha, 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 this conference. If at any time during the call you require assistance, please key "*" followed by "0", and a conference coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. Thank you. Hi everybody, welcome to KongZhong Corporation's Fourth Quarter 2005 Earnings Conference Call. You can find our Q4 earnings press release at out website ir.kongzhong.com. Again, I am J.P. Gan, Chief Financial Officer of the Company. I will first go through our fourth quarter financial highlights. After my discussion, I will turn the floor to Yunfan Zhou, our Chairman and the Chief Executive Officer. She will review our operations, and talk about our business outlook. Nick Yang, our President and Chief Technology Officer will then discuss our new initiative for the Wireless Internet Business. For fourth quarter, we had another record breaking quarter in terms of revenue. Our revenue grew by 9% sequentially to over $22 million, exceeding the high-end of our fourth quarter guidance of $21 to $22 million. 2.5G revenue was essentially flat year-over-year, but grew by 3% sequentially to 14.75 million. MMS was the main growth driver for 2.5G business as it increased by 32% from the third quarter, but was still 27% lower from the same period of last year. Our 2G business continues to perform well, and it grew by 25% quarter-on-quarter to over $7 million, it's consistent with our diversified growth strategy and our focus on gaining market share in the 2G business. In the fourth quarter, 2.5G and 2G revenue split is 67, 33. The increase in MMS and SMS revenue are primarily because of customer demand during the Christmas and the Chinese New Year holiday, and also our increased promotional efforts to enhance their manufacturer, and great stability of the MISC platform at China Mobile. Handset manufacturers are becoming a more important distribution channel for us. Siemens, the handset manufacturer in the fourth quarter increased by approximately 50% from the previous quarter to about 2.6 million. Revenue sharing with content provider also increased by 34% from the previous quarter and totaled 1.1 million. The combination of those two factors drove down our gross margin to about 54%, compared to 60% in the third quarter. Let me quickly give you a breakdown of the fourth quarter cost of sales in terms of our total revenue. Revenue sharing payments to the telecom operators was about 16% of total revenue. Transmission cost paid to telecom operators for sending MMS, SMS to our users was about 10% of total revenue. Payments to handset manufacturers were about 12% of total revenue, and the fees paid to content provider accounted for about 6%. The Remaining 2% is miscellaneous expenses. So, total cost of sales is about 46% of our total revenue and the gross margin is 54%. Total operating expenses in the fourth quarter 2005 were about 6.3 million, excluding the one-time pending class-action lawsuit related provision made during the third quarter, our total operating expenses in the fourth quarter increased by 9.6% from the third quarter. The increase came from higher positive elements in the sales and marketing expenses. Our G&A expense actually decreased by 8% from the third quarter. The increase in SG&A expenses was due to higher number of employees and their discussion of bonus determined in the fourth quarter, and also increased marketing and promotional expenses related to our core WVAS business as well as expenses related to our corporate brand building and our wireless Internet business, which Yunfan and Nick will be talking in a more detail. Our net income for the quarter totaled 6.2 million, it's a decrease of 6% from the same period of last year, and also declined by approximately 9.6% from the previous quarter again excluding the one-time class action provisions made during the third quarter. Our net margin was approximately 28%, and diluted earnings per ADS were $0.17 for the fourth quarter. For 2005, our net income was 22 million, an increase of 9% above 2004 and diluted earnings per ADS was approximately $0.62. We exceeded our Q4 guidance by growing our revenue by 9% sequentially and 34% year-over-year to reach a new record of $22.14 million. We are also very proud of what we have achieved in the whole year of 2005, with 77.75 million revenue which is 62% growth from 2004. We believe, we executed well on our diversified growth strategy, gaining the market share in all of our service market and sustain our leadership position in the 2.5G market. We expect our Q1 revenue to be between 24 and 25 million. In terms of 2.5G services, we achieved 3% revenue growth in Q4 over Q3. We expect to see continued 2.5G revenue growth in Q1. We anticipate our MMS revenues will continue to show double-digit growth from Q4 level. We expect our Java revenue to be flat in Q1, and after making a series of efforts, we expect our WAP revenue to resume growth in Q1. This sequential growth rate is expected at to be 1% to 5%. In terms of 2G services, we achieved 25% revenue growth in Q4 over Q3. We expect to see continued 2G revenue growth in Q1, driven by the growth of SMS and the revenues consolidated from Sharp Edge. In terms of revenue breakdown from different operators, our revenue from China Unicom, China Telecom and China Netcom accounted for 7% of the total revenues in Q4. This acquisition of Sharp Edge, we believe this ratio will be over 10% in Q1. Excluding expenses relating to employee share options, we expect our Q1 diluted earnings per ADS will increase to between $0.21 and $0.22 from $0.17 in Q4. The Q1 diluted earnings per ADS estimate includes a one-time gain on the sale of eFriendsNet shares and a part of first quarter earnings generated by Sharp Edge. In the coming year, our organic growth after acquisition of Sharp Edge, we believe we will further gain market share in our core WVAS business, at all four telecom operators in China. Our diversified operator relationship, will position ourselves in the upcoming introduction of 3G services in China. In 2006, we will invest heavily in preparation for 3G, Gearing up KongZhong brand and expanding our wireless Internet business which we believe has tremendous potential in the future. We have recently launched our new Wireless Internet Portal KongZhong.net, which is upgraded from KongZhong Media WAP portal Condo.net. We have established now over a 100 people team, dedicated for this portal. We also leverage our KongZhong's future based content and distribution channel, to develop and promote this portal, we believe the traffic of Condo Net is already the among the top Wireless Internet portal's in China today. We believe Wireless Internet is now at a very early stage in China. And it is worth investing. Our goal is to build Condo.net to be the largest wireless Internet portal in China. We plan to invest about $10 million in our wireless Internet business in 2006. We're focused on building our user base, traffic and Kongzhong brand. To summarize our goals for 2006, we expect our annual revenue will grow to $105 to $110 million. This investment in the Wireless Internet Business, our annual net profit is expected at to be between $25 to $30 million US excluding expenses relating to employee share options. Now I would like to turn to Nick to explain more on our Wireless Internet Business strategy. Thank you. Thank you, Yunfan. First of all, before we explore our wireless Internet strategy let's take a look at evolution of the Japanese wireless market, which means the role in terms of wireless technology and business model. Only a couple of years ago, the wireless data market in Japan are dominated by the operators. SCs or CPs provides content and services behind the operator portal on different platform without any brand. Today however, accessing free or operator independent wireless Internet site outside the operators well guarded is now very common. Many traditional media and businesses are now creating their wireless Internet site, and using wireless marketing in a very similar fashion at PC Internet marketing. We believe, China lacks Japan in this pace in about one to two year. Our vision is that China will also follow this path. This migration also parallels that of the PC Internet. The operators dominated mobile portal is similar to the early days of the Internet when the AOL was started and operator independent wireless Internet is very similar to the CP Internet. Therefore, we believe wireless Internet will follow a similar evolutionary path at CP Internet. We plan a two form strategy, on the one hand, continues to exert our leadership in the operator equipment mobile valued added services business. On the other hand, create a wireless Internet portal that focuses on mobile media, community and again outside the world guarded. There will be two business models. One is our current business of selling mobile content through the operator's channel and billing platform. The other model is to sell advertising on our branded wireless Internet portal. In Q4, we have successfully completed a trial wireless advertising where we have gained over $20,000 of advertising revenue. We believe there are two likely path for service providers to take, one path is to becoming a content provider, the other path is to becoming a branded content distribution platform. We believe brand loyalty is the paramount competitive advantage in consumer driven business model, and we believe getting customers to seek out our branded platform will lead to improvements of our margin. Therefore, we will be making a very sizeable investment into brand building today. We believe wireless Internet will bring profound changes in people's life in China, although China's PC Internet population is world's second largest. The penetration level is only 10% to 15% of China's current population. Internet sale is not a vital part of majority of people's life. Due to the high mobile phone penetration level, we believe high Internet penetration level is only possible with wireless Internet. Finally, we believe our advantages at the early mover with company-wide focus, and then experience Internet team already made us one of the top leaders in the space. A little bit of background about our team, both Yunfan and myself co-founded China Net in 1999, which was one of the largest community website before selling the company to SOHU, we stand on our senior management of SOHU before starting KongZhong. We believe our experiences are very relevant in helping us compete well in future. Thank you. Ladies and Gentlemen, if you wish to ask a question, please press "*" followed by "1" on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please press "*" followed by "2". Again, please press "*" "1" to ask a question. And your first question comes from the line of Mike Zhang with ThinkEquity. Please proceed. Two quick questions. The first one is upon the revenue guidance. The revenue guidance of 105 to 110 for '06 and 24 to 25 for 1Q, how much is from the Sharp Edge acquisition? We expect Sharp Edge will generate somewhere between $11 to $13 million in revenue for 2006. For the first quarter, we are still in the process of reviewing various, you know, accounting procedures and literatures to determine which part of the revenue and earnings could be included. We expect somewhere between, you know, 1 to 1.5 million in revenue from Sharp Edge. Okay, thank you. And my second question is related to the margins. When I look at the at the margin on -- I am talking about the pro forma of operating margin, which adds to the one-time charge and stock options. So KONG, right now is at the higher end of the industry range, and you know, I think it's unnecessarily high to maintain if you want grow the business. So, If acquisition of Sharp Edge, the 2G revenue will grow in about rapidly in 2006. And also these lines -- Zhou has talked about you are going to invest heavily on the branding and for the preparation of 3G. So combined those two forces, how are they going to impact your operating margins into 2006 and beyond? I think Yunfan Zhou mentioned, we estimate revenue to be between 105 and 110 million for 2006. And with that, our net margin for 2006 to be somewhere between 23% to 26%. And that includes a few things; one, as you mentioned is acquisition of Sharp Edge. Sharp Edge is primarily is a 2G business. So its gross margin is actually lower than ours, however being a private company, it is very new, actually its the net operating margin at this point is much higher than our Company. So, on a combined basis, that's actually helped with our operating margin in 2006. And second, the operating income numbers that Yunfan mentioned include the $10 million that we planed to invest in our wireless Internet business, and also the cost related to building up our corporate brand in 2006. Okay, just a very quick followup. If you have a branding campaign in place, when are you going to run it in '06? We are actually finalizing our branding plan -- marketing plan at this moment. So it should start, you know, probably at the end of this quarter or early next quarter. But we already have spend some, you know close to a million dollars, you know, wireless Internet business, that includes human resources, and also some marketing expenses. Great quarter. I actually just want to ask two quick questions. Number one is on your Java business line. It seems like you are guiding for a flat quarter for the first quarter, and actually the fourth quarter number wasn’t high as expected as well. Do you envision this business will be slowing down in 2006 as a whole, or do you think that it will actually pickup in the second half of the year? Okay. Thank you, Lu. I think we have talked about this before. We expect Java business to go into, you know kind of step by step growth. Right now, there is still some constraints on the GPIS network to download relative larger files. Secondly, the authorization, authentication and also billing platform has some capacity limitation. And third, we are also experiencing some, you know, relatively slow in testing and the specification of our games. So when the operator decides to upgrade the authorization, authentication in the billing platform, and also you know dramatically increase the resources for testing the specification, our Java revenue will be relatively, you know, basically single digit growth quarter-on-quarter. However, if the operator do expand the platform significantly, then hopefully being the number one player in China, we will again, you know, see a, you know, one big quarter growth. So this has nothing to do with increasing competitive pressure in the business, which is pretty much network constraints on the part of the operators. I think there is some competitive pressure that further jammed up the platform, just because more people are trying to execute more games. But we continue to hold the number one positioning in the Java business. Okay. Thank you. And also you actually broke down the cost of revenue for the first quarter of '05. I just wonder, if you could do the same for the third quarter, so that we can identify where the increase is actually coming from? Sure, for the third quarter, the operator fee is -- you know the revenue share with operator fee is about 15%, transmission is about 9%, the payment to handset manufacturer is about 9% total revenue, and the content about 4%. And remaining 2% is miscellaneous. I see. Okay. So it seems like that payment to the handset makers and the content fees saw probably the biggest increase of all, and also I just want to follow up on that. Of course, handset revenue sharing, how much of your revenue is actually coming from the handset alliance these days? We actually did not just close that numbers specifically. But you know knowing our business, you should be able to derive an estimate out of that. Actually for the fourth quarter, there a couple of innovative issues. First of all, we have the, you know, quite a bit of joint promotion with the handset manufacturers during the holiday season. You know, we actually have these digital greeting cards via MMS and several other things. And also the handset manufacturers usually at this time of year, they are trying to sell their phones in larger discount. And so you know the Companies that we setup alliance with basically pushing out their inventory, that partially contribute to the much higher increase in handset manufacturer payment. I see, thank you. And last question is on the $10 million investment in WAP, in wireless Internet business, where would you spend that money on other than headcount? Lu, this is Yunfan. I think for the 10 million, probably part of that is for the headcount, we have over a hundred people of team right now. So probably to the year-end it's towards like 150 or more. A big part is definitely for the branding campaign which hopefully will start some time in the first half of this year. And also, pretty big part is for the promotions for the user base and traffic, so that's different from the promotions of the brand, and we definitely going to spend a lot of money on that. So it's probably a third, you know the headcount, and probably more than a third on the brand and less than a third on the user base of the traffic. R&D people, advertising people, operational people, technology people. So it's pretty big team right now. So we started to form this team, started some time in the second half of last year, and those some cost already went into last Q4 expenses as human resource cost. Good morning, this is Paul Beaver for Safa. I have two questions, thanks for taking my questions. What are your goals for carrier diversifications of this era? And then secondly, while the gross margins continue to decline throughout the year? Yeah, I think for the carrier diversification, for the first quarter, our organic growth and the acquisition of Sharp Edge, we believe China Unicom, Telecom, Netcom's revenue will be more than 10%. And starting second quarter, this weekend fully consolidates the quarterly revenue from Sharp Edge, we believe that this number will go into somewhere around 20%, so that's our estimate right now. So for the whole year, I think it's about 20/80, 20% for the three operators or more than, a little bit more than 20%, and then 80% were China Mobile. This is J.P. If I may add, I think the overall market breakdown is that, China Mobile has about 70% of the market share, are you able to see operating profit (phonetic) about 30%. In 2006, as you probably see from our 2005 earnings, the gross margins will fluctuate from time to time. But with the increasing revenue from the non-China mobile operators, and more 2G business. We still expect our gross margins to probably decline slightly over the year. Hi guys, this is kind of a general question, but I was wondering give us an update on your platform strategy in new products, you are moving in sort of more of vertical model or horizontal model or a platform model. Can you just give us a update on the new products you are developing there? Yes, as I mentioned, we have two-pronged strategy. One strategy is to continue to exert our leadership in the mobile dominated portal. So constantly, implementing new products, new features, continually upgrading our product in that aspect. And also there is many new opportunities with the coming 3G, of course with, we are working on the applications such as the mobile streaming, such as mobile online games, such as many of the new applications that would be possible with the faster network, that's one aspect behind the portal, behind well guarded. And other aspect, as you have mentioned we have over a 100% team working on our wireless Internet strategy which is to build this distribution platform -- our branded distribution platform, our branded portal outside the well guarded, so that's another strategy. So we believe that, because at the end of day, brand will be the ultimate competitive barrier in consumer driven business. So we believe that, getting users to recognize our brand, and to come to our brand, come to our distribution platform to access information, to access content to services, we will also be, well, actually I think in the long run to improve our margin. Because, you spend advertise to build the brand, the customer recognize the brand and come to you. So these are the two strategies we currently hold. I will add one more point. I think for the value added services, we have six different platforms, we are running right now. And we do expect to launch a lot of new products, SMS, MMS, color ring back tone areas on the Java product. So it's, right now, we already have hundreds of different products on these different platforms. And we do expect to see the revenue growth from most of these, almost all of these platforms in 2006. Okay, thanks. And just in terms of your content licensing program, could you just give us a sense of where you are there? Sure William. We, as you know, we have signed two movie deals "The Promise" and the "The Myth" being referred in the fourth quarter. Both the movies had generally a larger Publicity and as well as significant revenue for us. We also have non-inclusive content deals with, pretty much all the major music labels, and some of the smaller music labels in China. By the end of 2006 the maximum effective income tax rate will be 7.5% if you exclude all the one-time items. Thank you. Good morning gentlemen. Just a couple of questions. First question, can you give us a idea, how much of the revenue is coming from music? And when you see that content cost increasing, is it mainly because of the music label companies are asking for more, or is it because other content, not music content providers are asking for more? And if you could maybe -- the percentage of the revenue sharing will be good indicator. Thanks. We should not give specific breakout for music. In terms of content cost partially it's because of the growth in revenues. We are sharing revenue with the music labels, and also partially it's because that we have find some, exclusive content deals that require minimum guarantee payment or one-time fixed payment. Okay, all right. So, in your guidance you are predicting the return of growth for the WAP segment. And this, can we say that your WAP has bottom in the Q4 or is it just a rebound and/or is it just some necessity associated with this WAP segment? Okay. In terms of WAP, we believe, you know, fourth quarter is the bottom of our WAP business. However, as we mentioned in the press release we’re definitely facing increasing competition on the WAP business. The primary reason for our WAP revenue decline is because of the silent user of that operator introduced in April 2005. As a definition of your silent user or the active user is eight months. So, that impact was pretty much all the way carry along to December 2005. So, we believe our first quarter revenues will grow, and we also hope at this point in the coming quarters our WAP revenue will continue its growth. So, what you say competition, do you also mean the competition of the free WAP sites announcing China Mobile is the, basically curbing the growth of those free WAP sites. Do you think your growth is coming from that site? I don’t think the free WAP right now has a big challenge to the paid WAP, the reason is that is the different user base. So, people access the Monster net, probably another people who access the free WAP site. So, the competition, as J.P mentioned, mainly coming from the competitors in the Monster net, and there are more companies right now working on the WAP business, and also people are, you know a lot of people are, as mentioned earlier a lot of competitors out there for sales, so they are doing their best together to get the revenue. So, that’s where the main competition comes from. Okay. I have a last question very quickly. I mean, in terms of your preparation for the 3G, you mentioned about the $10 million of investment. Do you think that enough, you know, I think we would have heard the numbers when you guys launched the China run how much cash you guys have earned? So, my question is do you think $10 million is enough, or will you spend more on that? I think for the 3G strategy is actually, also as Nick mentioned that there are two different sets of strategies, there is a strategy for the paid order. We partner closely with the operators including China Mobile, Telecom, Netcom and Unicom. We have heard a rumor about the 3G license giving to three to four operators either late this year or probably sometime next year before the Olympics. And so, we’re working very closely with these operators. We have set up dedicated team to partner with them on the 3G preparation. Internally, we also have a lot of people working on new products that’s specially designed for 3G. But, we believe, you know, even after 3G license dealers it will take, you know, at least a year for lot of people to be able to use this 3G services, they need to have their new handsets. So, it takes pretty long time for, you know, the 3G things to really, to generate much revenue from the partnership with the operators. Another set of strategy is to launch free WAP or we said wireless Internet portal. You mentioned China, if I remember correctly revenue in China in 1999 we received a total of $10.25 million from Goldman Sachs and bunch of other investors. And we poured all the money, maybe in a year and three months. We feel China will be the probably the fourth largest Internet portal in China. So, that’s how much money we spend. And so, believe for our preparation for 3G and building our KongZhong brand and the Condo net portal. If we spent 10 million this year, it definitely some - it definitely a beginning, but it’s now, you know, something too small. 10 million is a lot of money, so we believe that we can spends this smartly, and we definitely establish a pretty brand name and also very good user base. As I mentioned the Condo net is already now the leading wireless Internet portal in China today, and the size of the wireless Internet is still not that big right now. So, we believe that, you know, after two to three years it’s definitely hitting the net market, it will be around, it will be probably, you know, something I see that Internet today, because of the mobile penetration in China. Hi, good morning, great quarter. Just a couple of, I think more macro questions. First of all, so excluding - based on your forecast right now, excluding Sharp Edge right now incremental revenue, you actually expect that core KongZhong is actually picking market share or actually loosing market share to some of your competitors, and strategy that’s one you had to gain. Because why I'm asking this question is, because excluding - by taking the first quarter guidance and it’s simply multiplied by 4 atleast you got around 100 million, but your guidance, full year is only 105, 110 million. So, either you expecting Sharp Edge or either your expectation of full year guidance is pretty conservative? Second question is also pretty macro question, how does you see the visibility or kind of any potential risk that any investors that we have to pay attention in everyday after this year, I think recently we have heard about some rumors saying potentially China Mobile based on restrictions related to the partnership between SPs and handset brand vendors, that could be, or now maybe potential from other areas that we may have to pay attention on. Can you give us some highlight on that? Thank you. Thank you Wallace. It terms of revenue guidance. Well, definitely are relatively conservative in terms of giving revenue guidance, especially in this environment. As you mentioned, there's some rumors about some things which I think Yunfan clarify a little bit later. We have, we do 24, the low end of our first quarter guidance, we multiply that by four, that’s about $96million. And we actually hit the $110m, that’s still pretty healthy growth. Sharp Edge, we just recently complete the acquisition. On the revenue and profit contribution we think we have a good idea, but still we have to wait and see to see how the company executes. And then we probably will get more comfortable with giving guidance, both in top line and bottom line, relating to Sharp Edge. Yunfan will answer the second question. Yes. I think for a little bit add-on on the first one. I think we are, we believe we have gained market share in 2005, take a look at our revenue growth and also the revenue growth of the comps, the other least cost. Based on the numbers we have already publicized -- published, I think is, our growth is pretty high, it’s pretty good. And if you take a look at the projection for 2006 and compared this to 2005, we still 35%, 40% or more than 40% is our 2005. So that we believe that, that’s a pretty good growth. And for the handset manufacturer part of this. I think KongZhong together with a few other big names, the top, right now the leaders in the market in revenue, and also in the partnerships with the handset manufacturers. We are also working closely with China Mobile on their new project called MIDC, and this our new project. China Mobile they set up their own portal or with the handset manufacturers that they subsidize. However, that’s only right now currently handset that they subsidized, which is a very small part of the handset sold in the market. And most of the handset are subsidized are the foreign -- are made by the foreign the big names like Nokia, Motorola. While most of the domestic phone companies are more like PCL, probably are not even a player right now. So we believe that our strategy’s to lend hand and to work closely with the handset manufacturers because they sell, they have the power to sell their phones besides what is in their phones. And the other -- On the other hand to work closely with China Mobile as their MIDC project, to be included in their MIDC project when they partner we support. So, and we do believe there won't be much deal by the rumor you heard right now. Our strategy is still very clear. Okay, thank you. And just one more question is, in Sharp Edge we all understand that pretty good in the, say business dealing with some non China Mobile operators. But, at the same time the whole, well know that, some of these operators are pretty, you know, conservative in term of their payments balance. So, in such a case, you been I think KongZhong is getting quite ready like first five case such as platform and time mix. Are you willing to us little bit more in terms of cash flow payments firms or more specified on DSO terms to gain more market share in Unicom, Telecom, Netcom, versus do you maintain relatively healthy margin and cash flow payments in the future to sustain this further with it? Thank you. In term of margin, as I mentioned earlier at this moment Sharp Edge is also offering the margin actually higher than ours. So, we actually expect Sharp Edge acquisition will improve our operating margin. In term of cash flow, yes, you’re absolutely right, I think the other three operators payments time is usually longer than China Mobile, it is part of our business, and we have 117 million in cash sitting on the balance sheet. And, you know, in the near future pending cash is probably not within our priority, our key is to gain market share and also generate and grow our net income for our shareholders. Yeah, I think for the other three operators, I think China Mobile is the leader in the market. Their motto is actually following the Monster Net model. If you talk a look at what happened in China Mobile two years ago, the payments terms are similar what we have with the other operators today, but China Mobile gradually improved their payments terms. So, right now we have pretty good cash flow from China Mobile, and we do expect that the other operators will gradually improve their payment terms as well in the future. Hi. One follow-up question on the acquisition strategies. You mentioned that you have $117m in cash, that’s a lot of cash. I don’t know if you have, give us a, give us some color on your future acquisition strategies? And will you consider a share repurchase program if the stock becomes more attractive? Thank you. In any case, yes, we do have a good cash balance on our balance sheet. We will continue to make acquisition. The criteria of acquisition will be probably be. First of all, it has to be complementary to our existing business. Second, the valuation has to be attractive and hopefully accretive to our earnings. And the third, well, the management team has to be good managers and also fit in well with our existing culture. So we think Sharp Edge is a great company, that’s why we are willing to spend a relatively large amount of capital on this acquisition. And we actually have to take out the money for contingent payments for Sharp Edge deal. So we’ll continue to look for acquisitions and, as you probably know, all acquisition makes sense strategically. And the key is integrated acquisition into our existing business and the platform. So we’ll be very careful and very conservative in terms of buying companies. In terms of share buyback program, we have a resolution in 2005 that authorize our Board of Directors to buy back shares as they see fit. So we’ll continue to monitor our share price and also to look at our future business plan, and return of investment if we invest some money internally. And compare that to and we’ll make decision where we see fit. Yeah, I think, yeah, just one more thing on the cash. Its definitely that the dilemma we faces that we have a lot of cash in hand, and we definitely want to invest in the new business, to acquire a company and then to expand and another way to invest in new business like what we’re doing right now for the wireless Internet business that we believe is the right direction to go for us. And so why we decided to use $10 million as investment to the wireless business. And that will definitely hurt our, you know, as we invest in the new business rather than the acquisition, that will definitely hurt our net profit, and so, that the dilemma we faces. We take this 10 million numbers, because we believe that this year we need to invest enough money in the wireless Internet business and we need to - on the other hand to maintain a pretty good margin and also good profit. But, however, if the market allows and you guys, the investors, really want us to spend more money. We definitely want to invest more into the wireless Internet business in the future. Yeah, I think that wireless, you know, it’s a beautiful business in the future, I think with the more investment the better you get. Well, you said the management of the board approved a plan, do have they authorized the amount for..? The shareholders have a resolution to authorize the Board of Directors to initial the plan, at any time that the directors see fit. Can you give us an update on the ability for China Mobile's prepaid subscribers, and about 185 million of them to be able to use 2.5G services? I think, this is Yunfan. I think they are in the process, still in the process of opening the prepaid networks for the 2.5G services. I think Shanghai and Beijing are definite already to use 2.5G services. And as you mentioned a few quarters, probably two quarters of them, that the key practice here is still the static, because the prepaid network and the postpaid network they have different billing systems. And it's very important that the China Mobile adjust their dealing systems right, while people to use the 2.5G service that would be able to be build, so those are the two different issues that we are still seeing the China Mobile expecting to improve there. At this moment, the revenue contribution is still not significant. You know, Shanghai and Beijing KongZhong actually in those large City may actually, in those Cities actually there are more postpaid users, and the prepaid users in general the revenue per user is lower both for the million and also for the wireless data entry services. We have seen some new customers, some new prepaid customers, but at this moment, well, revenue is still not significant. We hope to see good improvement over the year. Yeah, I think the duration is a lot of prepaid users are able to use the 2.5G services. But most of the provinces still not able to deal that, and that's why they are not able to pay the service providers for the prepaid usage. Got it. And is there, has there if any change, and what your 2.5G or even for 2G customers are using. It seems that, there was a five quarter trend has been reversed which interactive entertainment category has actually gone down as a percentage of total revenues in media has increased as a percentage of total revenue? That's correct David. In the fourth quarter, well, the growth driver was MMS. As you know, MMS is mostly related to our digital magazines and digital greeting cards. We, of course, see digital magazine into the media. Okay, and last question. Do you know, where China assets is, in terms of disposing its 3 million shares. I believe, they have until May to do it. Do you have a sense if there actually already completed that? We have seen a 13G filing as of December 31st, they have refused, they are positioning from 9.7% to 6.7% as of December 31st. Again, ladies and gentlemen to ask a question, please press "*" followed by "1" on your touchtone telephone. And your next question comes from the line of Chang-hua Qiu, FORUN Technology Research. I wonder, whether, can you give us a little bit more color regarding your wireless Internet, you know, if you use a PC Internet analogy, right now you know, people, where are they coming from, advertising, from e-commerce, from a community, from emails, or from search. So your wireless Internet effort, do you have any focus, or for they moment, or the impression is, your focus is from online advertising, and maybe some online again? Yes, thank you. If you look at the history of an Internet, the first business model that comes up is the wireless, Internet portal system model, which is based on advertising. I think, the wireless Internet will playout, we believe those have a similar fashion, that because the, initially, they use a number, of course, if that's small right, then comes the catches in the early mainstream then the mainstream, then the advertising curse, so in the beginning we believe that at this time, that the most, the strategies to take right now should be the portal strategy, then with the portal, with the digital branded distribution platform, then you can have other business model that system has. I think the portal is the best property to acquire right now, so our portal will be based on these following things, these following factors. First of all, well a lot of that will be based on media services. If people need to know, people need to deploy information, it's always a very, very big need. And second, is that will be developing our branding strategy, because as I said, branding is the ultimate barrier to entry, I believe for the consumer driven business model. And third is that gaming and entertainment and the community will follow on, we believe that people are paid for the games, who will pay for the community, but people were not likely to pay for media or information, because in the PC Internet world, news or other short information or entertainment information, it's free. If you watch TV, most of the TV content is also free. So for content only services, it should be the pre-model supported by advertising, the other model games, communities, which our portal will also be working on, we believe in the future that you can have other business models in charge, customers again charge customers billing advertising communities, and then other business model will come to it. I believe, wireless Internet will be a, if you look at the transition numbers in China, we believe it will be a much bigger deal than the PC Internet. So I believe other business models will also come to, when they become little prevalent such as the hotel booking, e-commerce, or other auction, whatever, I think many of these models will come true. Believe me, right now, our strategy in this time should be the portal strategy. Okay, in terms of the numbers, you know, with this 10 million investment and with you know the, for how many order revenue will be your future years. So if this 10 million all recognize in '06 cost or, part of it, which should be recognized as cause for other years. In your net earnings guidance, how much you included for that guidance. I think we included all the 10 million investment as, well most of them operating expenses, so with that 10 million unit, as I projected earlier the main profit probably 25 to 30 million for the whole year 2006. Definitely this is 10 million investment, we won't be able to be profitable on the wireless Internet business. It will take atleast, as I project, you know, 2 to 3 years atleast to, for the wireless Internet business to be profitable, using the most of the revenue probably comes from, first it will come from the advertising, as Nick mentioned, that we already see the trial last Q4, I mean we got some advertising dollars in revenue. So we believe that, you know, it's a viable model, and right now probably the early, the important thing to do early on is to build out the brand and the traffic. Again, ladies and gentlemen to ask a question, press "*" "1" on your touchtone telephone. There are no more questions at this time. I will now turn the call back over to Mr. Gan for closing remarks. Thank you. Thank you, everybody for attending, sorry about the technical difficulties we had. Any have, we believe we had a good quarter. And we look forward to continue to execute well, and deliver return for shareholder in 2006. Take care everybody

EarningCall_233916

Here’s the entire text of the prepared remarks from New York Times’ (ticker: NYT) 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 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, including: Janet Robinson, CEO and president; Len Forma, Executive Vice President and Chief Financial Officer; Scott Heekin-Canedy, President and General Manager of The New York Times; Martin Nisenholtz, Chief Digital Officer; Jim Lessersohn, Vice President of Finance and Corporate Development; Stu Stoller, Vice President, Process Engineering and Corporate Controller; and Tony Benten, 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 10K. This presentation will also include a non-gap financial measure and we've provided a reconciliation to the most recently comparable GAAP measure in our earnings press release, which is available on our Web site, http://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 for that are in our press release. Thank you, Catherine, and good morning everyone. Our third-quarter earnings per share were 16 cents based on generally accepted accounting principles, compared with 33 cents in the same quarter last year. The 16 cents is net of a charge of 5 cents per share for cost associated with our staff reduction and a penny per share of incremental costs associated with the expensing of stock-based compensation that we did not have in 2004. We came in above the earnings range of 11 to 14 cents that we had provided last month. While the advertising market remained challenging in the third quarter, our earnings were better than we expected as revenue growth improved in late September. This is particularly true with The New York Times Media Group. Advertising revenues for our News Media Group increased 1.7 percent in the third quarter. Overall for the Group, national and retail were on par with last year, while classified was up nearly 4 percent with healthy gains in real estate and help-wanted advertising offsetting sluggishness in the automotive category. At The New York Times Media Group, advertising revenues rose 2.9 percent. We saw double-digit gains in several advertising categories, including: Financial services, with increased advertising from American Express and Ameriprise, Corporate, which saw increased advertising from Chevron and Exxon Mobil, Banking, which benefited from campaigns from Citibank, Wells Fargo and Independence Community Bank, and International fashion, which continued to grow in part due to the very successful T Sunday magazines and Thursday Styles and Sunday Styles sections. Weak categories were, Transportation and travel, where airlines and cruise lines reduced their spending, Telecommunications, which had difficult comparisons because of the AT&T-Cingular merger, Advocacy, which benefited from the elections last year, and Studio entertainment, which had a soft July and August, partially offset by a solid September. Color made up 29 percent of The Times' advertising revenues, up from 26 percent in the same period last year. We expect this to increase in the fourth quarter as we have just completed the addition of 40 percent more color capacity. This project came in several weeks earlier than anticipated and well in advance of the holiday season. Advertising revenues at the New England Media Group reflected the continued weakness in the Boston economy and were down 2.8 percent. Classified advertising in the group declined 4 percent because of weak automotive and help-wanted advertising only partially offset by strong real estate advertising. Retail advertising decreased 3 percent due to softer department store and home-related advertising. The Group's national advertising was flat in the quarter with travel, telecommunications and technology advertising being soft and the overall entertainment category showing gain. We continue to be pleased with our investment in Metro Boston, a free daily newspaper that targets commuters. It had its best month ever during the third quarter. The number of display advertisers placing ads in both the Globe and Metro is increasing and classified sales have gone extremely well. In August, Metro, the Globe and Boston.com introduced a new offering called Boston Uncovered, designed for college and graduate students. It has proven to be attractive to readers and advertisers alike. Our Regional Media Group showed the strongest advertising revenue growth of the three news media businesses, up 4.3 percent. This is consistent with what we have seen throughout 2005 when its properties in smaller markets have outperformed those in major metropolitan areas. Once again, the Group successfully achieved its goal of deriving a third of its total revenue growth through new products and services such as commercial printing, database marketing, weeklies, magazines and Web sites. This drove their revenues to increase 17 percent in the quarter. The company's overall circulation revenues decreased 1.2 percent. We maintained flat circulation revenues at The New York Times Media Group and the Regional Media Group. Circulation revenues declined about 6 percent at the New England Media Group where volume was lower for both home delivery and single-copy sales. For the September ABC statement, The Times expects to show gains for both daily and Sunday circulation. The Globe anticipates declines for both daily and Sunday, reflecting the home delivery and single-copy decreases as well as a conscious decision to reduce its other paid or bulk circulation. We continue to make progress in expanding availability of The New York Times across the country. Next month we plan to launch a new contract print site in Toronto, our first outside the United States. In addition to the greater Toronto area, the new site will serve Buffalo, Rochester and other areas in upstate New York. In January, we expect to begin printing in Houston. Our Web sites in the News Media Group had very strong growth in the online advertising revenues, up 31 percent in the quarter. Last month at NYTimes.com we launched TimesSelect, our new fee-based product that includes our distinctive columnists and extensive access to The Times archives as well as other features. Times subscribers receive TimesSelect free of charge as part of the benefits of subscribing. For others there are both monthly and annual packages available. The preliminary response has been very good, well ahead of our expectations. Traffic remains strong. As a matter of fact, NYTimes.com had record page views in the month of September as a result of Katrina and improved search engine optimization. We continue to be very pleased with the performance of About.com. It recorded total revenues of $14.2 million in the quarter, with advertising revenues up an estimated 67 percent over the same period last year. About.com's integration is progressing very well. It has applied its expertise and search engine optimization to NYTimes.com and Boston.com, which has increased traffic at both sites. Joint sales are currently underway with major advertisers, and we continue to pursue innovative ways of driving traffic between About.com and NYTimes.com. With About.com, the Times Company is now the 12th largest corporate online network, generating nearly 35 million unique visitors a month and providing advertisers with a robust inventory with which to market their products and services. Turning to our Broadcast Media Group, revenues decreased only 5.4 percent in the quarter, despite significantly lower levels of political advertising. In the third quarter, political advertising totaled $300,000 compared with $3.9 million in the same quarter of 2004. Last year we also benefited from $1.8 million of advertising related to the Olympics. Before the end of the year, we expect to close on our acquisition of KAUT-TV in Oklahoma City, which will create our first duopoly. We believe that our ownership of both KFOR and KAUT will enable us to achieve operating efficiencies and to offer advertisers more and varied ways to reach their audiences in this market. In the fourth quarter, The Times will have two new issues of its Sunday “T” magazine. The first appeared last Sunday and focused on beauty. The other will debut in December and is devoted to the holidays. “T” Design, which came out on October 9, was the largest Sunday supplemental magazine The Times has ever had. The entertainment category is showing strength in October and is expected to benefit from an increase in the number of wide screen releases, 48 anticipated this quarter compared with 28 in the fourth quarter a year ago. In December The Times will introduce a free pocket-sized magazine called “On Movies,” which will be distributed to more than one million moviegoers at Loews Cineplex Theatres and will generate incremental advertising dollars. This month Boston will debut its enhanced classified auto section. In addition, Explore New England.com, a one-stop travel guide to the New England states with content from The Globe, Boston.com, The Times and About.com, launched this month with the goal of becoming a go-to site for New England travel. Our Regional properties will launch another magazine this quarter, adding to their growing stable of other products and services. Online advertising remains strong, with NYTimes.com and About.com showing particularly robust gains. So far in October, pacings at our Broadcast Media Group are down in the high teens. In the fourth quarter of last year, our Broadcast Group recorded $9.5 million in political advertising so the comparisons are quite challenging. While the quarter was a difficult one and advertising growth remains uneven, we believe the steps we are taking to strengthen our businesses position us well. Going forward, we will continue to develop innovative ways to reach our audiences and serve our advertisers in print, online and broadcast media. At the same time, we will remain very disciplined in managing our costs. And now I'll turn the call over to Len. Staff reduction expenses, Costs related to About.com, which we acquired in March, and stock-based compensation costs, which were less than in the previous two quarters because of the valuation of our long-term incentive plan awards. Excluding expenses related to the staff reductions, About.com and stock-based compensation, total costs increased 4.6 percent primarily because of higher distribution and outside printing expense, higher wages and benefits and increased promotion expense. Newsprint expense rose 3 percent, with 5.4 percent of the increase resulting from higher prices, partially offset by a 2.4 percent decrease from lower consumption. This quarter we plan to complete the conversion of all of our newspapers to a lighter weight newsprint as part of our efforts to reduce newsprint costs. In 2005 we expect to save approximately $1.6 million as a result of this step. Going forward, annualized savings are expected to be $3.5 million to $4 million. As many of you know, late last year we embarked on a systematic review across the Company to determine ways in which we can operate more efficiently. We are also eliminating activities that no longer support growth in order to reallocate those resources to areas that do. We reduced our staff by approximately 200 positions last summer and in September we announced that we will cut an additional 500 positions over the next six to nine months. These reductions were possible because of this productivity and efficiency initiative as well as our ability to leverage the investments we've made in technology and shared resources. Some of the recently announced job reductions will be accomplished through buyouts while others will be done through layoffs. The Company estimates that the total charge for this staff reduction will be $35 to $45 million, a portion of which will be recorded in the fourth quarter. The amount of annualized savings from this reduction is in the same range as the charge. Further, we plan to continue the process of critically examining all aspects of our business to improve the efficiency and productivity of our Company in order to enhance profitability. We are committed to reducing our cost base and ensuring that expense growth is below revenue growth. In the fourth quarter, we plan to make a $45 to $50 million tax-deductible contribution to our pension plans. This is less than the contributions we made in each of the past three years and we expect that going forward higher interest rates will reduce contribution needs. Stock-based compensation in the fourth quarter will be higher than in previous quarters because of the acceleration of expense for awards granted to retirement-eligible employees in December. Therefore, our guidance for the year of $28 to $34 million remains unchanged. If we had expensed stock compensation two years ago, the cost would have been approximately $80 million. We've been able to reduce stock-based compensation by more than 50 percent by decreasing the number of option grants and accelerating the vesting of underwater options and modifying our compensation plans. And we'll continue to look for ways to further reduce stock-based compensation expense going forward. 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. Therefore, our guidance and the quarterly numbers we provide for capex now include both The Times and our development partner's expenditures. For 2005, the total amount of capex we expect is $255 million to $285 million. Of this range, $200 to $220 million is our responsibility, including $85 to $100 million for our new headquarters. In the quarter, total cap expenditures were $63 million. Of this amount, $46 million was the Company's responsibility, including $27.8 million for our portion of the cost for the new building. Year to date, total capital expenditures were $154 million. Of this amount, $117 million was the Company's responsibility, with approximately $59 million for our portion of the cost for the new building. In the fourth quarter, we'll complete the amortization of the non-compete agreement associated with the sale five years ago of the Santa Barbara News-Press. And looking ahead, we plan to provide you with guidance on the quarter before we present at the December conferences. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_233917

Here’s the entire text of the prepared remarks from Citrix’s (ticker: CTXS) 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. [Jeff Lilly, Senior Manager, Investor Relations] Thank you, Myles. Good afternoon, everyone, and thank you for joining us. In this call today, we will be discussing Citrix's third quarter 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 slides on the Citrix Investor Relations website, and the slide presentation associated with the webcast will be posted immediately following the call. Thank you, Jeff, and good afternoon. Today, I'm pleased to report strong third quarter result of the company, demonstrating solid execution across all four product groups. This was a great quarter for Citrix and really highlight the trends to continue drive our business in additional to provide you some comments in the third quarter results, I'll discuss our current trends in our business, and provide you with an outlook for the fourth quarter and full year 2005. I'll also provide you some early thoughts on the operating model for 2006. Beginning with our financial results, I should note that certain numbers discussed are adjusted figures, please refer to the press release or investor relations website for full reconciliation of adjusted figures, US GAAP figures. So, let's take a look at our Q3 highlights. Total revenue was $227 million, an increase of 21% over last year. Our GAAP EPS including $7 million write off of in process R&D relating to the acquisition of NetScaler was $0.23, this compares to EPS of $0.22 a year ago. Our adjusted EPS was $0.29 compared to $0.24 last year an increase of 21%, adjusted operating margin was 27% and cash flow from operations was over $76 million. So across the Board really a great quarter. Now I would like to discuss our revenue by product mix and geography as well as our operating performance. Turning to revenue mix, let me first talk about recurring revenue streams. Our online services revenue $26 million in Q3 an increase of 63% over the last year. When normalized for purchase accounting adjustments. The product license update revenue was $85 million, up 20% year-over-year and technical services, which consist of consulting, education and support was $19 million up 30% year-over-year. Finally product license revenue which includes our Access managements, Gateways and Application Networking products was over $97 million in the third quarter. This category grew 10% year-over-year with the major of the growth coming from the Gateways and the application networking groups. Overall we are very happy with the license growth. We are strong despite the fact that a number of anticipated Access re-transactions didn’t close EMEA. A pattern that we have seen all year in this region especially in Germany. When looking at total revenue by geographic segment EMEA was up 14% over Q3 last year and totaled about 34% of revenue, was $78 million. The America’s regions continue to execute well, growing 18% over the last year and accounting for $103 million or 45% of revenue. The pacific region grew 11% now contributing 9% of total revenue and our online services which are not included in these geo segments has grown into almost 12% of total revenue. When looking at the top deals for this period, we made four transactions greater than a million dollars and our remaining six were all above $500,000. This was led by our North American federal team, which closed five of our top ten deals. In addition our new application networking group generated two of these transactions. By geography six of the top ten are in North America, three are in EMEA and one was in the pacific region. Now we will briefly talk about expenses and operations. Adjusted operating expenses in the third quarter were $155 million, up approximately 19% year-over-year. This increase was largely driven by the addition of the NetScaler team and other head count investments. During the quarter we added approximately 290 employees to the company. Of this about 230 of the new people joined Citrix through the NetScaler acquisition, 35 came into the online group, and 25 into other areas of the company. In total worldwide head count now stands at 3086. On the balance sheet revenue grew sequentially by about $13 million bringing the total balance to $255 million. This is up about $35 million or 26% from last year. Restricted cash investments totaled $623 million, down $62 million. The sequential decline was related to the cash needed for the acquisition of NetScaler as well as share repurchase activity during the quarter. Also please note that at the end of the quarter we had $75 million outstanding against the term loan in EMEA. As a reminder this debt facility was established in Q3 to maximize repatriation of over $500 million in foreign earnings under the American jobs creation act. During the third quarter we stepped our stock buyback activity, our repurchasing 3.5 million shares at an average price of $22. This increase in activity was primarily intended to help offset the dilution from the share issued in connection with the NetScaler acquisition as well as our ongoing dilution management initiatives. And finally cash flow from operations in Q3 was very strong coming at over $76 million. This brings trailing 12 months cash flow to a record 295 million. In summary these results demonstrate the continuing progress in executing against the strategy relayed out a few years ago. A strategy to build the complete access platform to solve multiple access problems for our customers. And at the same time diversifying our product revenue streams. We’ve managed this while still maintaining operational discipline and strong profitability. Now I would like to discuss our outlook and expectations for the fourth quarter and full year ending December 31st, 2005. It should be noted that we are about to make forward looking statements that incorporates certain risks. Please refer to the Safe Harbor Statement noted in our press release and the rest that are stated in our SEC filings. For the fourth quarter we expect total revenue in the range of $243 to $251 million. Within the total revenue number online services are expected to contribute approximately $28 million and we expect the application networking group to contribute $11 to $12 million in total revenue. I would like to point out that this revenue will be approximately 75%, 25% split between license and services. Gross margins are expected to be in the range of 94% to 95%, total adjusted operating expense will increase 7% to 8% sequentially primarily reflecting addition of the NetScaler team and company’s programs to take place in the fourth quarter. For other income we expect approximately $5 million in Q4 rated average shares should be between 180 and 182 million finally we expect earnings of $0.25 to $0.27 per share on a GAAP basis and adjusted EBIDTA of $0.30 to $0.32. For the full year 2005 we expected the revenue in a range of $883 to $891 million, GAA EPS of $0.85 to $0.87 and adjusted EPS of the $1.10 to $1.12 per share. Looking ahead I wanted to provide some early thoughts on our 2006 operating model. As the application in networking in Gateways groups continue to accelerate, we expect overall gross margin would be in the 93 to 94% range, with more profitability coming from our businesses another US sources, expect the tax rate increase between 2 and 3% then compared to 2005, and overall we will continue to target total adjusted operating margin in the mid of 20% range. We built a strong foundation this year even alter our scheme from our execution in 2006, we work to continue to deliver top quarterly operating margin performance against our Peer group, while investing and growing our businesses. Now I’ll like to turn over to Mark to give you additional detail on the quarter’s performance and to discuss our ongoing business, as we near the end of 2005, Mark. Thanks David, thanks for joining us today. Our third quarter result are excellent, our continued momentum is driving solid growth in revenues, profitability and cash flow. On Q3 with our performance across financial product development and go to market dimensions. We are coming often exciting Q3, we are also coming of a really exciting event just last week, our biggest incest iForum customer events ever, and I would like to start right there. Suppose with incredible of record 3500 customer, partners and employees from nearly 50 counties were there. Attendance of more than a third over last year, and we had more executive level attendees ever. Over 30 customers shall break out sessions, customers like Boeing, Merrill Lynch and Chevron to name just a few. Sharing their successes across all our products and our ECO system partners turned out in record numbers, over 70 of them were iForum sponsors and made it exciting access platform product announcement during the conference. And we made some exciting product announcements too, upgrading and enhancing much of assets platform again, we also feature innovations from our R&D Labs giving attendees the peak into the future. Regard about our project we coordinate constellation. Constellation is next generation of application, virtualization technologies sales to the Longhorn server platforms. Attendees saw many of these technologies in the on site iForum lab, including Kevlar system health monitoring. IRIS policy based session recording and Constellation extreme graphics acceleration to names just a few. Constellation includes the broader ray of innovations that will be rolled out, out of the next couple of years as new products enhancement, and we will bring him forth Citrix as the industry standard for application and desktop virtualization We also demonstrated project Tarpon our breakthrough application streaming technologies, Tarpon makes the idea of push based desktop software installation a thing of the past. For the first time it gives desktop PC users one click self service access to desktop apps, it allows IT to deliver desktop application has the software service and delivers the TCO security and performance for desktop apps, that the Citrix brand stands for. Clearly between Constellation and in other areas as well we are innovating at a rapid rate, to extend our lead in the access infrastructure market long into the future. Customers at iForum were very excited to hear how all our products come together as an access platform that delivers a best access experience in every access application scenarios. What we think that we mean best PCO best security, best performance best availability and best business agility. It’s an access platform that’s complete for application delivery by virtualizing client server apps. By optimizing web apps. And by streaming the application to the desktops with our presentation server family, our NetScaler product line, and in the future, project Tarpon. A platform that enables access security and control to the data center, with our access gateway and password manager products, and a platform that enables real time collaboration, built on go-to-meeting, go-to-assist and go-to-mypc products. This is what our platform approach is all about to be the single source provider of access solutions. So now let us look at these solutions in our individual businesses in a little more detail. As David mentioned we had a quite a few large transactions during Q3 in fact 8 of the top ten deals were driven by Presentation Server. It is continuing it’s penetration of enterprise accounts. And maintaining its no.1 position in application virtualization. When it comes to virtualizing client server apps Presentation Server has become IC best practice providing the best cost, security and performance when compared to any other application delivery solution. The Presentation Server isn’t only for the enterprise anymore. In Q3 we released Citrix Access Essentials, our integrated app virtualization solutions for smaller customers; we are really pleased with the first three months of availability. To date more than 850 channel partners have been trained and authorized to sell Access Essentials and in Q3 they’ve already delivered the product to over 200 new customers. Last quarter we released Presentation Server 4 supporting 25% more users per server. 4x faster printing and broader application compatibility than ever. We are really pleased with the early response. PS4 has already generated a lot of excitement with our customers. Last week at iForum we announced the 64 bit version of Presentation Server a release that further increases performance and fundamentally changes the economic of the application virtualization. Performance increases 3X, X64 has all the power of PS4 plus it supports three times the number of users on each server and delivers instant ROI. It’s builds on Microsoft partnership and its garnering go to market support from IBM, HP, DELL and Intel. Moving customers to a more robust industry standards server platform. It’s driving primary demand for application virtualization solutions. Presentation server is already the industry standard for app virtualization the fact is however by our estimates we’ve only captured about 15% of the potential. Leaving a lot of opportunity ahead but for the entire Presentation Server product line. That’s why we are staying aggressive with our long term vision in this market, amplified by our development project code named Constellation that I mentioned a moment ago. Now I would like turn to our application networking solutions, the Citrix NetScaler product line. Just 60 days ago now the integration of the NetScaler team is off to a great start. We made solid progress in integrating NetScaler into the access platform; we’ve completed the first wave of training for sales, support in education. Launched a new standard edition of NetScaler for small and medium enterprises. And debuted integrated net iForum last week to rave reviews. On top of all that the new Citrix NetScaler team is delivering on its revenue goals and rapidly building a growing pipeline. NetScaler systems are number one in application optimization. Consistently ranked number one in performance and number one in customer satisfaction in the category. We are very confident in our choice of NetScaler and our ability the leverage the superior vision, excellent talent, technical innovation and market leadership this team brings the Citrix. We hit the ground running and are very pleased with the integration so far. Next we look at our gateways business. the gateways group continues to out perform our expectations with another quarter of strong growth, we getting great traction with the next generation SSL BPN our access gateways. As the stable in solution its doing great but it also doing well as the valuable product of the access suite, helping to drive suite sales. Early this year our guidance for the gateways group was 5 to 8 million in revenue, today we are executing ahead of that plan on a faster ramp and we moved into top five of the SSL BPN markets. More than 800 Citrix channel partners are already certified and in Q3 Gateways revenue growth of 50% sequentially. We expect this momentum to continue as we complete the geographic rollout worldwide. And packaged the products for multiple customer segments. Going forward we will bring the performance technologies of NetScaler to our access of Access Gateway. Aggressively driving the most complete and powerful product line for secured access. From the endpoint to the doorway of the data center. Now let us look at our online services business. This business continued its excellent performance and growing our software as a service competency and revenue stream. Citrix Go To MyPC was up 50% over last year. During Q3 we started the data testing of version 5 with much faster performance and support for true color extending our leadership in online desktop virtualization. Citrix Go To Assist the industry leading solution for online technical support grew 41% over last year. And now delivers nearly 8 million remote assistance sessions annually. Thus last week we announced Go To Assist 7.0, which raises the bar with new innovations in management integration and seamless session transfer to name just a few. These improvements will keep Go To Assist number one in its category. Q3 was another great quarter for our fastest growing product Citrix Go to Meeting up 48% sequentially and winning yet another desk collaborations solution award this time from Windows IP Pro. In July we launched version 2 of Go To Meeting with new features like application sharing reading recording and playback, drawing tools, Lotus Notes integration and presentation server optimization. I think its hottest online meeting product available anywhere. Our online services group leveraging our next generation real time collaboration technology bringing on-star like Access to desktop PCs web based meetings online support and stay tuned for even more. So in three years we’ve grown from a single product to nine product lines. I believe we now have the strongest product portfolio in the industry when it comes to access. Every product is the clear leader or the shooting star in its category. So to wrap up great quarter, great execution and momentum across the board and lots of opportunities for continued growth. Now we will open it for questions.

EarningCall_233918

Here’s the entire text of the Q&A from Ctrip’s (ticker: CTRP) 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, ma’am. Ladies and gentlemen, if you wish to ask a question, please key “*” followed by “1” on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please key “*” followed by “2”. Once again, that is “*” “1” to ask a question. And our first question comes from the line of Jason Brueschke of Citigroup. Please proceed. Thank you. Good morning James and Yin and welcome Jane. Congratulations everyone, going on a fantastic quarter. I have a few questions to them related to air-ticketing and then few more. In terms of air-ticketing, the first one is, could you maybe describe where we are in the market? I know your revenues are relatively small but growing extremely fast. And given, maybe the later stages of development of the overall travel market in China today versus where the hotel business was when you started; I should we be expecting a very fast ramp that continue to get the markets more mature? And then the second part of the question on air-ticketing is could you maybe describe why the cost of services associated with the air-ticketing is higher than the cost of services associated, I think, with hotel, with the implication but maybe it’s just an athlete term for describing? Thanks. Okay. While we are already pretty dominant in big cities, we, in places like Shanghai and Beijing, we already have 5%, 6% of the market, but overall, for the China market, our air-ticket volume still is less than 3% of the total volume. So, I think, overall, we still have a lot of room for growth, particularly in the second-tier cities. As for the gross margin, because per air-ticket, per transaction, the revenue first of all the revenue we get, the commission revenue we get for a transaction is lower, it’s RMB46 when compared to RMB65 roughly, for the hotels. So, the commission received is lower and the cost of service is a little bit higher, the cost of service per transaction is a little bit higher. I think the cost and the cost ph is roughly same. But, a significant portion of air-ticket still needs to be delivered. So, they’re a just little bit higher than the hotel because of delivery cost. So, overall, the air-ticket gross margin, I think is around 70% when compared to, almost 90% for the hotels. Thank you. The other two questions are, could you tell us what percentage of your revenues from both hotel and air-ticket are from your key customers? And then finally, could you maybe comment on the cost of customer acquisitions? Is that continuing to remain stable, or for any reason whether it’s a competition, or just the cost of your advertising and sales? Is the cost that these each incremental customer you’re adding; is that going on? Thanks. Okay. On a monthly basis, we define, you know, transactions from our key customers, -- transaction from customers who have booked already with us, at least once before. So, on a particular month, we received, you know, almost 80% for the hotel. And, I think it’s probably 60%, 70% for the air-ticket. Simply because air-ticketing is still growing faster of a smaller base, so, I think, given the same amount of transaction, new customers, we will see a bigger portion in terms of overall percentage and the overall transaction as a percentage. The customer acquisition cost still remains pretty stable, right now its’ at RMB160 to RMB180. I think that’s, you know, we have enabled to maintain that kind of efficiency over the years that has been pretty stable. Hello, hi, James and I have couple of questions. And first is regarding the growth in your online versus offline business, can you provide us a breakdown and then do you see a pickup in your online business? The online portion of our business is still about 30% versus the 70% offline. The percentage grew slightly, maybe, you know, 1% or 2% over our last year, lower or still around 30%. Okay. And, in terms of your penetration into like the second-tier city, do you see a more robust growth in second city in terms of hotel and air-ticket booking, versus, first-tier city and, especially in the first-tier city maybe a little bit separate there? For the hotel business, yes, we have seen higher in the second-tier city and then the first-tier city, because we are already very dominant in the first-tier cities. For the air-ticket, we are actually seeing pretty much across a broad growth over in all the cities we that we serve. And we are, having more and more second-tier cities. I think, probably in the future, we will see actually faster growth in second-tier cities. But so far we’ve seen across broad growth. Okay, sounds good. And my last question is regarding your leisure packaging business. How much of that, because you are saying you’re targeting that high-end customer, how much of that business is your pricing book business and how much of that is still with the agency business? Compared to the traditional travel agencies which are actually focusing on the tour group business, our you know almost, -- almost all of our leisure packages are targeted high-end, of course, you know, when we see high-end of this is still high, very, very high-end and just high-end. When compared to the target customers that the, of the traditional travel agencies, our target customers will be very high-end. Right, but do you hold it? I guess my question is that of, how much, what a proportion of the business you’re holding eventually in the, in the… I catch it okay. Very few, we actually prepay the money to the suppliers to get inventories. Only during peak seasons where the suppliers that we know and advance will be very tight, and we are very certain that we can sell these inventories we will actually buy these inventory in advance, like, you know, the October 1, holidays. In the non-holiday season, actually we don’t prepay; we just have guaranteed allotment from these subscribers. Okay, good. Can you comment on the competitive landscape, have you seen any market share gains by any of your competitors, has the landscape changed, eLong reported earlier today and they were showing somewhat faster growth rate in hotel bookings, is that just based on the smaller numbers or other types of revenues or do you have any comments on that and I have couple of followups. I think, well, I just looked at eLong’s report I think the hotel growth is mostly due to the acquisitions because they acquired the Fortune Trip, I think they closed the transaction in third quarter. So, like before the acquisition, the Fortune Trip has about 10% of eLong’s volume. So, if you check out that, organically, actually eLong is probably just growing, at our same rate as we did, probably even a little bit slower on a hotel side and we’re still growing faster on the air-ticket side, and then, eLong have grown much faster on the packaged side. So, I think, overall, we are at least maintaining our market share as you may expand a little bit, if you’re just talking about organic growth. Okay thank you. And then, a bit different question but related on the proportions of the question, this year you’ve seen in for Chinese companies report higher in some cases, significantly higher expenses usually has competitive in that case becomes more intense, but also as costs go up and salaries go up, fuel cosst have stayed relatively constant in terms of revenue. Should we expect that perhaps in ‘06 we could see some increase in your operating expenses, just as the overall Chinese market becomes more competitive and the costs go up? I think different market, different segment and different competitive, you know had pressure there, and, you know, in our business our, you know, sales competitor eLong has been there and has been doing the same thing, and we haven’t seen any new strong competitions emerging. So, I think we don’t have, right now, we don’t feel any pressure that forces us to increase our sales and marketing spending. Okay. One final question if I may, could you comment about how concerned you are of that potential impact of the adverse group is expressed implement ph in China? Are you taking into account that all in your guidance and I feel they’re recurring yields, suppose indiscernible of that Taiwan and to the secret. We continue to carefully observe any development with Avian Flu in China, thus far we have not seen softening of demand as a result of some recent isolated cases and more remote villages in processes. However should human to assume ph the infection become wide spread in cities the travel industry could be significantly impact at the case of SARS. Having said that, we expect that impact of such diseases should it happen to be short-term, I think, the long-term prospect is the fundamentals of our business to remain strong. Hi guys, nice quarter. Could you just give us a sense of the operating income growth that you expect for Q4, inline, is it inline with your 40% year-over-year or any change there? Well, because we, in our business, we have a limited view of the limited visibility visibility of our future revenue. So, we always guide, we currently still guide the revenue growth year-on-year 40%. Okay, well, last quarter, you also said that you are looking for bottom line of 40%, does that hold true for this Q4? I think we only give the top-line guidance officially because the bottom-line is more difficult for us to anticipate due to a number of unpredictable factors. For instance, during the fourth quarter 2004, we received a special tax preferential treatment procedure for travel information. Consequently, we received about RMB 8 million tax refunds for 2004 and also other factors such as discretionary bonus including Q4 as well as financial subsidy we received from time-to-time. So for these reasons, we’ve decided to focus on guiding the top-line. Okay. And then I just have a couple of house keeping questions that usually answer, if you don’t mind, how many customers did you have in the quarter? Hi guys, thanks for taking my question. Just one followup, I guess on the guidance side, looking at operating expenses last year particularly in product development and G&A, it looks like there is a pretty steep ratchet up in terms of absolute dollar amount and then you saw that level-off in the first quarter. And I think that was relating to bonuses, so I just want to make sure that we all understand that, is that something that we would expect to see again in this Q4? Well, I think the G&A and the product development expense are probably the same as Q3 I think, in Q2, we’ve developed, we added lot of people to actually develop new products. But, I think, we have passed that stage, so I think our product developments will probably remain; will remain pretty stable in the future. Okay, so there is not going to a bonus in the fourth quarter, like there was last fourth quarter, as I look at fourth quarter this year relative to fourth quarter last year, and last year you had a $400,000 increase in R&D and $500,000 increase in G&A which again, I think was a function of bonus payment, so we shouldn’t expect to see that again this Q? The bonus, discretionary year-end bonus happens every year and it’s related to individual’s performance. So I think the discretionary bonus will be issued depending on the overall performance of each individual. Okay, and then secondly we’ve heard some press here about, maybe the Bank of China limiting eCommerce transactions to RMB1000. I was wondering if you could comment on that please? The People’s Bank of China published October 30 a guideline on electronic payments, setting certain limits on certain types of electronic payment including amount of a single payment and a cumulative daily payment provided to different clients. When providing electronic payments service to neutral clients, banks are asked to endorse no more than RMB 1000 Yuan for a single transactions no more than RMB 5000 Yuan. Thus far banks, but the banks are comfortable with payment arrangement with us, and have not impacted of our transactions. Hi, good morning. A few questions, first of all in terms of the ASP for the air-ticketing business. I observed that there is a 2% decline; can you comment on that briefly just now. Could you just elaborate little bit more on what’s the reason behind it, it has been a while since you have decline in ASP. And then my second question regard to the size of the subsidy, I understand it’s difficult to provide the guidance on what subsidy you will be getting. But this quarter has been unusually large compared to previous quarter, I believe it’s about RMB10 million this quarter versus previous quarter around 3 million. If you could give us some guidance on how to look at that number going forward, I would appreciate it. Thank you. Okay. Well, first of all, the air-tickets commission revenue per transaction decreased slightly. So, from RMB46 to RMB45 this quarter. And as we are getting, as our air-ticketing revenue grow as increasing portion of our overall business, I think that will negative impact, or slightly make an impact on our overall gross margin. For the financial subsidy, we really cannot predict the timing of that. And I’m sure you will receive in cash, it’s really a not very good practice, just to predict it all, and even to book it. So, we only book it when we actually receive it, and it’s difficult to predict the timing, because, it’s having to go through all the government approval process. So, I think in the future we are sure to book probably that I think receipt from government from time-to-time. Okay. In the previous quarters you, the ranges has been about 1 million to 3 million or so, and it right now it’s about 10 million. Is this the magnitude we should be looking at going in the future or is it going to be more? This is anomaly for this quarter and it’s going to be back to the normal… If I line-out some few theories, not necessarily associated with that quarter, the financial subsidy, may be associated with the whole year to perform as a whole year tax contribution by one of our entities or a few of our entities. So, you cannot match that quarter-to-quarter. So, that definitely, that’s not related to just a one quarter for Ctrip’s performance, that 10 million received account. Yeah, good morning, James. One question for you, one of the companies in China state announcing on increase of salaries for employees since the third quarter. The salary increase, why not other companies increased the salary for their employees to keep them motivated and more stable. I wonder, what’s going with the Ctrip, are you increasing salaries for your employees too? Yeah, we do that every year; well it’s just like any other company, depending on performances, and the promotions we’ll increase anywhere from, 10% to 20%, I might add with last year, which is probably single digit. But, the entry level people, people we hire into our, the most basic call centers staff, their salary just increases there slightly, the entry level salary. Okay. You mentioned also earlier that percentage of e-ticket, decreasing slightly in third quarter. I just wonder is that related with the Bank of China’s Reminbi 1,000 kind of guideline? No. The guideline was just recently issued, I think probably end of Q3, even into Q4. The reason that our percent of e-ticket decreased is primarily due to one or two airlines recently having upgraded their e-ticketing systems. Not upgraded, but is in process of upgrading their e-ticketing system. So, their e-ticketing system has various substantial downtime in a quarter. So, that’s why our e-ticketing percentage was going down. We are working on that, of course international credit cards, you have international credit card. But overall customers there is a percentage that’s very low and the international credit card we have to pay very high transaction fee compared to the local credit card, that’s why, we are kind of reluctant to accepted international credit card. But, we are working on that, we are probably accustom to transaction cost to the customers if we were to do that. Okay. We have seen that number actually quite large at other companies in that geography. Is there any particular reason that that might be different in your case? Well, the reason that the functional currency of China introduced RMB as a revenue in cost denominated RMB, but the functional currency of indiscernible Hong Kong and where we keep most of our US dollar cash as they want to make it in Hong Kong dollar as our functional currency. Because, we’ve receive commissions in Hong Kong and Macau hotels and incur expenses in Hong Kong. We’ll have to see 500 hotels a year, and most of hotels we’ve added during the first, second quarter, because it’s just a flat season and it’s easier to negotiate with hotel in that period of time. As a reminder, ladies and gentlemen, that is “*” “1” if you wish to ask a question. Our next question comes from the line of Michael Millman of Soleil Securities. Please proceed. Thank you. That is Soleil Securities. Just to clarify, I think you said e-ticketing was 11% of the total or did you say that was up 11% and compared to the 30% that audit online sort of, only one-third of those online tickets are then e-ticketed, is that, am I understanding that correctly? And can you talk about; we know that you have on the order of 5% of the hotel business. Can you talk about what percentage of the travel marketing is attributable to yours that you spend and do you see that travel marketing expense over that travel marketing total growing very fast, or what rate do you see it growing? Okay. Of course, we don’t have a very accurate number, we only rely on the numbers issued by the government agency. And, really the number is saying a year or three years if you like. We have, the most recently we will have actually the 2003 number. But, we believe the travel market overall is growing 1.5 to 2 times of the GDP, I think, for example, the number of the air-ticketing passengers is probably growing at close to 20%. Okay and you are not growing your marketing or maybe, or let me ask, are you growing your marketing or would you expect you to grow your marketing at that rate of faster, going forward and the total market spend? How do you see that? Okay. You mean travel industry, the total marketing expense spent by the travel companies in China then we don’t, that’s a very difficult number to get, I mean, there’s all the different types of companies, you can call the airline companies, travel companies and hotels and the restaurants, but this is the number that’s very difficult to get. I would assume, unless, if they the overall travel industry maintain the same kind of profitability, their expenditure on marketing is probably grow very much inline with their overall revenue growth. So, if you take that assumption, their revenue, their marketing growth probably will be around to your 15% to 20%. And, our marketing expense is also a stable proportion of all of our revenue. So, our own revenue grew, this year 50%. So, our marketing expense is growing probably in that 40% to 50%, much faster than the overall marketing growth in the travel industry. And as a reminder that is “*” “1” to ask a question. And at this time, I am currently showing we have no questions in the queue. I would like to turn the presentation back over to Ms. Yin for closing remarks. No more questions. I want to thank you all for attending, and looking forward to hear from you on the next call. Thank you. Ladies and gentlemen, thank you for your participation in today’s conference call. This does conclude the presentation and 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_233919

Here’s the entire text of the Q&A from Hurray’s (ticker: HRAY) 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 would like 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, and that’s “*” “1” to begin. A couple of questions here. It appears that you have successfully compensated and more than offset the decline I revenues from China Unicom, by increase that you have had in other areas other than China Mobile. Do you expect this trend to continue, and in particular what is your outlook for 2.5G year revenues from China Unicom? And I have a couple of follow-ups, thanks. Yes. Basically, Safa, you see the trends are growing rates in terms of the 2.5G, especially for WAP, and that grow faster than the China Unicom. We actually have the sort of the difficult time with the China Unicom deal, to CDMA user growth slowdown. Such kind of, trend I would like to see will last a couple of quarters, and we fully believe we have a big growing potential in China Mobile in the future. Not only one or two quarter but in a future couple of years. In China Unicom, we believe it take a couple of more quarters to stabilize the market. And what we hear from the China Unicom, is they’re going to update some of their GSM network into GPRS in first half of next year, to allow the existing, the GSM of future GPRS user to use it, 2.5G, business. So, we expect that these potential growth some time first half of middle of next year, come from the China Unicom. Okay. Thank you QD. Now, secondly, on the investments that you have, the majority investments in Freeland Group, can you give us a sense of what, I assume you would be consolidating revenues into the majority holder? So, can you give us a sense of what revenue and growth we can expect from that area? Actually, we’re still working on, the next year’s budgeting and with Freeland, and currently we have the rough number in mind. We prefer, Safa we really prefer absolutely a whole of budgeting process has been complete; we would like to give a more accurate forecast and the projections. Yeah. And we would like to see given by the end of the year, the projections, nice profits around US$1 million from the Freeland Music Group, and that the top line is around RMB20 million for revenue. And Son of Pigs, these are very, very famous songs in China, generating 20 million download from WiFi search. About 12 million ringtone downloads in one month on China Mobile platform. Right. Just on aside here too. One final question if I may, on the margins. You noted that there was a fairly significant reduction in your SMS margin, because of the timing that you had. Is that a one-time spending? What should we assume for your SMS margins going forward? I think our old SMS business translation or transformed through the mid platform, and therefore did not really grow or even decline. So, we have to rely on alternative marketing and promotion channels to re-grow our SMS business. So, at the beginning the gross margin is quite low because of the start-up cost, and the upfront payment to start, to restart the SMS business. We think as revenue grows we will be able to expand the margins over time. So, I should say this is not purely one-time cost. It’s an effort have made to be, to have more control over our own fate, in term of our business when it comes to marketing and promotion. Hi guys. Could you just talk a little bit about the outlook next year for 2.5G, which services in which operators you think will be your main drivers? Actually, William, next year’s for the 2.5G, we would like to see, there are several major drivers from this market. First, we would like to see, like you see we take significant step and due to the music-related product rollout companies, and even actually acquire a majority interest in the music listeners, local music record companies. Conversely, music will become even more and more popular in 2.5G, and currently including the ringtones, especially the true tone download, is very, very, becoming more and more popular here in China. It will, undoubtedly will drive the ARPU going up in the future. Of course, actually, game is becoming more and more popular. I mean the both the WAP and JAVA game in this market, and that talking about it for our cap rates, film or video stream is still too early to have the commercial market here in China. In terms of the user growth you see, China is still takes a significant month after month mobile user growth and most of this are new mobiles users, 2.5G user. They have a lot of browsers and albeit the JAVA Virtual Machine built in their handsets. So, these are actually both download pictures and ringtones in 2.5G applications, let us be honest, I have got JAVA, WAP game. Now, yes, let me see if I answer your question, address your question here. So in terms of the revenue breakdown, do you think that, I mean WAP on China Mobile will be your major breakdown? I mean, where is the music coming through and where do you think the games will come through, more on, WAP or MMS? On WAP. Do you see the structure of; is that changing over the next year, or into next year? Any regulatory, or operational changes there? William, to be frankly, we’re just, they’re neither tired of the, pacing the rumor in this market. Well, actually the rumor coming to the market for almost a year and a half, talking about, to claim all the return on income into to and go through the China Net and China Unicom. There is not too much late news about this change, and looks like, beginning with the rumor coming through the market. It really, really bothers the China Unicom people, manager and employees, to book down their business. But now at last we don’t stop on this second, third quarter especially fourth quarters, China Unicom start to give up their planning and budgeting and strategy in operations. They want to actually further growth in our CDMA users, as well as the impact, as well as operate their GSM network into the GRPRS area. Especially for the south east, the coast, reach Taipei first. So I’d like to see it and no matter what’s going to happen, China Unicom realized they’ll have to good chance to develop both their CDMA and GPRS mobile users. And we were actually pleased and the slowdown of China Unicom PDMA user growth wont’ stop. And we believe and expect China Unicom CDMA user will resume growth by end of this year, or beginning of next year. And especially expect we are now work upgrade from GSM to GPRS. That will be happen in first quarter of next year, and probably complete the whole infrastructure construction by end of the second quarters. And both Hurray and other top service China Unicom will benefit from such kind of the network affiliations. William, to add to QD’s statement, we are being asked by China Unicom to provide the 2.5G software infrastructure for the GSM network upgrade to GRPRS network. Yes, this is right now in initial stage, very small scale. If Unicom decides to really expand the capacity of the network, we are very uniquely positioned to benefit from that. Not just, Not only for the software business but also the 2.5G content services as well. Yes. I guess my question more on debt placement. Do you see any changes within the operators, in changing how they decide debt placement? I wasn’t asking about Unicom’s holding now, thanks. Sure. I think debt placement, any position changes gradually over time; depending on user traffic and revenue generated, but not any, many, not arbitrary changes. At the same time, I think, given that we are focusing our effort on music and launching some stars. And these efforts actually help us to gain some very neat top menu positions by, with our new services. For example, the Super Girl that we signed up, I think, we use her name to get quite, a few good menu positions on both China Mobile and China Unicom WAP portal. And we believe we ill continue leverage our content expertise, and breathing to enhance our menu position. Yes. William, you’ve probably have heard of the late news from China Unicom. They are going to change their WAP portal from the different category into a different channel, which I actually copied the TV stations business models. And it looks like they changed the picture download into the picture or movie channel. They changed the music download into the music channels, yes. What we know so far is quite similar, like the, what we have in the China Unicom WAP portal before. And a smaller change is that they will like to put the WAP Hot, WAP New, in each individual channel. Like WAP Hot is music, WAP New page for music channels. What we, What I can say is that Hurray now owns a very unique resource, in terms of the music, in terms of the game, and we feel more comfortable of, as good as a position like we have before, or even a better position than we have before. For some of the channel, like the communities and pop cultures and probably a slight change, but it is still up to subject to the user base the revenue generates. And the pay-to-view as the benchmark to organize and a power to right this service, provided by the service providers. So, we don’t see too much significant change for this WAP portal rearrangement, from the category base to the channel base. What we are actually still feel China Unicom is the, they take a little time to resume the CDMA user growth, not user growth. And they take a couple of quarters to build up the GPRS infrastructures. And we see a, with faster growth on the China Unicom one or two quarters later. Okay. So, just as a follow-up. In China Unicom launches GPRS in Q4 and benches in Q2 (ph), what would be the timing and the size of the opportunity for you? And will there be a lot of hard work after involved? Yes. Actually in terms of timescales, China Unicom is working on the budgeting and the implementation scale right now. They will finish it by end of November or beginning of the December, of their next year’s budgeting and operations plan. Currently advance we know, they expand to the construction for the south east reach Taipei, like a Beijing, Shanghai, Guangzhou, Shenzen province to Jiangsu province. Like, 10 to 12 province first in fourth quarter, and the first half of second quarter and the launch their service by mid of the second quarter. That’s their current plan but we have to follow up with China Unicom, until we got their final plan, like I mentioned before, by end of November or beginning of December. So in terms of, hardware part too, over the past three, four years we have got into an arrangement with China Unicom, at least for the CDMA, WAP, and then nationwide WAP portal projects. We no longer take on third party hardware part to their other channel distributors provide those. We only focus on providing our own software, and all services are required to put the infrastructure in place and make it work. Thank you. I have a couple of questions, mostly in the round of music business. I’ll just give them to you in order. Could you tell us what percentage of total revenues you expect in that music will become the next few years? Do you think you guys will need to, or should we expect that you will do further acquisitions of music production companies? The third would be, could you maybe give us a little bit of color on who Freeland’s competitors are, and maybe why you chose them as opposed to some other production companies? And then the final question is, could you just discuss how the new Freeland relationship, Baidu and Hurray are likely to work together going forward? And how Hurray will monetize the relationship with Baidu and Freeland, have more so in the future than you are now? Thanks. Thank you, Jason. You’ve probably asked a little bit too much question, but our take some of them just from memory. Yes. The first is about the, what the current percentages are in terms of revenue generated from the music-related. For us is, like we’ve mentioned, is 35%. In the future, one or two years, and we hope the revenue generated from the music-related products is improved and grow to their 40% to 45% or even more than 50% of the revenues. You see what’s happening in the Korea and the Japan market, as well as the US and Europe, the music-related product actually occupies more and more pie of the total revenue. And the second question is, are we going to acquire more music-related companies? And we will have to see and we have this intention, and have a sort of the discussion with music-related companies. Then we will actually make an announcement if we have any substance program and deal with other music-related companies. And for us, Freeland is a major competitor; I’d like these, all top 5, local company, music companies here. But Freeland is the absolutely leaders in terms of the online music and artist development in China market. They have a more primary online music and a sound like we’ve mentioned, like we’ve just mentioned before. They might elaborate “Return My Love”, “The Pig of the Song”, and music actually that’s so popular in China. And also the big company including the Huawei Brothers, have been most famous brand name, and also all of the pop, movies produced in China. Most popular movies produced in China come from the Huawei Brothers, and they have a very famous brand name, as well as they’re largest movie star too. And the third one I’d like to mention, the Danwei. Danwei is also a very strong, and the most solid music record companies are run by the Danwei Group. And they also actually have the sort of, the good artists, and have the certain copyright too. And as long as you know, Danwei saw that claimed, they’re going to invest in the Danwei, as a venture capitalist. And also, I’d like to mention is Huawei and Danwei and Busheng. Busheng is another actually good local music company. Actually they are under final negotiation, probably it’s already closed its negotiation and term-sheets, and have signed agreement with the EMI. EMI’s going to acquire the majority interest, or the minority interest of the Busheng. At a top 5, and like I mentioned, Freeland, might be a Danwei like Huawei, like Busheng. Some of the international music company, I mean come from the Asia are also very attractive, like the Ocean Butterfly, like the HIM, like the Linfair from the Taiwan. And, if I would have to see, these in the top five actually, is adversely the top five local music companies are pretty strong. And they are, some of them even actually are larger than the big four. The big four, I mean international big four like EMI, like the Sony, like the BMG and Warner Brothers. Then, I’d like to say in terms of the revenue and profitability, Freeland actually as far as we know; they’re even bigger than any single of the international big four in China market. And, Danwei and Huawei Brothers in terms of value, they are a bit large as every single of the international big four in this market. Jason, for your information, the local record, music record companies in market in China is very fragmented. There are over 100 different status quo record companies. The global big four together represent about 20% or 30% of total market share, and then all the other 100 or so make up the remaining 80% of market share. And another factor that is very true to this market is that this is, music is a local market. The international artists, the global artists, the Britney Spears’s like, up to now they’re not the most popular artists or songs in China. It will be a local artist and local songs that will be the most popular and it will be the case going forward as well. The third comment I’d like to make is that we are not a venture investing, investor in this sector, and we will do whatever it takes to take us to the leading traditional music production and distribution company status. And I think this market is open right now. To add to Jesse, and also to address your questions, Hurray actually adversely is pretty good in terms of the digital music production and distribution channel, including all of the 2G, SMS, IVR, CRBT channel, but we are 2.5G, MMS, WAP, and Java channels. And once actually we own the majority shares of the fact of Freeland and future other music-related companies and we can maximize the traditional music content. And few are our own brand names in the music areas, and maximize the digital music distribution and production in the future. And what’s our vision is, in the future we can own ourselves label music content, and we have as well as work hard for wireless and Internet, also these distribution channels. Our relationship with Baidu currently is good, pretty good in terms of the Chinese language search, is that people actually like the our music like the “Love Rights”. And they actually go through the Baidu’s search engine to find the music, and download music through this Internet very easily. And Baidu actually is our strategic partner. My follow, Just a few follow-ups. The question on Baidu is when they download, So if someone searches on Baidu and downloads a song it is, for example “My club rights”, will that now be revenue that Hurray, Freeland and new entities will get those revenues? Or will you only receive; well will that revenue go to the surviving entity of Freeland? Or will you only be able to monetize it somehow if people use “My club rights” over a mobile phone? What I’ve just said, say, we use the Internet as the advertisement and the marketing tool, and also presentation, user presentations tool first. And that is the end we still use a wireless as the money transaction tools. And what actually you are finding, what is heart is to the music; at the heart is the hit, what they hit. So as you can go both the WAP portal and WAP portal is pretty much like, you’ve mentioned, the presentation tool, the marketing and advertising tool to say. But we’re working on how to actually tracker revenue and the money through the Internet in the futures. But as far as you know, all of those music, all of the songs that you’ve acquire and interest in will still be available, just as they were before through an MP3 download via Baidu. I think, firstly, for this acquisition, Freeland RE entered agreement with Baidu to allow Baidu an MP3 search to list all Freeland music. And I don’t know the details of the agreement but I think Freeland has had already made by doing legit (ph), in terms of surfing an MP3 search platform. Yes. I have one question. Looks like you are getting more and more into music production. My question for you is, compared to licensing, what advantage do you see with the in-house production of maybe cost, in terms of copyright or whatever advantage you see? Basically, I would like to see, and we are pretty good in terms of the digital music production and distribution. I’d like, as I’ve mentioned before, in how to actually convert the traditional music into the 2G type of applications, 2.5G type application, or even filter 3G type application and authorities. And also we can actually use our multi-channels area as a non-carrier, our alternative marketing promotion channels, to maximize the digital music distribution, and attract as much as we can the revenue through our side. For the traditional music production and distribution, we are currently fully reliant on the Freeland. Their management group, they have more than 17 years working experience in the traditional music business and as they know how to actually fund the artist, how to develop the music, and how to distribute their music through the traditional ad channels. And we really would like to actually achieve the, some synergies between traditional and digital music, and make sure we can leverage each other, Freeland with others, and maximize the existing music resource. And develop it more and more better music content in the futures. There is a working group. Chang, I’d like to add a couple of comments to that. First of all, if you look at Japan, Korean and US, as QD mentioned earlier I think in the case of Japan. More than 50% of total wireless value added services revenues are already music-related, whether it’s ringtone or ringback tone or truetone or MP3 download. And second fact is that in the original ringtone download, service providers like us typically pay about 14% in China to the copyright owners. When it comes to ringback tone, service providers will probably be paying somewhere around 30% to 40% of its revenue to music copyright owners. And with, going forward is that it’s all total MP3 download, service providers will have to pay maybe 50% or 60% of our revenue to music copyright owners. So it’s, going forward as the music content, or music component of wireless value added services becomes larger and larger, service providers buying music license will have to share more and more of their revenues with music content copyright owners. That means significant margin erosion. So our aims into this sector is not only because it’s going to be the largest vertical market of wireless value added services. But also something that mobile users in China truly need and are willing to pay, and we want to defranchise ourselves by offering just that. And thirdly, we want to do that to protect our margin, both gross margin as well as net margins going forward. Okay, that’s great. And on a quarterly basis, can you give us some idea how you look at your IVR business going forward? Actually we have the Board resolutions but we’re not going to, we’re not allowed to do any quarterly projections to analysts and also the investment communities. But generally speaking, we are with this actually, like we’ve mentioned, this quarter our IVR business declined slightly due to the China Mobile and China Unicom, the height (ph). Their marketing resource for IVR, and as long as we know in Q4 they still have this policy, and the, our spend is cut for our IVR business. So probably you may see IVR business, I’m not in the position to talk all of the detailed numbers and we can only talk about the trend. The trend is quite like what’s happened in the Q3. Yes. IVR business is not a subscription paid, so it doesn’t have that recurring revenue once you have user subscribed to you. So every month we need to start from zero, using our search marketing promotion approach, to keep highs, and mobile user to use our IVR services. So this is sometimes subject to the overall environment. Sometimes mobile operators are very expensive to IVR marketing and promotion activities by service providers, essentially smaller ones very aggressive. So we need to be watching for operators in occasion of guidance, in terms of how active they want to promote IVR services. I see, okay. And for the SMS business, you also have quite a future ramp-up in last quarter. So is that a business more or less a subscription business, or is also not the IVR, it’s more like a one-time or you used it again and again? Yes. SMS is slightly better than IVR business in terms of the, I would like to assist, of partly more than 50% of the IVR. Where this comes from, our subscriber is the reason. So you can have a certain actually return on revenue carry on month after month. You don’t have to start renewal like IVR every month. And as far as I know, China Mobile is come very easy on subscriber base for the IVR for past two quarters. But they didn’t have actually a large service provider to grow out the subscriber base, IVR service that if where you don’t have any, a clear idea of what time they can actually allow the service provider to grow out the subscriber base for IVR business. Yes. As a projection for this year, and US$1 million, net profit and 20 million RMB turns revenue for year 2005. I have a couple of questions, just very quickly. First, your WAP revenue grew nicely on China Mobile’s platform, but maybe the base number is not big. But can you comment whether the silent user clean-up has come to an end, and shall we see higher gross for the fourth quarter? That’s my first question. Second question, can you give us some color on how many users, the GSM users, potentially can become the GPRS users? Yes, in that south eastern region. And finally, two question for Jesse. Can you give us an update on the income tax rate? And the last one, the account receivable went up significantly. Can you comment on that as well, thank you? Thank you, Ming. Let me address your first two questions. First question is about the, we actually outgrow pretty part of our WAP business in China Mobile in Q3. And if there any risk, they clean up the Baidu’s user in Q4. We did not hear any news from the China Mobile before their clean-up of the silent user in Q4. Yes, and we don’t have any further news, and yearly China Mobile it wants to clean up the silent user, or they change the locality of the, redefine the silent user. The yearly more discussed with the major service providers and have a leading time. So what are WAP trends in the Q4 in China Mobile? I would like to its end, we have pretty good growth in Q3 in terms of the WAP revenue in China Mobile. But the, I would like to see we have grown but the, how far, how fast of the growth is sometimes it’s most likely that one quarter is grow pretty fast, and another quarter it grow a little slow. And similar growth starts again one more quarters. So it’s very hard to foresee the, how fast that we can grow in Q4, but undoubtedly we will grow, grow our WAP business in China Mobile. From long-term point of view, we see a big growth potential in China Mobile. Yes, and second question is talking about the, how many potential mobile users that can enjoy the network upgrade from the GSM to GPRS in the south east region of China. I ask of seeing numbers many, many times in past couple of months, and as long as I know China Unicom still has a price different operands, and in terms of the advancement for this GSM network upgrade. This is now a final life. There are budget trends for next year. So I have no idea about the accurate numbers but, as far as I know, most of our GSM mobile user especially the high pool mobile user come from the south east rich province and places, and as well we have plan to have the 10 major places and the province. We are now working to the GSM network, they work harder. The total GSM user in China Unicom is around 120 around 90 minutes, and I would like to Southeast Asia and actually 25%, around. 80% I think. 80% of the revenue, that means the user number. Actually we actually have the, how much of these are in province, they have a 30% mobile user, but they account for 80% mobile revenues, yes. So conservatively estimate is the only trend, the major safety of this 10 province in the southeast of China into the GSM now worth. The major cities like the capital state of the, each province. These probably in half the valleys, 6 million, 10 million to 15 million users are, can enjoy the GSM 2.5G service. And compared to the CDMA users so far and China Unicom trends they have 25 million CDMA but as far as we know the real active users is around 15 to 20 million. That’s probably given you some ideas, but the final question plans and exactly the investment for the GPRS upgrade. And the exacting numbers, user numbers, estimation may coming out by another year. So I will comment on the two questions you have for me. On the enterprise income packs, we have almost a dozen local operating entities offering WAP, different kind of wireless value added services in China. And each entity is following a different tax holiday schedule. Tax holiday meaning the first two year of the start of the company you pay fewer percent income tax, and the second three year you pay 7.5% income tax. And then after that you pay the nominal 15% enterprise income tax. If we have different offering entities following different timeline, what you see in our income statement in terms of tax expenses, is more a estimate of an effect of local PRC (ph) tax rate, combining all these operating entities. This year I think most of our entities have already entered the 7.5% income tax bracket this year, with only a couple of them still in the zero percent income tax. Next year most of them will be in 7.5% tax bracket, with maybe one entering 15%. We’re constantly seeking to optimize our tax plan, optimize our income tax by, I think, doing some tax planning work ahead of time so, that we would, will have the most efficient tax structure in place. On the second question regarding our account receivable, in the third quarter we have a net increase of account receivable about $4.5m. $3m of that is related t our software business where we recognize software revenue, following percentage of completion. While we are not yet in the, at a stage of issuing invoice and asking Unicom to pay us, because the contract, the payment terms, follow certain milestones. So there’s the time difference between recognizing revenue by percentage of completion, versus getting paid by following contractor’s milestone. And the remaining account receivables come from our content services, our wireless value added services. And as a result of our ramping up new services, especially 3G services, we have yet to keep up with the collection process because these new services require us to set up new collection practice with the operators. So we think by the end of this year we will necessarily improve the situation. I hope that answered the question. Okay. If there is no more question and, Jesse and I would like to on behalf of Hurray, thank you very much to join us for the conference call. And Hurray will strive to develop its mobile and service through our 2G, to combine in the future our wireless value added service. And we strive to make more significant and solid that into the digital music production and distribution capability building. And we really want to be the leading digital music production and distribution company in China. And we thank you all for your support, and looking forward to talk to you, with you soon. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Have a great day. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_233920

Here’s the entire text of the Q&A from Coach’s (ticker: COH) 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. Hi ,good morning. A couple of questions. First, Lew, as you look at the macro environment heading into holiday, do you have any concerns that you guys are really focused on throughout the different channels that you participate in? First, Bob, as you know, we offer everyday excellent value, and we work hard to provide a diversified range of product at all price points so that even the value-oriented consumer can have an opportunity to enter the Coach franchise or purchase of product. So we think we're extremely well positioned for the holiday in all of our channels. And, Lew, when you look at average ticket this past quarter, traffic trends, this past quarter, can you talk about that a little bit and what your expectations are in the outlet channel as well as the full-price channel for the holiday season? Sure. As we indicated, our same-store sales were driven by a combination of higher-ticket and higher traffic, that's in full price, and we believe that will continue for the holiday season. Similarly, in factory, the trends that we had in the fall are continuing this quarter where we are enjoying higher traffic, higher ticket, and we think that, again, these trends will not change. Good morning and congratulations, everyone. Can you talk a little bit about Special Edition products, Limited Edition product, where is it now as a percent of sales? Where do you see it going? And do you see any of the price points changing there? And also can you talk a little bit about Japan, and you had mentioned earlier about business processes, given the hiring of the COO, how is that doing and what do you see average pricing doing in Japan also? And then just, lastly, can you talk a little bit about the factory outlet channel and differentiated product there, how that's performing and what you're seeing in average price? Thank you. Okay, let me ask Mike Tucci to answer the first and last part, the first part being around special product, and the last part being around factory and what we're seeing there. Sure. Good morning, Dana. Special Edition, we actually had a very strong quarter in Q1. When we look at Special Edition across handbag and women's accessories, where we focused on developing that product, it represented about 16% of our total sales versus 10 from a year ago, slightly higher than where we had planned it. And within that Limited Edition, which really speaks to the higher price point handbag opportunity at 498 and 598, was 4.6% this year versus 1.3 last year, so a very strong performance there in the Limited Edition portion. On the factory side, we really feel good about our product assortment there. We hit, in terms of the composition of inventory there, we hit 70% of our total sales in what we call "made for factory" product and about a third of that was in what we would call "made for factory" exclusive that is, styles that have been designed specifically for the factory channel and, clearly, that 70% overall number drove comp, ticket, as well as significant margin improvement in the factory channel. You know, we were less promotional there this quarter than we had been last year. First, in terms of our prices in Japan, prices on average, the average transaction is up about mid-single-digits. We are tracking well there, and, as we indicated, our business is quite strong in Japan and just as an aside, Dana, the one thing that's also very encouraging in Japan, which we've noticed in our first quarter is a list in overall luxury sales and accessories, and we're hopeful that that trend is going to continue because it would mean that the category will begin to become more resilient, which will offer us an opportunity to grow within a growing category as opposed to just taking market share. So we're hopeful there. In terms of business process, as you know, we are looking to elevate our business processes in Japan to the level that they are in the United States. So we are working rapidly to implement, over the course of this fiscal year, a point-of-sale system in our stores, a new planning and allocation system, and other stops that may not be that visible to us outside of Coach but will enable us to run our business a lot more efficiently. Hi ,good morning everyone, a couple of questions, first of all, with regard to the factory outlet channel, just wondering what is the goal there in terms of total numbers of stores, and then could you talk about just the average handbag price? What is it running now versus a year ago, considering that you're factoring in more Limited Edition special type of bags? And then, lastly, if you could talk about the gross margin outlook. It was up 100 basis points. I think most people are starting to think that your gross margins can't keep going up, if you would talk about your outlook there. I actually have another one, marketing expenses, what percentage are they running and what kind of leverage are you getting on your marketing expenses, and then just a general, broad question, traffic in the malls, Lew. I know your traffic is up in your stores, which is a tremendous accomplishment, given what we're hearing about traffic trends, generally speaking. If you could just talk about the environment that you're working in and how you're attracting more traffic to your stores than we're generally hearing. Thanks. I'm sure. Okay, on the factory side, we see two things happening. One, we are targeting about 100 locations in factory over our planning horizon. We're going to be very, very measured there in terms of new-store opportunities. We know the channel very well. We do believe that within our current mix of 85 or so stores, there are significant opportunities to reposition within the best factory centers in a more dominant format, similar to what we've done up in Woodbury. So we're focusing in factory on really maximizing productivity in our best locations that exist and selectively going after new opportunities in the marketplace to about 100. And then on the handbag side in full price, we're seeing handbag retails hitting about the 255-range at this point in Q1 versus 233 from a year ago, about a 9% increase. As you know, our handbags business is a driver, it was a primary driver of our comp and productivity increases in Q1, and we do feel like we have a balanced assortment, going forward, for Q2, both at the opening price points, those gift-giving and entry-level price points as well as continuing to find opportunity at the more pinnacle price points that we've spoken to. Yeah, I'll take the one, Margaret, on gross margin, and while we were very excited about the year-over-year improvement of 100 basis points on that line, we're even more excited about the total margin expansion of about 240 basis points on the operating margin line. And I think it speaks to the overall operating efficiency of the business, I think factory can play a major role in that. On the gross margin line we talked about product mix and sourcing initiatives helping, but below that line, the SG&A leverage that was achieved, even though factory's gross margins somewhat offset the total growth in the quarter, they really helped to drive and deliver total profitability on the operating margin line, which was something we are very excited about. In terms of the follow-up question, or the second question in the financial area around them, our marketing spend, we did see leverage there on essentially very similar dollar-spend levels year-over-year in the quarter. We actually picked up significant leverage on what we call our "corporate communications line," which includes our media spend and our outreach to consumers, and I would add while we got leverage spending slightly less dollars, we actually increased our consumer contacts by more than 50% as we used a much more efficient delivery vehicle by using e-mails along the internet to supplement our mailed creative that we send to consumers in hard copy. So we're very pleased with what happened on that line as well. Thank you, Mike. Lastly, your fifth thought, Margaret, in terms of traffic and malls, nationally, during the first two weeks in September, there was a fall-off in traffic of about 5% from the rate that it had been trending. We also experienced a relative similar decline, although we were trending positively, so it impacted us much less. What we experienced since the first two weeks in full prices that our traffic levels have bounced back to the prior levels. However, more generally, mall traffic has not fully recovered nationally. On the factory side, we basically divide the malls into two sides, two categories. One is premium malls, where we play, and the others. On the premium malls, which are largely malls run by Tanger and selectively Chelsea, what we've noticed is that traffic is still trending positively. They're doing somewhat better than the full-price malls, low single digits. We, of course, are trending materially higher than that. Great, thanks, and let me add my congrats to the whole team. Hey, Mike Tucci, I have a question for you, and thanks so much for the rundown for the upcoming holiday. That's very helpful. Can you give us a sense in terms of the number of four sets and the timing of them heading into holiday. Are we comparable to last year or do you have something maybe up your sleeve for the extra Saturday pre-Christmas this year for December versus last year? I just have one follow-up. Okay, it's a good question. We look at it very, very carefully. Within the quarter, you know there's so much activity at retail. We compact a lot of business into December. We all know that post-Christmas has become more important. Our schedule today is very similar to last year. We are advancing our November floor set, which we had planned to do on Monday, the 31st, a week from yesterday to Friday of this week. As I mentioned in our product lineup, we feel like we have an opportunity to catch the weekend here, get our stores set, and go into November very well positioned. We also feel like there's product opportunity with some of the novelty items that are showing in the November floor set. We will do a floor set refresh pre-Thanksgiving. Resort will come in, to be exact, on the 5th of December, and where we have flexibility is we'll always look at how the business is running going into December 26th, and if we have to call an audible and pull goods in early to take advantage of sell-throughs that may be coming in, we will absolutely do that. We will also refresh the front of the store mid-month in December, which’s really not driven with new product, necessarily, but is more of a hard-hitting gifting message that we do on our front table in mid-December, just to put a veneer on the store and freshen up the store. So, one, we've built in a lot of flexibility to move. We have that flexibility built into our supply chain from a delivery standpoint. Two, it's about equal to last year, and we will do whatever it takes to meet the demand that the consumer puts out there. Great, and then I just have one quick follow-up for you, Mike, and then a question for Andrea. First, for you, in terms of the 10 categories that you listed, where would the electronics-related items fall in that. I'm just wondering kind of what your commitment is to the iPod covers, et cetera, for this year. And then, Andrea, if you can comment on, have you discussed with First Call what presentation Coach will be having in terms of the numbers? Are you going to be doing including or excluding the options expensing? Thanks. Okay, on iPod cases, that's actually a business that I didn't include in the 60% key item target. It is a new business for us in that we are putting iPod cases out in a more meaningful way. We have about 16 customer choices in the store right now for the mini and the original iPod as well as the Shuffle. We've projected it to be possibly a 2% idea with some upside, and we feel good about where that's going early in October. It is a business that we'll build as we get closer to gift-giving. I also mentioned that we've built in capability into our service commitment around what we're calling "multiple gifting," and the idea there is to take some of these small category items like iPod cases, charms, key fobs, where we see people coming in and requesting multiple units on that. Take that burden off of the store and actually execute that sale through Coach by Special Request, gift-wrapped and sent from Jacksonville, and we believe that iPod cases, charms, small accessories, lanyards, and the like are perfect opportunities with our gifting strategy. In terms of First Call, Neely, right now, these seem to be taking the lead with the analysts and 21 out of our 24 covering analysts are reporting pre-option expense. So they have been using those numbers, the pre-option expense, to calculate First Call consensus. My expectation is, as you guys move towards it, and it shifts, they will move to post-option expense, certainly, the first of the year if not before then. So until then, we are going to be guiding you both ways with an emphasis on looking at post-option expense, as that's the way the world is going. And just as a clarification, Andrea, you guys have not changed your options value model, correct? I mean, the options expense from last year. Okay, excellent thank you. Thank you, good morning. A question on Japan, how much of the sales now are being generated from comp store sales versus last year? Or how many stores are included in that comp base versus last year? Because, as I remember, there were very few in there last year. We're looking it up, Jeff. The number is in the neighborhood of 70 to 80 but give us a moment, and we'll come up with that. My question is, what has been the pattern of the store openings? Very, very high volume and then trailing off or high volume, leveling, because just sort of playing devil's advocate here, if one is expanding your store base rapidly, that usually generates above-average comp store sales. Are you getting the same kind of handbag penetration as you are in the U.S. and what's happening to the average selling price of the handbags there? Okay, well, let me answer the easiest parts first. In terms of our handbag penetration, handbag penetration is running roughly equal to the level in the United States and somewhat higher than on the level in Coach retail stores. It's running about, close to about 70% in Japan, and that's for new stores and existing stores. In terms of sales in year two, Jeff, it depends on the nature of the store. If it's a flagship store, we tend to have a stronger first year than we do second year because of the noise and activity around the opening. And then in year three, we recover to the first-year levels. If it's a retail store, non-flagship, or shop-in-shop, it starts at its level and in year two comps very favorably, and it continues to. So it depends on the nature of the store itself in terms of what happens in year two. Mike, do you have some numbers? Yeah, on our comping store, Jeff, 89, actually, are in the comp of 107 including both full-price and factory stores in Japan. Right, okay, good. And just, secondly, again, playing devil's advocate, I assume your sales momentum has not slowed in October based on your comment in the press release? As you know, Jeff, we don't give exact numbers. Our business is extremely strong, and we're running on plan to deliver an outstanding holiday season. You commented this quarter and last quarter that most of the growth, or the comp growth in Japan was coming from an increasingly average ticket. Can you just kind of back up and kind of tell us how that's trended before the last six months and then how you expect that to be for the rest of '06? And then also just your four- and five-year growth targets, kind of where the comp is going to be coming from. Is it just a continuation of, again, that average ticket increase or are you going to see transaction growth as well? Okay, well, first, we are seeing transaction growth, and we have in same stores as well as overall, of course. The average ticket is misleading, because unless you break it apart to take into account the shift towards a greater role of handbags relative to overall assortment, you don't really get at the full granularity. So when we talk about an average ticket increase, a very good part of that has to do, in fact, the vast majority, has to do with an increase in make as well as a Special Edition product as well as an assortment mix change to greater, to more greatly emphasize bags. Over any extended period, we are seeing an increase in handbags. One of the things in the number of units sold that's over a period of time. We don't look at it every single month. What you're going to notice, though, this holiday season, with the increase in our small giftable items such as lanyards, ID charms, and the like, is a lower level of increase in average ticket, and we're looking to also see an increase in the role that small accessories play in our overall assortment. Hi, everyone, congratulations on another great quarter. I have a question about your indirect results. They were a little bit stronger than what we were looking for now, since they don't include Coach Japan, and I wondered if you could parse out the difference between your sales into U.S. department stores and your international sales. We haven't typically broken that previously. I think we said in our prepared remarks the overwhelming strength of the U.S. wholesale channel where, during the quarter, at PoS, our sales were up 30% over Q1 a year ago, very strong performance, and that is really what's driving and is the biggest business within that indirect segment. So that is really the most important business unit in that channel. International, though, is exhibiting similar strong growth, both at the register PoS, and also in our shipments to our distributing partners around the world. Okay. My last question was can you just remind us what the key items, including the Resort, made up of Q2 sales last year? Okay, another small question, you guys didn't mention the footwear assortment at all. I wondered if there were any plans or any updates on that this quarter? Just to highlight, footwear, actually, in the stores that it's in, comped at about 13%. It was about 7% penetration. We feel like the driver behind that was absolutely the boot category, and we're well positioned for boots going into Q2 as well. In addition, the footwear category, footwear has performed very well in U.S. department stores also running up in the teens at PoS. We have time for one more question, I apologize, and I know I set up CQ all the sell-side analysts after the call. So let's proceed with one more. Okay, and then the overlap between your factory and retail customer base? I know it's pretty small. Has that changed overall, changed at all over the last--? At this time, it is 9:38. We try to complete these conference calls before the market opens at 9:30. Of course, we'll take your follow-up questions. I believe, as I said, I am speaking to all of you after the call. Thanks for participating 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_233921

Here’s the entire text of the Q&A from eDiets’ (ticker: DIET) 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. Ladies and gentlemen, if you would like to ask a question please press “*” followed by “1” on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, you may press “*” followed by “2”. Please press “*” “1” to begin your question and answer session. No. We didn’t give paying subscribers, but, Scott; I can tell you that as of the end of September 30, we had approximately about 220,000 paying subscribers. That’s correct. In the summertime, obviously, you do see a little bit weakness, particularly in the online diet market and the seasonality continues. So you should expect obviously that base to continue to decline between now and the end of the year, then ramp up quickly in January. And I think you mentioned you saw a decline in CPA as percentage of lifetime revenue for the customer, is that correct? Yes. Actually, CPA for the quarter came in about $58.00 for Q3, and that is compared to about $67.00 a year or so ago. And that decline as a percentage, could you break it out between being driven by a lower CPA and a higher revenue per subscriber? In this instance, it’s mainly on the lower CPA components. There have been improvements in the lifetime value as a member, but not significantly on a quarter-to-quarter basis. Just for rough purposes, we’re valuing a member currently now at about $125.00. Okay. A couple of questions. First, with response to the Mediterranean diet, in general, is there an immediate impact when you add a new diet? And I’m not excluding the hot, trendy diet that you add maybe at the right time. But generally, is there an immediate impact from adding a new diet? Yes, generally, we get a lift; it is really a function of the promotion that we do, as well as the promotion and exposure the diet gets in the press. And we’re kind of at the mercy of the market in that respect. Atkins comes along every five years, but then in between, there are a lot of other opportunities for book related plans. If I could answer that, Scott, there are niche diets and there are some generic diets. Mediterranean diet would be an example of a good generic diet, in the sense that the mainstream customer will take an interest in a plan such as the Mediterranean diet or the GI diet, or obviously, Atkins in previous times. And then we have more niche diets, such as health related diets, like diabetes, which obviously, don’t have the same incremental lift. And you also made a comment that you saw ad revenue as a more significant opportunity going forward. I guess I’m interested in that. You’re not implying a change in some larger strategy. I mean, I assume that the major opportunity here and the major focus is still diet-specific revenue per subscriber. Yes. The major focus will continue to be the diet plans and kind of the services that relate to that, as opposed to a strategy change. Okay. Just let me answer that. Clearly, in this market, with ads, CPM rates at a record high, we are obliged to demonetize our pages as best as possible, without, of course, damaging any subscription opportunities. And I think it behoves us just to look at ad revenue, and I think we’re beginning to see the potential in that area. Basically, yes. As Dave alluded to in his comments, we’re continuing to see improvements with our authoritative approach. We believe this will help drive up our CPM’s and higher quality advertisers will continue to come to our site. Great. And financially, do the prospects of the first full profitable full year and forecasting the same for next year, does that change your ability to do things financially, bank relationships, things of that nature? Well, we are somewhat of a virtual company, and most traditional banks are looking for companies that have hard assets. We have, we believe, substantial assets, but they’re not what would be traditionally monetizable. We always do our budgets assuming that we will not generate any funding from the outside. That doesn’t mean that for the right opportunity we wouldn’t attempt to do so. But a commercial bank is probably not the way in which that would happen. We have historically financed our growth through internal cash flow, and we always budget on that assumption. But if some unusual opportunity were to come along that would justify it, we would not be averse to raising money that we could put to work at a good ROI. Hi. Thanks for taking my call. Just a quick question on the Tesco relationship, is the licensing revenue from that relationship included in ad revenue? It’s not. So is it significant enough, the potential for it significant enough over time such that you will be breaking it out? And do you foresee additional licensing opportunities in the U.S., similar to the Tesco relationship? I’ll take the first part of that, Courtney. On the, in that, actually the full 10K, we actually break out royalties as a separate line item. So you’ll be seeing a little bit more about that going forward. And with regards to the future opportunities, I’ll let Ciaran comment on that. As Dave said in his talk, the Tesco model is something that we would love to show to other supermarkets or other vendors in that vertical as a great opportunity to grow revenue for both parties. It’s been a very successful relationship. We’re beginning to make some inquiries in the U.S. markets and showing the Tesco template as a good example. And might you, just a little bit more on Tesco, might you consider deviating from the eDiets.com to kiosks in supermarkets? Is that an opportunity? Or do you see it continuing to filter through the website? I think, primarily, it’s going to be online, primarily. We are fortunate in the sense that Tesco are beginning to look at some other channels using the supermarket as an offsite center, whereby they may be able to deliver online services. So we have the benefits, if you like, of watching how the progress in that area without necessarily jumping the gun in the U.S. market. And, Courtney, what kind of technology we use with these different partners is going to be, to some extent, dictated by what they want to do. And as you may be aware, food stores and supermarkets are starting to become more interested in the kiosk format. For example, there’s a privately held company called Health Note that is starting to work that, particularly, I believe in some Whole Foods Market. So if that technology is available and they want to use that, we can certainly adapt to it. Two questions. When you guys talk about testing out a meal delivery plan, can you give us a little bit more color on what that might look like? Would that be somewhat similar to, say, a NutriSystem offering? This is Ciaran here. We have a test up at the moment, which is in our sales firm if you care to go through and subscribe, you may see an option to purchase a food delivery service, or meal delivery service. Currently, our partner in this area is in the fresh side of this, rather than the side of NutriSystem, which is more shelf stable foods. So we’re looking closely at that side of the market. But it is in test mode, and we hope to have more updated numbers to give you in the next quarter’s call. Great. And then my other question has to do with driving shareholder value. You guys are clearly, as you mentioned, your trends are extremely favorable. Your customer acquisition costs have gone down significantly. You’re nicely profitable. You’ve got a lot of drivers in the business. Yet the stock is trading at 1.5 times EV to REV and all the comps and the takeouts are 3.5 - 4. In addition to executing your business plan, what are you guys thinking about doing in terms of generating shareholder value? And would you consider hiring a banker to help you with that? Bill, you are correct, of course, about your calculations, although we’re not big proponents of EV to REV, given that we are a profitable company and this is a profitable industry. It’s really, in our opinion, without cash flow. Okay, I mean, by whatever metric, the stock is extraordinarily cheap, is my point. And my point is, in addition to executing your plan, would you consider some other action? We are actually taking some other action. We noticed one sign of progress to that is as we got on the call this morning, back in late August we did engage in an investor relations firm. Actually, the timing of that is related to the fact that we’re back in profitability mode. We’re going to be having, have started already to have a regular series of meetings with supply side. We’ll be doing a little bit of work on the retail, and, of course, the sales side, as well. And you heard some significant sales side interest already in this call this morning. So we’ll be out probably one to two times per quarter through a combination of road shows in the U.S. and also conferences, and that schedule for 2006 is being put together right now. But the indicator that we saw this morning was significantly higher participation in our call already. Well, that’s good. But with all due respect, you guys have been on the road in the past, and it hasn’t really helped your stock. And my specific question is, would you guys hire a banker now to explore strategic options, because the public markets aren’t giving you the valuation that you guys are deserving? We want to see our value realized. I don’t think we’ve plummed all that we can do in terms of communications and marketing. But, as you know, that is something that we’ve explored in the past. We did a press release about that in ‘02, and I wouldn’t categorically rule anything out or commit to anything at this point. Hi. Good morning. Just a followup on the last question about meal delivery and the test that you’re doing there Do you anticipate that meal delivery is going to be a strategic focus of the business in 2006? As I said in my statement, the eCommerce is a major focus for us in ‘06, together with ad revenue, and also, of course, keeping our subscription levels up. And we see the food product as a core part of the eCommerce and store plans we have in ‘06. I look on the diet destination as our core strategy, and we think this can include and embrace not just diet brands and health brands, but also services. And I think a meal delivery service as part of that strategy is going to be key for us in ‘06 and going forward. Well, the test, as it goes forward, you mentioned that currently it’s more of a fresh offering. Do you anticipate then in the near future testing something that’s more shelf stable, something in the frozen category, or something that has a longer shelf life than obviously fresh? As I said, we are in test mode, and I think, as a company, we want to explore all niches, but I think we’re more than likely going to concentrate on this fresh category as a way of growing this side of the business. And if I can just build on that a bit, I think you’re going to be hearing us use the term "destination" more and more and the authority strategy as part of that. We want to be the go-to place for anyone who’s interested in improving their weight and their diet, and to provide more and more comprehensive range of solutions for that. And that includes meal plans; it includes food; it could include supplements, anything that people buy in order to help them do their fitness and their weight. So that’s a pretty wide range of options. So we’re in expansion mode, continuing to honor our subscription route, but moving into other areas, as well. Good morning. I just wanted to make sure that I had all of the various metrics down correctly. You said that for Q3 2005, the total members at this point are 220,000. Refresh my memory, what was it in Q3 of 2004? And then the revenues per member, you said, it was about $125 or you’re valuing your customers at this point at $125 per member. What would it have been in Q3 2004? Let me give it to you in terms of our accrual, if I could. Earlier I referenced a 15% growth. Our accrual is roughly about $3.98 this quarter, versus roughly about $3.44 a year ago quarter. A weekly revenue per average user. And you can assume roughly about the same comparable, roughly six-month length of stay for both of those time periods. So then am I to understand at this point that what really has changed since last year is that you dropped your customer acquisition costs and raised your prices. And I guess the question is, on a going forward basis, in terms of forecasting growth, how much more growth can you get in pricing, and how much lower can you drop the cost per member? Because if they both stabilize, then effectively, you would expect that revenues and profits would just equilibrate at roughly the levels they are at now, saving for additional strategies and/or distribution channels, if I’m hearing you correctly. I just want to make sure I understand. There’s considerably more potential on the upside in the pricing. We’re on the low side of the market, with Weight Watchers up around $12.00 a week offline and $5.00 a week online. And there’s less of an opportunity on lowering the CPA, although we will continue to work in that area. It really is a, particularly online, it’s still a seller’s market, and it’s a tough market to survive in. Well, the online Weight Watchers price point is not comparable to ours. I would like to compare us more to the offline version, and they’re at $12.00 a week, roughly. Chris, when we’re doing our budget for 2006, although we do believe we are very well priced right now, we’re not assuming price increases. The growth that we’re budgeting for next year is coming through new products and services and improvement in ad sales and in eCommerce. And we expect to be able to, through doing that, monetize the customer, keeping retention flat or improving it. We do have a special task force working on improving retention above six months. But even if pricing and retention stay flat, you layer on new services and ancillary revenues that will start to push the cycle value up and provide definition. If we have the same level of dollar CPA, it, it will continue to push it down as a percent of revenue. Do you know what I’m saying? I guess the impression, just having followed your company for a couple of years, that the single greatest challenge, in a sense, is getting that length of stay to move much off of six months. I’d be curious as to what you might have learned from people and whether the redesign of the website is something that you believe may have an impact on length of stay. I’ve always said that a diet has a beginning and an end. And I think that pushing -- as an example, the average stay of Weight Watchers offline is nine weeks, I believe. So I don’t think that’s a key metric. I think it’s the weekly price and acquiring more subscribers. Those are the real objectives. And we do that with the new services and new products and better marketing. One final question. Could you update us on two things, one would be efforts to move this out into the corporate market, either directly marketing to corporations and/or through health plans; and the second one is any updates on the efforts or trials that you had conducted to see if making outgoing phone calls from the dieticians to the customers would change either length of stay or improve efficacy of the diet? Well, Chris, in the area of corporate programs, there are different ways in which you can ally with corporations. And a way in which we’ve tried in the past has been to offer a discounted program, at which then is a benefit from the corporation or from the insurer to the member. And as we’ve said in the past, a challenge with that, given that we have a very small sales force, is actually getting that promoted to the end user, it’s still the end user who’s paying for it. Going forward, we’ve had some technology challenges to doing site licenses, which is another model that’s emerging. However, the big focus over the last several months has been to improve our architecture, to make it more licensing friendly, if you will, and we expect within the next two to three quarters that we’ll be in a position that we can tackle things that way, which will be more probably a significant sales cycle, but that will be more volume friendly. I’ll take the second part of your question. As a company, we’ve generally been more responsive to members, rather than proactive in terms of reaching out to them, and that’s purely a factor of the volume of members that we have and the cost of supporting customer service. We don’t have a lot of evidence concerning reaching out to members in terms of being proactive regarding phone calls. We are, however, engaging members more with things like weigh-in reminders and email contacts, and it’s definitely a key part of the strategy for ‘06. And something the Retention Task Force recommended is that we become much more proactive in terms of communicating either by email or instant messaging, etc. And we have some evidence from our Tesco partners that dealing very quickly with weigh-in comments is improving our customer retention. So that’s something we intend to implement in early ‘06. Good morning, everyone. Good luck with recovering from the effects of the hurricane. I know it’s been very tough on the people on the East Coast of Florida there. It’s been a rough year. Two questions actually, the possibility of an infomercial for eDiets sometime in the future. I heard that NutriSystem is planning on doing one for the 2006 diet season. Do you think that the eDiets service lends itself well to presentation in an infomercial? And are you entertaining any plans to do one in the 2006 diet season? I don’t want to give too much away, for competitive reasons, obviously. But we are looking very closely at the infomercial area. We definitely see potential for using the infomercial as a new channel. As you know, we’re very successful with television, and this is another part of the TV media that we think we can deliver both the subscription side of the business we can enhance, as well, as obviously infomercials tend to lend themselves to the product side of the business. So we’re looking at that very, very closely. But for competitive reasons, I don’t want to expand on it. My second question is, when you look at the eDiets website, you now see a lot of complimentary services geared toward women, not only the online store, but things like channels for sex and relationships and dating. I know you have a partnership with Perfect Match, selling the skin care products, motivational content, all kinds of things. Do you feel like you may be losing your focus on dieting a little in broadening, expanding into so many areas? There are other much larger players out there, like iVillage that serve a myriad of women’s products and needs, and WebMD also. Do you think you’re moving away from your focus primarily on dieting to all these other areas? Our demographic is 87% female. So we try to give an array of information to keep them coming back. I believe that diet is still the focus of the site. But I think if you narrow it too tightly, then you’re going to lose some traffic and site visitors coming back because there’s just not enough variety there for them. No. It sounds like a good connection, but, frankly, we’ve tried advertising on some of those sites in the past, and it’s been moderately successful. But having said that, we do find there’s a tremendous amount of interest among our subscribers in relationships, in the love life, and perhaps as people are feeling better about how they look, their fitness, etc., they may be becoming more receptive to relationship issues. So the members are saying that they want that information. And also, some of the things that you mentioned, Perfect Match, for instance, and the skin care, those are advertising deals, and we have an incredibly attractive demographic of women 25 to 54. And as you’ve been hearing all through this call, we’re trying to monetize that, as we do all of our assets. As a reminder ladies and gentlemen if you would like to ask a question, please press “*” followed by “1” on your touchtone telephone. Just two quick questions. The first one, you guys mentioned cash flow. Are you guys planning to be sort of free cash flow positive for the year? You mentioned sort of free cash flow for the fourth quarter, but you guys have a little bogie to make up; I’m just trying to get that. And then the second question is, can you give me a better feel on sort of the end of the year, what your subscriber acquisition costs will be and sort of how you see that going into ‘06? And I’ll take these answers offline, thanks. Sure. Hi, this is Rob. I know you mentioned free cash flow, as opposed to cash from operations, as you can imagine, in our business, we don’t have heavy expenditures for capital equipment because of the nature of our business. So for purposes of your question, I’ll address the cash from Ops. One thing I do want to remind folks, on the year-to-date cash flow number, about $1 million dollars of 2005’s cash usage had to do with the 2004 acquisition of eDiets Europe, some value added taxes, as well as capital gains taxes were paid about nine to 12 months in arrears. On schedule. That’s correct. So I guess my point is, a million dollars of that is reflected in your 2005 number. So absent that, those numbers, you’d be looking at a positive cash flow for the full year 2005. And I do want to just qualify that. We talked about some of the exciting things that we have in line coming up for 2006 with regards to perhaps some other offline advertising initiatives, as well as this meal delivery service we’re looking at. So, we could have some cash flow prepaid coming through by the end of the year. That will obviously sort itself, out in the next couple of months. Could you repeat the second part of your question? I couldn’t hear it completely. Describe acquisition costs. I’m trying to get a feel of how that looks on a 12-month basis, and what you sort of expect that to look like in ‘06? From a 12-month basis, just for the sake of argument, for 2004, it averaged us in the high ‘60s, about $69, again, 2004. 2005, if you take a look at what we’ve incurred now for the first nine months, you should probably see it in the low $60.00 range. So probably about a 10 to 15 percent decline from last year. With regards to 2006, we mentioned earlier, we’re still in our budgeting process. I will comment and say that our CPA right now or our ad spending is in a very good position, and that we’re very flexible whereby we can put our dollars. We’re no longer subject to the 5 to 10 million dollar annual contracts with some of the larger portals, and we’re buying our ads with them on a little bit more of on a smart market basis. And that’s certainly more helpful, because we can control our costs in a much more efficient way. So, with regards to CPA next year, obviously, that will flush out as we work the 2006 budget. As I think we mentioned earlier, what we effectively look at is, what is the percent of dollars that we’re paying or willing to commit for ad dollars, compared to the total revenue coming in? And again, we talked about the positive trends that we’re seeing here now. We see that continuing going forward. Does that help your question there? Hi guys, couple of quick questions. First off, did you guys talk about some kind of partnership or deal with Time? Yes. I have, I am impressed about that John. How are you? We signed a bookazine deal, which essentially, is a cross between a soft copy book and a magazine, retail is, I think, around $12 or $13, and that will be on the checkout stands I think the second week in January, I believe, I’m sorry, in the supermarkets. You also said you’re working on furthering your international license deals. I guess that’s from Germany and Spain. Can you give any more color on that? Okay. Okay, that’s helpful. Also, you talked about, is a lot of this lower customer acquisition cost-driven, as you referenced earlier, you’re not buying those bulk ads from I guess the likes of like AOL and pre-committed ad spending. I guess those broke on June 30, right? Can you talk any about how much pre-committed ad spending you have with those major portals through June 30, ‘06? John that will be flashed out in detail in the 10Q, which is filed in the next two weeks. I don’t have that number right in front of me right now, but I will tell you it is significantly lower. And you’re right; actually, the portal that you’re actually referring to is actually MSN. Our multi-million dollar contract came due with them this past June 30. We still do advertise with them in a very significant way, but in a different format, pretty much, again, on a weekly spot market basis. So, again, this is kind of what I was getting to with regards to our flexibility of the dollars. And as we continue to shift and reallocate dollars into more productive areas and as Ciaran indicated, we’ve seen some very positive signs on the offline market. So that will continue to get a bigger share and perhaps some of the major portals will have a lesser share. There are many areas of online advertising that are performing quite well for us, and many of them are actually in performance based deals where the economics are quite favorable, as you can imagine. That’s helpful. Is the long-term model about 15% cost of sales, about 50% sales and marketing, 5% product development, 5% GNA, and then you’re targeting, I guess, eventually about a 20% EBIT margin. I guess, Allison has referenced 20% EBIT margins in the past. Is that the target for the model? Let’s start at the top again, if we can. So we have said that on an individual subscriber basis, we are targeting to spend at this moment no more than 50% of projected cycle value on acquisition. Now, that will not necessarily flow through in that fashion in the GAT statement because of the mismatch between when we invest in acquiring a subscriber and when we recognize the revenue. So that would typically, all other things being equal, be higher in the first half of the year and lower in the second half of the year. But on an individual subscriber basis, that is the model, you’re correct, on the variable expense, 10% to 15%. Now, this is not the way it flows through the income statement, right? There are certain fixed items that are in that cost of goods, for instance. A few other things, John. For example, you’ve got some overhead in your cost of sales line items. Those are like nutritionist cost and things like that. You also have some depreciation numbers, and all of that. So that’s why we kind of break it out into those three categories, not necessarily matching up to the GAAP categories. And we’re speaking now primarily of the subscription business, because as we get more into the eCommerce business, and perhaps taking some inventory risks, etc, that could change the cost of this equation significantly. But I think the point you’re trying to make is that relative to where we are today, there is significant operating leverage available that can push our EBITDA margin well into the double digits. And I think we will be disappointed if we’re not able to achieve that. Last quarter Chris Sassoon from Eagle Asset Management asked you guys a question. He said, given all the levers at your discretion, could you create a company with a sustainable level of growth well into the double digits? And you guys said, absolutely. I guess, 2006 seems to be looking like a pretty good year. Do you have any more color to add to that comment from last call? The online diet industry, as you know, is growing at about double the rate of the overall services industry. So the online diet industry is growing in the 15 to 20 percent range, and we think we can at least maintain our share in that. And we believe we still can outperform other internet companies with similar demographics who are on the ad sales growth side, simply because it hasn’t been an area of focus for us, and the same thing on eCommerce. Again, we’ve been focused on the subscription business. Now we are continuing to be committed to that, but expanding. So, starting to layer on other things that make us a true destination for the dieter or the person watching their diet is going to drive the revenue growth, on top of basic industry growth. We have not said anything yet about ad spending. We go through line item by line item on our online and our offline ad spending. Another factor that we would like to see kick in, although you won’t see it in the base numbers that we’ll probably be giving for ‘06, are these channels that Dave was discussing. Some of those things are longer lead time items. We’re already working on them, like the supermarket. But that would be a source of subscription growth that wouldn’t be related to ad spending, per se. Lastly, I wanted to just talk a little bit about Q4, your guidance. So you basically, you said, 53 to54 million in revenue, and I guess that implies around 12.6 or so in revenue. Just looking at kind of plugging in what you’ve given in the past, we get, I guess, a lot higher number than what you’re guiding for. Is there anything in product development that’s going to ramp up in Q4 or any other item in there that can explain, I guess, maybe the difference in what we have and what you’re guiding for? Actually, as you know, the second half of the year, I should say, we typically see lower members than in the first half. And we actually under-spent a few ad dollars in the third quarter, i.e., we had actually targeted to spend a little bit more, which ultimately would have led to a little bit higher growth in the revenue in Q4. But as we talked about earlier, we are determined to make the right decisions on an economic basis. So it wasn’t prudent to go out and acquire members at all costs. So actually, those numbers obviously came a little bit lower than expected on the revenue side, and obviously that helps the bottom line, at least in the short-term. Right now, we’re pretty much focused on January 1, the kick-off of the new season. As you know, this is our slowest time forever to recruit them, almost a 9-week quarter with regards to new customer acquisitions. So there was a lot going on, a lot of optimism with regard to some of the new initiatives we have that we’ll be launching for June 1. I guess last question, on a 1 to 10 scale, how enthusiastic are you about looking forward at what you have in the pipeline, versus where you were a year ago? I can’t give you a number on that, but I’m very excited about what we have going and the potential for us long term. Good morning. Two questions. One, didn’t you guys talk a year or so ago about possibly getting a pharmaceutical company to partner with you on one of their diet drugs? I’m not sure what happened with that. Or perhaps you’re doing it and I missed it. The other piece has to do just with your long-term competitive position. I want to understand a little bit better about how valid your exclusive contracts are with these various diets, what would keep a portal or a Weight Watchers, or someone like that trying to offer some of the same products that you’re offering? Last year we did have a deal with Bristol Myers, and we no longer have that because they dropped that particular product. So we did have an association with one of the pharmacies. The second part of the question had to do with sort of your long-term competitive position. What would keep Weight Watchers or someone like that coming in when one of your exclusive contracts expires, perhaps, with one of your providers? I think we have a pretty strong position here with this depot concept in terms of new diet books that come on the market that become very popular. We can just show them what we paid Atkins. We have a track record of paying substantial royalties, and I think now that we have built this up. I think we’re the first choice. We do have people with diets contacting us actually on a daily basis wanting us to digitize them, and we’re fairly selective about that. But if you think, Paul, about the basic model of almost every other company in the diet industry, it’s to promote a single approach, or maybe one or two of their own approaches to dieting. No other company has the depot approach that we do. So strategically, it would be difficult for someone, like a Weight Watchers, for instance, to do that. But also we have multiyear agreements with our partners, and we are busy extending those agreements as we speak. We maintain and own the customer data associated with the individuals that are on those plans, and because of our website and our newsletters we’re capable of investing over a period of two or three years, literally tens of millions of dollars of advertising value on behalf of these brands. That is a very strong position. I would just add one last thing, that the brand of diet I think you’re referring to actually represents the minority of all the diets here at eDiets. The more popular programs still today are all within the eDiets family are the ones that are developed in-house. So we kind of refer to that as the diet depot, as well. So we’re highly diversified amongst in-house programs, as well as outsourced programs. In terms of some of these initiatives that you sort of alluded to for January 1, will you be updating us on those prior to the beginning of the year, or will we need to wait until next year to hear about them? Bill, our practice is that we announce initiatives at the time of launch. So you’re going to see a lot of activity in the last week of December or the early part of January. As there are no more questions in the queue, I would like to hand the presentation back to the company for any closing remarks. I would like to say, on behalf of the management team at eDiets, again, that we appreciate your participating in this call, and we appreciate your forbearance with us over the last few days as we’ve been struggling with some of the weather related issues. And we are available for followup. And we look forward to speaking with you again in the near future. Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_233922

Here’s the entire text of the Q&A from ValueClick’s (ticker: VCLK) 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, gentlemen. Operator Instructions We'll pause for just a moment to assemble our roster. First going from Piper Jaffray, we have Aaron Kessler. Great. Thank you guys. Good quarter. A couple of quick questions for you. One, can you give us a couple of examples, you talking about the cross on a couple of examples how you're seeing that play out with some of your, some of your clients and also just to give us a update on how the integrations are going maybe for the FastClick and Web Clients acquisitions. Thank you. Yeah. Thanks, Aaron. First, if you take a look, we won't mention the name, but if you take a look at the top 25 advertisers that we have today, several of those advertisers and I mean say a half a dozen or so are traditional offline advertisers that have come into the online space. So we're seeing more and more of that. And while they have been tradition branding oriented sites they're looking for performance-based advertising solution to generate leads. So we think that will continue to grow through 2006. So far as the FastClick and ValueClick integration, I think it's going terrific, frankly. We did not anticipate that we'd be able to take the cost out as quick as we could, number one. That was done virtually in the first couple of weeks at the level that we had anticipated. But as far as the personnel are concerned, which is the more important part, we just couldn't have asked for a better cooperation between the teams on both sides. And we think that there's a very high energy, a number of the folks at FastClick are very talented, have been in the business for a number of years and have assumed certain leadership positions within ValueClick media as well. And some of these folks have worked together before. So, it just, I think that in conjunction with the fact that they're based in Santa Barbara virtually across the street from our Commission Junction operation, that there's just a good held chemistry amongst the people which is always the most important part in these integrations. Great. And one quick follow-up if I can. On the '06 guidance, does that imply and gross margin improvement from FastClick and how confident are you that we can see those margins improve? Yes. What we're building into our model is that there'll be over the course of 12 months a 10% increase in gross margin. And it's a little bit early to tell just how quick we can do it but we are seeing some improvement in that area right now. And we'll probably see are little bit in the fourth quarter. But I think you'll just see it progressively that first 5% will probably will be the easiest that you'll see that probably through the first quarter or so of 2006. The second 5% will be more difficult. And I would expect that to happen over the following three quarters. A couple of questions related to one you just got there. Can you detail for us how you're going to get those 10 percentage points of margin improvement in the FastClick business? And I've got some follow ups, too. There are several ways of doing it. And let me first say that we're not going to wholesalely go out and change the economics to the publisher. We think that's pretty important that we do not want to lose this valuable publisher network that FastClick has built. But there are several things that we can do in the area of performance through the lead generation side, primarily, both with Web Clients and our high speed media division but also with the lead generation that we have at ValueClick where we think we can improve the kind of conversion rate and continue to pay the publisher an equivalent amount of money that they've been making but yet at the same time increase our margins. Okay. Second question, on affiliate marketing segment, last quarter you talked about maybe a normalized gross margin there, maybe 80, 85% and we ticked up again. Have your thoughts changed on that at all? Okay. Lastly, on PriceRunner, could you talk a little bit about what the organic trends have been over in Sweden and the U.K.? I know they were both pretty high numbers when you guys acquired the business and also talk about maybe where you are in terms offer organic traffic here with the site in the U.S.? Thanks. Yes, Thank you, Kyle. The organic growth in Europe has been at the rate of about 70% year-over-year. And here in the United States, we have a great package of content that has been built here and we think that the differentiator for us here in the United States and in Europe, for that matter, the fact that we are always listing the lowest price, which is different from anyone else that's in our space. That's probably also one of the contributors to being rated number one by PC magazine in this past edition. But the challenge that we have there is the same challenge that everyone has, and that's getting the most amount of traffic to that site in the shortest possible time. We are utilizing all of our divisions today to help do that. And you can see month over month, even though we've only been really open for the last four months, but month over month you're see we are seeing a significant growth in that area. We're also seeing that people who visit our site are coming back to it, which is an indication that they're book marking and coming back and using the site time and time again. So it's still low or small as far as volume here in the United States. But we're really optimistic about our ability to scale it and grow it over the years. And of the traffic that's coming in in the U.S., I would assume the overwhelming majority of that is being acquired through search engines or through your own, there's very little organic traffic coming in the U.S. versus maybe Sweden and the U.K.? That's correct. And most of it is either internally utilizing our own traffic that we have and diverting it to PriceRunner or acquiring, as you say, acquiring search. Thank you guys. Gentlemen, you guys are making it look easy. The question has to do with the phenomenon within your media network. You've got 6,000 publishers from ValueClick media, you got 9,000 from FastClick. I understand a handful of sites are going exclusive with you. Could you talk to the phenomenon that's driving that, whether it's a push or a pull? And then the second question has to do with 2006 how we think about the seasonality of your business given FastClick and Web Clients? Yeah. You've given guidance for 2006 on a quarter by quarter basis your business is now skewed more towards the media side. Which quarter shall we be expecting to be seasonally stronger than the others? I would say in that vein, that fourth quarter has always been the strongest, Eric. I would say that will continue to be that way. The third quarter and the first quarter have always been close in comparison. The second quarter has always been probably our most challenging quarter. And as far as the network is concerned, if you look at ValueClick network and the FastClick network, they are quite a bit different in that FastClick has done a wonderful job of building a very robust network of websites that are small, medium websites, much the way ValueClick did in its opening years of business. In fact, ValueClick has done, we believe, a great job in building a network of some of the larger sites. And if you look at the two, there is some overlap but not a great deal of it. So we believe that with this combination we're really positioned to both deliver the branding type of campaigns that our advertisers are looking for but also deliver on the lead generation type programs that advertisers are looking for that we've been talking about. My question had more to do with a handful of folks going exclusive with you guys as the ad network provider on their sites. Can you talk to that at all? Just the phenomenon. Is it people saying we like what we're getting from ValueClick and we want more of that, or we want to simplify the process, we want to outsource the process, we don't want to have our own internal force? That's what I'm... Yes, I think, Eric, there are two things going. Number one we've really focused on going out and finding those relationships. But more importantly where we have been able to enter into those kind of relationships we've been able to produce for those sites and they have experienced a significant uptick in what we've been able to provide versus what they were doing on their own. Yes. Hi, it's actually Imran Khan. A couple of questions. First if you could talk a little bit object comparative landscape if you are seeing any larger players or any other startups getting traction in the marketplace. And secondly if you could talk about what differentiates your display networks from others in the space, how do you differentiate your product? And then with regards to FastClick could you give us some color like first what kind of revenue and EBITDA you are expecting from FastClick for next year? Thanks. Imran, as far as breaking out FastClick next year, we're not. But I would say this, that in putting the FastClick budget together along with the media side, one of the reasons we're not splitting it out because they are really becoming one virtually every day since we've come together. But one of the things that was in FastClick's number for 2006 that was significant was the search engine marketing revenue and if I recall somewhere in the range of 17 maybe to 18 million in revenue. And that was on an gross basis with gross margins in the range of maybe 20 and 25%. And we see that more as a service product. We're going to count it on a net revenue basis. But more importantly we think that that won't be a major part of our focus. We'll be able to utilize it as a product. We're glad that we have it because we'll be able to utilize it at Mediaplex and we'll be able to utilize it in Commission Junction where we currently are providing search engine marketing searches. But as a free standing product I don't anticipate that we're going to put a organization together to go out and just sell that service as a stand alone product. Yes. The first question was like how does your display ad network is differentiated than your competitors in the marketplace? And I was also wondering if you could give us an update on the competitive landscape. Have you seen any larger players do in-turns in this market or anything in the competitive landscape has changed? And I had an follow-up question on the FastClick. I was wondering, you talked about $4 million cost saving. Can you give us a update on the cost savings? Are you saying that you can save because I think Jim, you talked about like you have a good progress on savings and integration, I was wondering if you are expecting to have more than $4 million cost savings now. Thanks. Yes. We expect the cost savings to be more in the range of 5 million where we have set when we did the acquisition that we thought the cost savings would be somewhere in the range of 4. And we pretty much have achieved that number already. So now, as far as the competitive landscape and people coming into our market, we worry about it every day. But we're not seeing a significant threat today of people coming in and other than the normal folks who've already been out there. But we haven't seen any of the larger players coming in and really competing for the small, medium web sites that we represent around the United States and throughout Europe. Thanks. A couple questions. If you take the FastClick part of it out of the equation on gross margin, I'm just curious on the media business prior to FastClick and affiliate marketing as you look into 2006, even if it's not a quantitative guidance comment just directly where gross margin might be headed. Obviously over the last several quarters that's been up kind of nicely in somewhat step function fashion. I'm just curious where you see that going and kind of tied into that is a pricing question if you anticipate getting a good delta between what you can charge the advertiser and what you're paying out to the publishers. And then a second question on the competition, one of the groups that has basically done nothing to speak of in the online world has been the offline ad agency companies I'm just curious if you're seeing anything from that group trying to build a group winning those companies organically essentially the four major offline ad agency holding companies. If there's anything new on that front. Thanks. Yes. In terms of the margin expansion, a good question, Martin. We haven't really seen expansion in margins. And in terms of the plan that Jim mentioned earlier, we do plan to see a improvement in the margins we're able to generate in FastClick. But as we mentioned before, when we see improvement in pricing in the market, we generally like to pass along that improvement to the ad networks so the members of that ad network become loyal and stay with us. So generally we have not experienced margin expansion in either affiliate marketing or the media business. And our plan doesn't really count on that aside from what we expect to do with the FastClick team. And Martin, on the second part of your question, more and more of the traditional ad agencies have an online initiative. And currently today, it probably represents better than 50% of our total just pure media ad placements. So they are all pretty heavily involved in this segment right now. Okay. And then one quick follow-up, your notable large customer on affiliate marketing that changed their payment structure to their affiliates. We're a couple months past when they announced that and I guess a month or so after it was enacted. Any notable difference in terms offer your business as a result of that? Or is it fairly neutral at this point? Yes, Martin, yes, I'm surprised we got this far down the list before that question came up. We expected we were taking a little pool here and we thought it would be in the first question. We've met with our customer and have really kind offer worked through this with them. We don't anticipate any significant change. But it's still early in the game it just really took effect the first of October. But I think from our standpoint we don't anticipate a large variance in what the revenue would be for the quarter. Good afternoon. I have an few questions. Because historically we've enjoyed ValueClick outperforming the overall online ad industry and even in the second quarter your organic growth rate was 44%. This quarter it's 30% and in terms of your outlook it's now 21%. Are you being conservative? Is it possible these acquisitions are diluting your core growth rate? That's question one. And then, two, in terms of lead generation I definitely agree with you that opportunity and demand from marketers has been to cue it. I guess my question is what systems do you have in place to ensure that you're delivering high quality leads? Cause we've seen some other models out there. There's been sort of a retraction or push back as marketers discover that the leads being delivered aren't plausible customers. Yes, Stew, two things. Let me answer the last part of your question first. I think the feedback that we are getting and some of the research that's being done by some of the outside independent research firms have come back and shown us that we are converting very well. The fact that our customers are also renewing is a pretty good indication that we're converting very well. And we're getting that direct feedback from the clients themselves telling us that the leads that we're generating for them are converting either to a high quality lead or to a sale itself. So I'm feeling good about that. And the first part of your question in response to the growth rate, last year we put out some early indicators as to what we saw in 2005. And I think we probably did increase our outlook on several occasions throughout the year. But we just completed the business planning process. And there are a couple things in our product line that don't have the traditional 30% growth that we've been averaging. That's our technology and our e-commerce businesses. But they're a relatively small part. If you look at the rest of our business in lead gen and affiliate marketing, comparison shopping, they're all growing at much higher rates. But we hopefully are being a little conservative. I don't want to stick my neck out in saying that I think we're going to do 30% growth next year. I think that what we're seeing we're trying to be realistic and trying to give the best guidance that we possibly can and then hope that we can increase it just like we did in 2005 as the year goes through. But we've been asked this question several times as to what our thoughts are about 2006. We have gone through a process with all of our leaders of the various divisions of our business. And this is kind of our first brush at what we are seeing next year. Although hopefully we are being conservative. I would like to think that. And that we certainly wouldn't want to put out a number that we think we can't make. So I would hope that there is some upside next year. But this is the best that we see right now. You know, one thing I'd add to that, Stewart, is that Jim and I talked in the early part of the call about growth rates being at around 29% for affiliate marketing. And that was on the segment information. If you take a look at that from the standpoint of worldwide product line that growth rate is more like 31%. And as Jim alluded to earlier, the organic growth rate in media for the quarter was about 32%. And what that means is that technology was still growing and our overall from an international perspective at single-digit rates. And that's pulling down the overall company average an bit. But again, growth rates in the range of 31 to 32% for both affiliate marketing and media and just wanted to mention that some of the slower growing areas in media include e-commerce. You know, it's an area that's small but it's also an area that for us is growing a little bit more slowly than some of the other areas. Yes, hi, guys. This is actually Youssef Squali. So a few questions. First of all, if I look at your gross margins of 72%, that's somewhat high this, I guess, considering that you guys had Web Clients and E-Babylon for the full quarter on your previous call I think you had guided to margins lower than that given the fact that both Web Clients and E-Babylon carried lower margins than your traditional business. And second, what is the implied gross margins the implied gross margin in Q4? So that's the first series and I have a follow up. Okay. There is one thing that's more of a technical part of the answer to this question, Youssef, in that last quarter we didn't really have Web Clients in our results. And as we got underneath the hood in terms of the accounting classifications, on a number of their costs, we concluded that there was probably a bit more of their costs that was appropriately classified as marketing and selling expense and a bit less of their cost that was appropriately classified as cost to revenue. And that does have an impact on the margins recognized in the quarter and explains a fair amount of the deviation between what we had originally seen in analyst consensus guidance and what we actually brought in the quarter. And I think obviously somebody pointed up earlier that we had higher than expected margins in affiliate marketing in the U.S. segment, if you will. And I wouldn't count on a continuing margin expansion in affiliate marketing. No. I don't have detailed numbers in front of me but it does represent a fair amount of the difference between what was in the consensus estimates and what we actually reported. And then the rest, there were some favorable performance variances, not the least of which was affiliate marketing. But a fair amount of that delta was associated with this reclassification. And obviously, since that's a part of the GAAP, appropriate GAAP treatment, that will continue through next year's guidance. It'll be slightly less in the range of probably about 65, 66%. But that's based primarily on the fact that we'll have a full quarter of FastClick in the fourth quarter and we had no inclusion of FastClick in the current quarter. Okay. No that makes sense. And on that, when you look at that 10 percentage points that you guys are looking to grow that line item by next year, is that primarily coming from just a lower web share to the partners from FastClick historically paid about 65% where you guys paid more like 50. How much of the 10% is just kind of that versus just other scale or increased scale in other line items? Well, I think, Youssef, that hopefully it's not in giving the publishers less. What we're hoping is that we can continue to pay the publishers what they're getting in terms of raw dollars but that we can improve the quality of the traffic or not the traffic but the improved equality and the amount of the advertisements that we're sending through so that they can continue to get their dollars and at the same time we can increase our share by leaving them with the same spread. Okay. Then lastly, FastClick generated historically somewhat, 30%, maybe a little less from pop enders and you guys have historically had much less exposure to that. Is there much cleaning that needs to be done from your perspective in FastClick either in terms of traffic or advertisers? When we first really got to know FastClick their pop-ups were in the range of like 90%. Remember I was saying at this point we wouldn't have been interested because we felt that that was going to be a challenge. They got it down to that 30, 35% range and are continuing to go drop that number. So we would expect that that number will continue to fall. But then when you put it into the mix of our total business next year, it's going to be pretty insignificant. Hi. Thanks. On kind of along the same lines on FastClick I was wondering if you could update us on a unduplicated reach. I know you said you think you're kind of around the range of the leading portals when you combine FastClick with ValueClick. I notice that FastClick's uniques according to ComScore fell off pretty dramatically in September. So I was just wondering if you could give us first a unduplicated reach or unique visitor number for the two networks? And then secondly I believe FastClick had maybe let's say 25, 30% of their network that was going unsold and was curious about how what percent of their inventory today is unsold, how much are you planning to sell-through across your network going forward? And how much of that is in your guidance? In terms of the 25%, we still believe that to be a real opportunity. And we want to make sure we do that in a fashion where it's appropriately targeted and that the inventory works out to be quality inventory generating quality results for the advertiser. So it's a little early on to say how productive we're being there but we still continue to believe that that's an opportunity. I was going to add to that, Bill, what we believe that there is a pretty significant opportunity when you start combining the sales force of these organizations and some of the things that are going on right now where the ValueClick sales force along with the FastClick sales force are selling the full breadth of all the products, not just that all of our lead generation products through Web Clients and high speed media. So I think that we'll be able to utilize the remaining part of that network pretty efficiently, especially here in the fourth quarter. I'm sorry, Bill, I think that Jim meant that he wanted me to answer the first part of your question, not the second part. On the unduplicated reach, unfortunately for now I don't have any updated numbers for you. I can tell you that since we have both a FastClick team that works with ComScore and has been working with them independently as a self-standing company and a different team within ValueClick as a part of the integration activities, they're now collaborating and they're in the midst of having a discussion with ComScore to make sure that the internal numbers from both teams are able to be reconciled or consistently square with ComScore. And that's going to take a little bit more time for us. So, you're going to have to wait a little bit for an update on the unduplicated reach number. But it's coming. Okay. One last question, Jim. I can't let you get away. This would be the first call in several years if someone didn't ask a question about potential acquisitions. And I guess I just would ask you do seem to have a much, much fuller breadth of services under your umbrella now. If you could just maybe talk about are there any holes in your service portfolio that you see, or any other individual areas that you might be targeting over the next year or so to enter, whether that's through acquisition or through building your own service internally? Yeah, Bill, I think that on the M&A side that we do have an pretty full suite of products right now that are serving us well. There could be some additional integration of these channels that we are currently in, for instance either affiliate marketing or comparison shopping kinds of things. Although we're going to put Sam on ice for awhile because we've got our hands full in putting Web Clients and FastClick together and frankly, there are a few other opportunities that are outside the U.S. that we would really like to pursue. We talked about China I think in our last caller and we are going to look into expanding into that market. But we also have some additional markets with affiliate marketing comparison shopping especially in other parts of Europe. We are, as you know, currently in Stockholm, and that's the home base of our comparison shopping product. We believe that that probably is going to be the next expansion for us for Commission Junction, given that we can utilize the English speaking site and that we currently have bricks and mortar in that area that we can and an organization that we can utilize. So I think that that's probably our focus throughout 2006. But now that I say that Sam will come up with something next month and change everything I've just told you. But I think right now, seriously, that we really need to focus on making Web Clients and FastClick, bringing the real scale that we think that brings to our media. And it really gives us a opportunity to put all of these products together in a very cohesive way. Okay. Thank you. Okay. I'd like to thank everyone for joining us on the call today and look forward to talking to you again in the first quarter of 2006. Thank you again for participating in today's ValueClick third quarter conference call. A replay of today's conference will be available beginning at 4:30 p.m. Pacific Time today by dialing 888-203-1112 or 719-457-0820. The access code for the program will be 3526974. This replay will be available through November 8, 2005. Thereafter the call can be accessed on ValueClick's website at www.valueclick.com. 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_233923

Tim Luke, Lehman Brothers Sumit Dhanda, Banc of America Securities Glen Yeung, Citigroup Investment Research Tom Thornhill, UBS Adam Parker, Sanford Bernstein Ben Lynch, Deutsche Bank David Wong, AG Edwards David Wu, Global Crown Capital Mark Edelstone, Morgan Stanley Rohit Pandey, HSBC Securities Joseph Osha, Merrill Lynch Hans Mosesmann, Moors & Cabot Allan Mishan, CIBC World Markets Jim Covello, Goldman Sachs Michael Masdea, Credit Suisse First Boston Good day ladies and gentlemen, thank you for standing by and welcome to the Intel Corporation Fourth Quarter 2005 Earnings Conference Call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all of our participants are in a listen-only mode. We will be facilitating a question-and-answer session towards of the end of today’s prepared remarks. At this time, if you’d like to ask a question, you may do so by pressing ‘*’ ‘1’ on your touchtone telephone. If at anytime during this call, you require audio assistance, please press, ‘*’ ‘0’ 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, Doug Lusk, Director of Investor Relations. Please proceed, Sir. Okay. Thank you, and welcome to the Intel fourth quarter earnings conference call. Attending from Intel are CEO, Paul Otellini, and CFO, Andy Bryant. Before we begin, please bear with me a while I read our Safe Harbor language. The fourth quarter earnings report and this conference call discusses Intel’s business outlook and contains forward-looking statements. These particular forward-looking statements, and all other statements that may be made on this call that are not historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our press release for more information on the risk factors that could cause actual results to differ. The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation, and amortization of acquisition-related intangibles and costs. These statements do not reflect the potential impact of any mergers, acquisitions, divestitures, investments, or other business combinations that may be completed after January 16, 2006. Lastly, during this call we will use non-GAAP financial measure as defined by the SEC and Regulation G. Reconciliations for the most comparable GAAP financial measures are set forth either in our earnings release or on our financials webpage, both of which are on our website intc.com. With that, let me turn it over to Paul. Paul? The Cody Report is a monthly newsletter focusing on trading and investing as the Internet and the wonders of tech change the world around us. It's written by Seeking Alpha contributor Cody Willard, a partner at a buy side firm who writes a monthly column about the Digital Revolution for the Financial Times and a trading blog on TheStreet.com, and is an adjunct professor teaching a class at Seton Hall University about the market, media and technology. Read more about The Cody Report, read a sample issue, or view Cody Cam clips about the market, media and technology. Thanks, Doug. I will keep my comments brief, and then turn it over to Andy for more details on the results for the quarter and the full year. 2005 was a record year for Intel for both revenue and operating income as we posted our third straight year of double-digit growth. These strong results came in a year, where we underwent the largest reorganization in our Company’s history, as we realigned our company around platform solutions. We’ve just recently seen the fruits of this effort with the launch of CES of two exciting new platforms. Centrino Duo for notebooks and Viiv for the digital home. 2005 was also a year of many other notable accomplishments including our entries to the fast growing demand to market segment with sort of a new relationship with Apples, and shipments of millions of dual core processors including the first built on our industry leading 65-nanometer process technology. Fourth quarter results also set records with new highs in revenue and operating income as we surpassed the $10 billion revenue level for the first time. We continue to see strong demand for our notebook platforms and shipped record units of mobile, desktop, and server CPUs during the quarter. However, we were disappointed that results in the last part of the quarter fell below our previous expectations. The shortfall was a combination of a number of factors resulting from the continuing constraint of internal chipsets. We overestimated the ability of third party suppliers of chipsets and motherboards to ramp supply late in the quarter resulting in about 1 point of share loss in the low-end desktop CPU market segment. In addition we believe end demand for desktop PCs weakened somewhat over the course of the quarter and this became evident as expected turns business from OEM and channel customers failed to materialize in December. Pricing was also a bit lower than we expected in a very competitive desktop market segment. As a result we believe that our OEM customers increased their CPU inventories rather than decreasing them; resulting in a lower than seasonal expectation for Q1. Although fourth quarter results fell below our December guidance revenue did come in at the low-end of the range we set in October. As you know our practice has been to provide a revenue range at the beginning of each quarter and narrow it at our mid quarter update. As the Company has grown to current revenue levels of approximately $10 billion per quarter we believe that narrowing ranges to plus or minus 1% of revenue is increasingly less relevant as an indicator of the performance of the Company. More importantly we manage our business to deliver long-term earnings growth and believe this current process is not effective in communicating our progress towards that objective and only heightens attention to short-term results. Therefore, beginning this year we will return to our previous process and the one prevalent in the industry by providing annual and quarterly guidance but not a mid quarter update. At the same time beginning this year we will start providing further insight into how we view our business by adding annual revenue and spending projections to our outlook each January. Our goal is to have more meaningful discussions about the long-term strategies and trends for our business. In summary, 2005 was a record year for Intel with strong financial results and numerous significant accomplishments. Although the year did not finish as strong as we expected we look to another solid year of growth in 2006. Thanks in part to a very strong product roadmap. 65-nanometer process technology is healthy and ramping exciting, new, dual core products such as the Core Duo into high volume. We expect the majority of our shipments and performance segments to be dual core by mid year. And in the second half of 2006 we will launch a new micro architecture that we expect will deliver performance per watt leadership in mobile, desktop and server settle. We remain confident in long-term growth opportunities in our business such as mobility, the digital home, digital office and emerging markets. With that I will turn it over to Andy for more details on the quarter. Thanks, Paul. 2005 was a great year punctuated by a difficult December. As Paul discussed unexpected issues with the timing of chipset supply demand in the desktop segment and practicing of logic products resulted in less growth than we usually see in the final weeks of the year. For all of 2005, revenue, gross margin dollars, operating income, and net income each achieved year to year growth rates in the double-digits. Stock repurchases and cash dividends returned over $12 billion to stockholders. Quarterly average shares outstanding were down nearly 5% from a year ago and 11% from the peak in 1998. We delivered not only our third consecutive year of double-digit growth in revenues, which Paul mentioned; but also our fourth year is the fourth consecutive year of progress in gross profit margin. And our tenth year in a row with cash from operations in excess of $8 billion. Our outlook for 2006 anticipates another year of growth but at a slower rate than the last three years in line with industry forecasts and the overall economy. To prepare for silicon demand in the years beyond 2006 we are substantially increasing research and development and capital spending. Revenue for the fourth quarter was $10.2 billion at the low-end of the range we forecast in the October earnings release, and below the range in the December update. Although revenue grew a little over 2% from the third quarter this is lower than is typical for this period. Compared to the fourth quarter a year ago revenue grew approximately 6%. Revenue for the second half was up 8% over the first half within the range of the last five and ten years and approximately 12% over the second half of 2004. On a geographic basis the sequential growth in revenue came from the greater Europe region. Asia Pacific was flat with the third quarter at the low-end of historical range, primarily due to some softness in the desktop segment. In the Americas revenue was down almost 4% with most of the decline concentrated in the United States, offset somewhat by growth in Latin America. Year to year growth for the fourth quarter was led by Asia Pacific at 16% and Japan at 11% driven by demand for mobile computing, chipsets, and flash memory. Europe was flat with the fourth quarter a year ago. The year to year decline of 10% for the Americas region is primarily a function of continuing movement of sales from manufacturing to Asia Pacific. For the year overall, Asia Pacific was nearly half the total revenue followed by Europe with 21% of revenue. Gross margin dollars of 6.3 billion were up 6% from the third quarter when results included a charge $140 million related to a legal settlement and up 17% from a year ago. Gross margin percentage of 61.8% improved 2-points from the third quarter and is up substantially from a year ago. The result was just below the range of the forecast in December due to a lower inventory, lower revenue and inventory evaluations. 61.8% compares to 59.7% in the third quarter which included 1.4 points for the legal charge. As we anticipated in October, gross margin benefited from the qualification of new dual core products as we ramp 65-nanometer. This accounted for the largest part of the improvement from the third quarter. The gains in gross profit were offset somewhat by reducing valuations of logic products due to lower unit costs. In the year to year comparison gross margin percentage is nearly 6-points higher than the fourth quarter of 2004. Higher revenues, higher factory utilization, and lower unit costs contributed to better gross profit margins than a year ago. Spending, R&D and MG&A was $3 billion, consistent with our previous forecasts and up 5% from the third quarter. For the year, spending was 28% of revenue approximately the same level as in 2004. The number of employees rose during the quarter to 100,000 at the end of December, up from 85,000 a year ago. Before looking at non-operating income I will highlight results for Intel's largest operating segment. A little less than two-thirds of the total revenue came from digital enterprise group which was flat with the third quarter and down 5% from a year ago. Operating profit for the digital enterprise group was up 13% sequentially and flat from a year ago. Revenue at Intel's mobility group accounted for nearly one fourth of total revenue. Revenue from mobile microprocessors was up 3% from the third quarter and 40% from a year ago. With the success of mobile platforms, revenue from mobile chipsets and other products was up 66% year to year. The mobility group also made progress in operating profit, up 8% from the third quarter and 63% from a year ago. Our flash memory business revenue was up 5% from the third quarter although flat from 2004 overall. For the entire year flash revenue was flat with 2004. With the formation of IM flash technologies, a joint venture with Micron, we will report flash memory revenue and operating profit as part of a new operating segment. Now to non-operating items. The effective tax rate in the fourth quarter was 29.1%. Intel's third quarter tax rate of 38.5% included accrual of tax expense of approximately $250 million related to the repatriation of accumulated income earned abroad. Fully diluted earnings per share were $0.40. This is well above $0.32 in the third quarter which included a charge related to the legal settlement and a charge related to repatriation of foreign earnings which together lowered earnings per share by approximately $0.06. On the balance sheet inventories of $3.1 billion were up over $300 million from the third quarter. As anticipated in October, we built inventories with the production of more 65-nanometer processors. Total cash investments comprised of cash, short-term investments, and fixed income trading assets ended the quarter at $12.4 billion, a decrease of 1.2 billion from the third quarter after stock repurchases of $3.1 billion, capital spending of 1.4 billion, and dividend payments of nearly 500 million. Long-term debt grew to $2.1 billion, up from 432 million, following the issuance of $1.6 billion in convertible securities. As we turn now to the outlook for the first quarter please keep in mind that the forecast data do not include the effects of any new acquisitions, divestitures, or similar transactions that may completed after January 16. I will use a mid point of forecast ranges when making comparisons to specific periods. We are planning for revenue in the first quarter to be between 9.1 and $9.7 billion. The midpoint of this range would mean a sequential decline of 8%, although this is within a wide historical range for the period, it is less than the typical seasonal growth. This is flat compared to the first quarter of 2005 which included 14 weeks instead of 13. It also incorporates what we believe will be the impact of an inventory build at our customers in the fourth quarter. Our expectation for gross margin percentage in the first quarter is 59% plus or minus a couple of points. This includes share-based compensation expenses, a non-cash charge which we will begin recognizing in the first quarter. Without share-based compensation of approximately 1 point of margin, the forecast for gross margin percentage is 60% plus or minus a couple of points. This is down two points from the fourth quarter due primarily to start up costs for IM Flash technologies, the NAND memory joint venture, lower revenues, and inventory valuations. Spending, R&D plus MG&A should be approximately $3.3 billion, higher than the fourth quarter due to the impact of share-based compensation expense. The forecast includes approximately $300 million of share-based compensation, a non-cash expense. Without the impact of these charges spending should be about $3 billion, flat with the fourth quarter. Depreciation should be $1.1 billion plus or minus $100 million. We expect amortization of acquisition related intangibles for the first quarter to be approximately $20 million. Our estimate for gains and losses from equity investments and interest and other income is a net gain of $140 million. Looking ahead to the full year we are planning for revenue growth of 6 to 9% led by mobile computing and emerging markets. The pace of year to year growth and our plan is slower than in recent years tempered somewhat by the outlook for the worldwide economy. We expect gross margin percentage to be 57% plus or minus a few points. Without share-based compensation of approximately 1 point of margin the forecast is 58% plus or miles a few points. This is down more than 1 point from gross margin in 2005. Lower start up costs for logic products will help lift margin from 2005 levels, but this will be more than offset by slightly higher unit costs and slightly lower average selling prices for microprocessors and start up costs for the NAND memory joint venture. At the same time we are ramping the 65-nanometer process technology, we are also moving ahead with a transition to even smaller geometries and increasing our investments in manufacturing technology and capacity. We are targeting overall capital spending at $6.9 billion plus or minus 200 million, an increase of 19% over 5.8 billion in 2005. Most of the projected increase will be spent on construction and long lead purchases to support 45-nanometer capacity requirements. With plan to invest in a construction of two 300 millimeter, 45-nanometer factories in Arizona and Israel both announced last year. We believe the capacity will help maintain Intel leadership in providing silicon to a growing, global market and the technology will be an advantage that enables us to deliver better products at competitive unit costs. For research and development in 2006, we plan to spend approximately $6.5 billion, an increase from the $5.1 billion we spent in 2005. The forecast includes share-based compensation of approximately $500 million, a non-cash expense. R&D spending excluding share-based expenses would grow to $6 billion. Most of the increase in the budget will be directed to product development and validation for platform products. As is the case almost every year this is the highest level of R&D spending in Intel's history. Total spending for the year including not only R&D but marketing and G&A is forecast at 13.1 billion. This includes the impact of share-based compensation of $1.1 billion. Excluding this impact total spending is forecast at 12 billion which is $1.2 billion or 11% higher than 2005. This spending growth exceeds projected revenue growth for the year and deviates from what remains our long-term goal of keeping one in line with the other. Excluding projected spending in IM flash the year to year growth will be 9%. The largest dollar and percentage increase is in R&D for resources to deliver new platforms for new markets. Depreciation for the year is forecast at $4.7 billion plus or minus $100 million, up from $4.3 billion in 2005. The estimated tax rate for 2006 is 32%. In summary, 2005 was a good year and the Company is in excellent financial condition. We are planning for another year of growth and are optimistic that our competitive position will improve as we see the fruits of investments in new products and new manufacturing capabilities. In any year while the economy may fluctuate we can be certain that the pace of technical innovation will not stop. Our investments are a statement of confidence in the future of innovation. With that let me turn it over to Doug for Q&A. Thanks, Andy. We will now open the call for Q&A. We will attempt to take questions from as many participants as possible. To help in this process we ask that you please limit yourselves to only one question and no more than one brief follow-up. Thank you. Operator? Thank you. Andy, I was wondering if you could frame the extent of the inventory build that you described in the fourth quarter in guiding us somewhat lower than seasonal first quarter off a somewhat lower than expected fourth quarter. Thank you. Sure, the easiest way to frame that is really to look at the Q1 outlook. The Q1 revenue outlook calls for the midpoint to be down approximately 8%. If that we were having, and I know seasonals a wide range, but if we were having a seasonal first quarter it would have been down approximately 5%. The difference 3 percentage points is roughly equal to what we think the inventory is on hand at our customers that needs to be worked off. I was also wondering, Andy, if you could just give some more color on the gross margin outlook going forward in terms of suggesting that there were lower start up costs but I think you said offset by the higher unit costs and lower ASPs. If you could give some color on those issues that would be helpful. Sure. I will do what I can. I can't give you too much detail on that. As we all remember throughout 2005 we had the start up costs on the 65-nanometer and the fact that process was going into several factories which depressed gross margin percentage. We will see positive or an uplift in margin in '06 because we no longer have those expenses. On the other hand we did enter into the IM flash joint venture which will begin NAND memory production in several factories this year. It is not quite as expensive as doing our start up in our logic factories; but it is similar in nature and the way the contract with the joint venture is structured those costs come directly into our P&L. So you can almost think that those two will offset each other. In the meantime, I do expect unit costs to go up slightly. To give you a simple indication, if our revenue growth for the year hits out mid point of 7.5% you can look at my depreciation cost is going to go up more in terms of 8 to 9%. So I am going to take a little cost pressure there. Headcount generally in the factories relate to the capital expense so I will take probably a little bit of cost pressure there. Right now materials going into finished products has been tight for the last year or so, a little bit of cost pressure there. So what you are seeing is no big change other than a little bit of pressure in each cost element. Same thing if you look at average selling prices. Remember I'm talking about a year-over-year, what we saw in the fourth quarter was average selling prices step down a little. If you just take that number and compare it, blow it through that entire next year you are going to see average selling prices a little bit lower year to year. So there are no big, wow, there's a huge change coming type numbers in here, there are a series of small events that are going to tend to put margin pressure down a point on a year to year comparison if you exclude share-based costs. If you don't it will be down 2-points. Andy, I had a question on, you talked about the fact that demand for low-end desktops was below expectations and that impacted your growth. But your mobile segment growth was also what I would say is subpar given how well that segment has grown in recent quarters. Could you talk about what's happening there and is there a share loss issue, was there a slow down within the notebook market that you didn't allude to earlier in your comments? Well, we thought the mobile business did pretty well in the fourth quarter as expected so I don't know where you got information. We had certainly record shipments in that space. If you look at what we thought was quote, the shortfall in revenue from the mid quarter update, I'd say maybe a little bit in mobile but it's really not much change. I guess my point was that you reported 3% growth whereas seasonality would have dictated better growth within your mobile segment? A little bit. Recognize that some of the growth went into the lower end value stuff which maybe was what contributed a small amount of our pricing stuff. But in reality mobile did fine. I would not be talking about a revenue shortfall if we were dealing in the mobile business exclusively. The other question I had was, this seems to be the second straight quarter where your OEM base has built some level of inventory, the 100 million the prior quarter and this quarter you are implying roughly 300 million. Could you talk about why, I mean, is that just, first of all, relegated to your OEM customer base and are you seeing a similar build in the channel and if not why not? Well, it isn't the OEM and the multinationals. If you go, study your balance sheet carefully you can actually figure out what our inventory is in the channel; it was down in the fourth quarter and channel sales out were at a record. The other thing I want to correct is there wasn't a $300 million inventory build in the fourth quarter; there is a total of between, say 250 and $300 million excess inventory in the customers hands today. They would also have billed in the first quarter. So you have got to add the two together to get to the total effect. In general what I would suspect is you are seeing some after effect of the constraints we've been in and the customer is trying to match chipsets and the timing of when chipsets are coming from third party suppliers and our products, it's a fairly complex equation and you certainly wouldn't want to be caught short if you had the chipsets and the motherboards available. I don't think it's anything other than that at this time. One final question. I mean when can we start to see a better match between the revenue growth and your cost structure? It seems to be a little out of whack right now. Well, I actually think we improved margins in '05 and that was revenue growth exceeding the cost structure. I do believe it will turn a little bit the other way this year. It really is a factor of if we can drive revenue I can hold cost, I can leverage my fixed cost base pretty well. If revenue can't be driven then I have got to address costs, but certainly not something you do in the short-term and not something you do today facing what should be a high single-digit revenue growth. Andy, when we look at your forecast for revenues for 2006 at 6 to 9% growth. Can you give us a sense as to what you think underlying PC growth is when you come up with that number? Sure. What we are guessing for underlying PC growth is somewhere in the high single digits, low double-digits, so 9, 10, 11%, somewhere in that range. Mostly we've seen that from external forecasts as we've had conversation with customers. We've looked at macro economic data. It's kind of what we have settled on as a good target. You made the comment in your prepared remarks that with some of the new products that you are introducing in 2006; I think the words you used were that you could gain share. I just want to get a sense of if that's exactly what you mean, you think you will be up higher market share in 2006 or maybe just slow the rate of loss? Let me take that one. What I said was I thought we would be able to be in a position to retake share over the course of 2006. Gain. Thank you. Just to be absolutely clear. If I could just ask one more quick question on expenditures. You were seeing a big CapEx number, a big R&D number. I get the sense that there seems to be some acceleration here of hitting the 45-nanometer manufacturing node. I want to get a sense as to whether or not that's an accurate read and whether or not you think that's technologically achievable? I don't really think acceleration. I think we are still on our two-year cadence. It turns out if you are on a two-year cadence towards the end of this year you need to start spending a fair amount of money to get the equipment in place and get started. Paul, it feels like you've accelerated several programs and some spending in order to strengthen a competitive position. We'll bear the brunt of that through the first half. When do you really feel that that will pay off and get the Company back into the operating ratios that we've seen over the last year or so? Well, the acceleration, the spending acceleration really is focused on the deployment plans for 45-nanometers and from our perspective is not an acceleration; it's the deployment that we've been planning for some time as Andy indicated in the two-year cycle. I don't see that as being an acceleration. Spending is a bit higher in R&D and we believe that we need to do that to be able to deploy fully on the platform plans that we have in store for '06 and '07. We launched two new platforms in January and we will be launching another one kind of in mid year for the business client. Those are more complex developments, more comprehensive developments than we've had before. In terms of operating ratios it really all hinges on the revenue. I think that part what have you are hearing from us is that as the fourth quarter ended up being lower than we thought and the first quarter is more than seasonally down as a result of the inventory that Andy discussed, we are starting out in a bit more of a hole for '06 than we first had thought. And we hope to be able to capitalize on any revenue opportunities and a lot of it's going to depend on the product health and the competitiveness of those products in terms of whether we can gain share and how much share we will gain. Would it be your opinion that the ratios that we are going to see here in the near term are a temporary phenomenon? That as the new products come to market and if you get the share gains you anticipate getting that the Company gets back into the operating model that it had in terms of…… Yes. In terms of spending versus revenue growth absolutely. Andy implied that we are a little bit backwards here as we enter '06 because of momentum we had going out of '05 in terms of hiring and stuff, and we had already built a plan, a conservative spending plan into '06 and now there's a little less revenue around that plan than we at first thought. And so as the revenue picks up you will see us get the spending growth versus revenue growth back in line. You have our commitment to continue to focus on growing revenue faster than spending. Well, gross margin is a slightly different question. I mean, that one view there is to grow gross margin dollars and not necessarily focus on the percent as we've talked about before. All right. One last one for Andy. What would you expect the direction in share count to be across the '06 year? Hi. I just want to say thanks for canceling the mid quarter updates. I think that's positive. Now, in terms of the longer term issues you want to talk about, I just want to talk about 2007 if we can for a minute. Can you talk at all about your gross margins as we look out a couple of years in terms of 45-nanometer start ups, depreciation looks like it will rise and how should we think about your operating expenses there as well? And also it doesn't look like you can continue to buy back stock at the current rate for more than a couple of years. So what would your strategy be as you run out of cash there? It's going to be tough for me to make a gross margin percentage prediction for '07. We do focus on capital efficiency. We do plan to try to do the best we can with that. As Paul said we do try for positive return on invested capital and absolute dollar margins. It really the big factor will turn out to be end demand; if we have decent end demand and full factories costs will be fine. If we don't we will struggle. As far as the cash, you are absolutely right. If you look at this year, we've been pulling about $1 billion a quarter out of cash. We will meet with our Board again in the first quarter and set a cash target with them and then we will use, the way we do the work internally, is we say what projects do we have to fund, what dividend can we sustain for a long period of time, and then we use buybacks to try to get the cash to the level we think it should be. So there's a point at which time the buyback will diminish as we come more in line with the cash targets that we have. No, it's too early. Even though in reality I wouldn't give you that type of data for a year. I think we will start to see meaningful data in the first half of the year. We will provide your cost of unit forecast in the spring analyst meeting so will you start to get a sense for where we think we are headed. I really think I need to wait on that one. Okay. Just one more short-term question then instead of long-term. I am kind of thick on this one here but I don't understand how your inventory builds internally, whatever it is, 10%, your big OEMs build inventory, yet there's a chipset shortage that lowered your revenue. Can you explain that? And then just, are you comfortable with inventory levels now or should we expect a further build here in Q1 and Q2? I would expect, let's see, the simple question is I expect to further build in Q1. Let me talk about Q2 as we see what revenue looks like in Q2. But I do expect a further build in Q1. We were building obviously for a higher Q4 and a higher Q1. As a result, pending a three-month throughput time, I'll collect some more inventory. The levels I'm at today don't disturb me in the slightest. I could use more chipset, finished goods inventory. I still need to get a little more inventory in my 65-nanometer processor lines. I still have to make a transition between the 90 and 65. So today's inventory levels I'm very comfortable with. My guess is I will build some in the first quarter. My second guess is I will try to get those down some through the rest of the year. In terms of this explaining about what happened, I mean, the chipset shortage, how do you build so much inventory internally and externally yet not yet have lower, yet not meet demand? Is it all nonprocessor? The simple answer is we anticipated third party chipsets coming into the marketplace quicker than they did, which meant we could have married up processors to motherboards to chipsets and we all could have had a little less inventory. So the chipset imbalance we think got us hopefully one last time. Hi, guys, Paul, maybe I will just give you one first. I know you like to be precise. You said you believe Intel will be in a position to retake share during the course of '06. Is this the same thing as saying taking share or just be in a position to take share? If you look at '05 we took share, we gained share in the first half of the year and we lost a little bit in the second half of the year. And I think our product portfolio particularly in mobile and desktop as we shift aggressively to dual core only gets stronger and then we have two server platforms launching in 2006. One is the Bentley platform which will ship this quarter for our customer shipments in Q2 and then we will ship in second generation on 65-nanometers in the second half of next year. So, I believe you will be able to plot the regain of market share or the take back of market share along the dual core ramp of the Company across multiple segments. Great. And then maybe one, I guess for Andy. Yes, I just want to point out that the bubble bursting, what you've guided to is the worse 1Q over 4Q following the worst 4Q over 3Q of the past decade and it sort of seems like most of this is coming down to inventory. It's strange that after some inventory build in Q3 there was an even greater magnitude in Q4. Unless you are basically telling us that end demand was a lot worse or else your specific customers were losing share or else they have been building inventory principally of Intel processors. We don't think end demand was a lot worse. We do believe there was some disconnect between our processors getting connected to chipsets and motherboards which caused a bit of the problem. We do believe end demand and flow in desktop was lower than you seasonally would expect so there is a little bit of demands there. We do believe, we haven't seen the AMD numbers yet but we believe we lost up to 1 point of market share to AMD through these things. So it all triangulates but that, I realize it doesn't leave you with a great feeling of comfort. I understand that. Thank you very much. You may have touched on this already. But I don't really understand the pattern of your costs especially depreciation of margin through the year because you are starting 59%, gross margin of 59% in the March quarter but you end presumably even with some seasonality of revenue with a lower gross margin for the full year. So would you expect gross margin to continuously drop through the year? Or what's the shape of the pattern? Similarly your depreciation is 1 billion in the first quarter and you end up with 4.7 billion in the full year, which suggested a ramp of 20 to 30% in depreciation as you cross the quarter. Is there some big event that cuts in a lot of depreciation partway through the year? Depreciation in the earnings release said 1 billion for this quarter, it's actually 1.1 billion. That's a typo in the earning release. So starting at 1.1 billion, it grows, for the year comes in at 4.7. So you do see some depreciation growth. What you see through the year is some cost growth. You see normal ASP struggles. It says margins actually, I don't want to give a quarter by quarter margins. It's also going to be a factor of how full are the factories in the second and third quarter, and the fourth quarter. There are a lot of working variables here. Let's just leave it at full year, 59% plus or minus and first quarter, 60% plus or minus a couple. Yes, two quick questions, please. The first thing is on capital spending. Is that the joint venture on NAND, is your portion of the joint venture's capital spending included in that $6.7 billion guidance for calendar '06? The midpoint of the guidance was 6.9 billion and it does not include the memory joint venture. The consolidated company of that joint venture is Micron and they will report their capital spending. Actually there's a pretty heavy construction load in this one with the two fabs we are getting started and some office buildings that we started around the world. Okay. The other thing is, help me one more time on this fourth quarter thing, because you said there was some low-end market slowing particularly in the Asia Pacific. Where did the demand go to? Did it go to notebooks or did it go to competition? Or basically disappeared to things like PDAs or iPods, things of that like? In reality we don't believe it quote, went any place except the consumers kept more money in their pockets. The ones who were in Asia would buy the lower end desktop PCs. Maybe went to a PDA and we are able to finally track the data. Mobile laptops seemed to sell kind of normally. Servers seemed to sell kind of normally. What we really believe is in Asia and the low-end of the desktop there were just less computers bought by people who wanted to use them. Thanks, guys. A couple of clarifications. One, in the press release, Andy, you talked about average selling prices down slightly. Can we define that as 2 or 3% in the processor business? We believe the supply metric demand today in total, we still believe there is a little bit of time it will take for everything to get rematched, resorted, and returned to what I would call normal operations. But there is enough supply today. Then, just lastly, from an accounting point of view on IMFT, I guess, I was surprised by your last comments that the 1.2 billion of capital spending that Intel is going to contribute to the joint venture does not show up in your CapEx numbers. Is my understanding correct that you are consolidating the revenues and expenses? If that's true, how come the capital expenses and other items there, do not get included in your CapEx numbers? We are not the consolidating company. Micron is the Company that consolidates the JV. So what we do is we take our portion of the JV into the other income line, they report the capital as a result. The reason that hits my start-up costs this year is, there is an agreement between us that are start up costs for the JV are charged directly back to the two parents as opposed to kept inside the JV. So what you will see is that Micron is the consolidating company. They will report their revenues and the cost inside their P&L. They will report the capital expense. What we will take is a capital charge, not a capital expense as we contribute cash or assets into the JV. I am going to give you a sense. But, we will purchase product from the manufacturing joint venture, IM flash technologies. What we then resell will be revenue for us. So my costs will come across as well with that and I will have a normal margin. The business itself will be consolidated at Micron. So each company will have its own revenues for the product itself. Each company will have the appropriate cost of sales. If there's profit or loss left in the JV, it will be in Micron's income statement at the operating line. It will be at ours in the other income line. Thank you. A quick one on the ASPs. A quick look at the ABC data shows that the desktops are about 25% more expensive in the mature markets compared to the emerging markets and servers about 10%. Whereas notebooks are 15% more expensive in the emerging markets. So do you think as the notebook penetration increases, your ASP this year would actually go down more than slightly as the product might shift to more of the value product there? No, actually I don't, not in mobile. I think that a lot of that difference in markets that you are seeing, market pricing you are seeing is that notebooks principally are sold by branded multinational firms or very large firms and a third of the desktops in the world are sold by white boxes and in the emerging markets many of those are shipped without software. And that accounts for the bulk of that difference, differential pricing you talked about. Okay. And then I have a quick one on the new positioning of the Company. Intel Inside was very clear to the consumer as to where the Company is positioned. What are you trying to position with Leap Ahead? And then I have a follow-up, or a quick one for Andy. Well, Leap Ahead won't be part of our branding program or merchandising program at the ingredient brand level. That's the tag line much like the Nike, just go do it tag line, it's much more of a corporate identifier. The Intel Inside program will take advantage of the existing nomenclature. The logo has changed because we felt that the word inside, inside a swirl was redundant. Since it's already been ingrained in 1 billion peoples psyche and this is a little bit more elegant cosmetic treatment of that. But the program in its essence is still at the computer point-of-sale level an ingredient sale. And for Andy could you clarify in the die bank inventory is valued differently for the tax and the GAAP purposes? No, the die bank, first of all, all inventory is valued, I'm sorry, you are going to get into a level of detail that normal people never want to get to. The value of the inventory is the same in both cases. In income statement GAAP books if you have a reserve that would lower the expected tax that you are going to pay because you have, you don't, you take a write off for that cost. In your tax books reserves don't count, so the difference between tax and GAAP isn't in terms of the value of the inventory it is in terms of how the reserve is treated between the two different sets of books. Thanks. Listen, Andy, just looking at how the JV works, for starters, can I assume that the JV itself, not your reseller margin, but the JV itself is going to be run with an eye towards having it be break even and then the margin is earned on the resale activity by you and Micron, is that the idea? Second question, then, can you maybe give me a little help in terms of understanding the magnitude of the revenue resale that is built into your target as well as some kind of sense as to what kind of start up costs that you are taking and whether those continue through 2007? Some but not a lot. In 2006 there is not a lot of revenue to be honest. I won't tell you a specific number but it's a pretty small number. There is some. More importantly is the cost in the spending side. You got a sense for the spending when we said spending growth is 11% without the JV, 9% with the JV . So you can get a sense for how much we are putting into the R&D line for the business. In terms of start up costs, don't want to get too specific but it is notable in the year to year reconciliation. Not quite as big as what we saw for the logic business last year. But in that magnitude, so…. Gross margins would be discussed as flat. I don't want to give you a precise rounding to decimal points. But it's enough to cause the round to be different. Okay. Last question and then I'll go away. Paul, it seems to me like the repositioning of, let me rephrase the question. It seems to me like you've top Core Duo, which was kind of initially a dual core notebook part and you are aiming it now at the desktop market as well with the Core Duo branding and with the Apple announcement. Is that true or am I off base there? It's partially true and I think it gets increasingly true over the course of the year, Joe. Our view for sometime has been that performance per watt matters as much in the desktop particularly consumer desktops and in servers as anywhere else. And so you saw the first part of that with the Viiv announcement where the number of the Viiv living room PCs were built around Core Duo, particularly the small stainless ones. You also saw that last week with the iMac. I think that you will continue to see more and more momentum towards low profile, small form factor designs consuming much more, utilizing much more energy-efficient processors. That is particularly true when we get to mid year and start in Q3 start shipping Conro which is the new desktop product that comes off of the same power efficient course. Okay. I'm sorry, does this margin target that you've given perhaps incorporate extra special aggressive pricing year in the desktop market as you look at 2006 and what your competitor has done. Do you have maybe a little lower pricing umbrella built in? That's it. Thank you. No, no change at all to the ramp to 65-nanometer. We actually are watching wafer starts closely. We haven't changed anything. If we did by the way, it wouldn't be in 65-nanometer. It would be in the clearing out 90-nanometer quicker so you can make the chipset transition more quickly. No, nothing has changed yet. I said if we saw a weakness that we wanted to respond to that's how we would respond. As of now we have not changed our low returning factories. Just to be clear, 90-nanometer doesn't go away. We will use that technology to build chipsets and we'll be converting our chipsets from the old 8-inch network to the 12-inch 90-nanometer network over the course of 2006. I don't make ASP forecasts. So I won't give you that one. But you can see essentially we see gross margin percentages down mostly because of the business, somewhat because of IM flash start up costs. Hey, guys. A quick question. If I look at your quarterly revenue guidance and your annual revenue guidance, you either have to have a much better than seasonal second quarter or you have to have kind of a huge second half. Can you help handicap those two for me? Certainly, what we believe is as we get past the first quarter it will get progressively better and stronger. We think the roadmap gets progressively better and stronger. We think the inventory will be worked out. So I don't want to handicap between Q2, Q3, and Q4 but certainly we believe the strength builds through the year. Okay. That's helpful. And can you also help us understand the thinking behind the convert? If you are buying back so much stock, I guess, in hopes of reducing dilution and you are such a big company with a great credit rating why wouldn't you just do straight debt? Why would you dilute shareholders in that manner? We don't believe that when we finish with the convert and the actions as a result of the convert there will be dilution of the shareholders. We did the convert because we think there's a positive return to the Company that's ours; and we are using the funds for basically general purpose to run the Company. Also don't, we are walk around with the assumption that says the reason we buy stock is to offset dilution of our stock options as some have said. We are really doing it as a balancing act to getting cash back to the shareholders. Thanks so much. First, quick question on the Apple Business. How much is that going to help Q1 relative to Q4? Some, but the customers are pretty sensitive about us providing their cost of sales data to the market so I really don't want to do anything other than say they will by more in Q1 than they bought in Q4. Second, on the CapEx. Can you help us understand from a wafer-fab equipment perspective, you said overall CapEx is up 18%. Do you think the equipment portion of that is up 10, up 15, up 5, flat? I will give a better break out at the analyst meeting. Again, there is a heavy increase in construction of this piece. There will still be increases in the equipment business as well. I am not going to let you pin me down today. I will give you a lot better detail in April when we are out there. Final question probably. Andy, at the Analyst Summit in Oregon, you talked about the risks of underage or overage relative, the capacity relative to demand and you talked about how even a little bit of overage can have a pretty significant impact on gross margins. With the demand doing what it did at the end of the fourth quarter and with you guys already ramping two new fabs given the CapEx from '05. Do you think the risk has been raised for overage a little bit in 2006? If you asked me I would say ever so slightly it's something I'm watching with a lot more interest than I was a quarter ago. It really comes down to does the worldwide economy hold up? Do we get through an inventory hiccup here? And as Paul says we gain share, the worldwide market grows as we think will be okay. If there's extended softness it will hit margins. I guess maybe one quick follow-up to that. When you have seen inventory start to build and/or demand start to soften up a little bit. Is it normal, that it would turn around as quickly as a quarter? It's not abnormal. It depends on the underlying strength of the business. In this case I think it can turn around inside the quarter. We haven't seen information out there that would cause us to say this is going to linger for the first half of the year. It doesn't mean I would build a little more inventory than I would like. So I will have to get my inventories fixed over the next couple of quarters. Great. Thanks a lot. When you guys talk about gaining share in Q2 through Q4, sometime in that time frame, it sounds like Paul is maybe saying that dual core is the main driver. Paul, is that more from a cost structure perspective, the power side? Or what do you feel like your true advantage is over the competitor, the dual core out there? Well, we are on a technology generation conversion well ahead of them. That gives us a cost advantage, a performance advantage, a die size advantage, and an overall power envelope advantage. That clearly has clear merits in notebooks, and clear merits in blade servers where people don't have to retool their data centers, and I think that will have clearer merits in consumer PCs over time as a result of the form factor discussion. In addition we are launching our first platform brand for enterprise focused on manageability and that will come out in the second half of the year; at the same time as IT shops will be looking at Vista ready purchases. So I think that overall we have a pretty compelling list of attributes to bring to market in '06. Okay. Great. And then, I guess on the memory side. I've seen you kind of take a variety of strategies, you fund other companies that do development, you do JVs now and you also have your NOR piece internally. Longer term is memory a piece that you are going to continue to treat multiple ways? Or is it something you want to get off your own books going forward? Or how do you think about memory longer time? Putting a lot more on, effectively our books with the NAND joint venture. That's a pretty big bet on NAND and we intend to be a number one, number two player over the course of that entities existence. Is that the structure you are going to favor more going forward is JV rather than, just tell me the whole thing. No, I can't say that. This was a very opportune deal and the partner, the two-parters were melded nicely with the right attributes and time to market capabilities. Got it. The last question. You made a comment earlier about spending around platforms. Do we need to think about platform spending as an overall higher spend per desktop server, mobile, et cetera and the hope is that, we do with Centrino, just a much bigger revenue pie from that. Is that how you think about it? Yes. I think I explained it in the last analyst meeting in terms of the Centrino model, but it's, in theory it generates a higher ASP for us, a higher build of materials presence for us, faster market expansion for us and our customers, and everybody wins. We would like to thank everyone for listening to today's call. A recorded playback of this call will be available at approximately 5:00 p.m. Pacific Time tonight. Those interested should dial 1-888-286-8010 and reference passcode 76055708. Thank you. Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. The Cody Report is a monthly newsletter focusing on trading and investing as the Internet and the wonders of tech change the world around us. It's written by Seeking Alpha contributor Cody Willard, a partner at a buy side firm who writes a monthly column about the Digital Revolution for the Financial Times and a trading blog on TheStreet.com, and is an adjunct professor teaching a class at Seton Hall University about the market, media and technology. Read more about The Cody Report, read a sample issue, or view Cody Cam clips about the market, media and technology. Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and link to www.SeekingAlpha.com. All other use is prohibited. 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_233924

Good afternoon. My name is Ramona, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cadence Design Systems Fourth Quarter 2005 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be question and answer period. If you would like to ask a question during this time, simply press “*” followed by the number “1” on your telephone keypad. If you would like to withdraw your question press the “#” key. I would now like to turn the call over to Jennifer Jordan, Corporate Vice President, Investor Relations. Please go ahead. Thank you, Operator, and welcome to our earnings conference call for the fourth quarter of 2005. The webcast of this call can be accessed through our website, www.cadence.com and will be archived for one week. With me today is Mike Fister, President and CEO, and Bill Porter, Senior Vice President and CFO. Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations. For information on factors that could cause a difference in our results, please refer to our 10-K for the period ended January 1st, 2005 and our 10-Q for the period ended October 1st, 2005. In addition to financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Please refer to our earnings press release for a discussion of non-GAAP measures and to both our earnings press release and our website for reconciliation of GAAP and non-GAAP financial measures used in today's discussion. Thank you, Jennifer. Good afternoon and thank you for joining us as we discuss our performance in the fourth quarter of 2005. We had a terrific fourth quarter. We reported fourth quarter revenue of $378 million. On a GAAP basis we earned $0.08 per share for the period. Non-GAAP EPS is $0.29 per share. Operating cash flow for the year totaled $426 million. Verification was stellar. Customers are adopting our enterprising methodology, including hardware emulation. In fact, hardware emulation had its strongest quarter ever. Digital continued to build on its great momentum. In December we lost the third tier of our segmented digital solutions from counter GXL targeted at the most advanced design. Also added solid, sold all, first kits during the quarter and as we anticipated, the response to kits has been very encouraging. On Monday we introduced the first solution from our katina incubation, the Cadence Chip Optimizer, adding to our growing offerings as a design for the manufacturability, along with VCS and RET. Now let me give you a few highlights from the quarter. During the quarter we had both global customers and broader based customers choose Cadence as their enterprise partner. They are making this choice because our strategy and solutions better align with their demands for technology, efficiency and productivity. This was added in Freescale's decision to build an enterprise level partnership with us. Freescale was looking for the customer that had the breadth and depth of technology to help them create a standard design and mirrorfication methodology. This allows them to reduce internal support costs, simplify the rollout of new technology companywide, and deliver the most innovative and compelling products to their system level customers. Their customers now require that Freescale not only provide chips for end-use systems but also related embedded software and interface technology that goes with them. Building on a strong foundation with Virtuoso, Freescale added the full encounter platform and our prices, enterprise verification to constitute complete design environment. Their decision will result in major proliferation of our technology, beginning with enterprise verification. We have begun to build a bridge to the adjacent systems and software market with our enterprise approach to verification. In the fourth quarter global accounts that have adopted our enterprise verification methodologies were rapidly proliferating our solutions. For example, ARM committed to Cadence's incisive enterprise solutions, selecting both of the enterprise specon simulator and Palladium II. The combination speeds ARMs times to verification closure and enabled ARM to meet their aggressive customer commitments with confidence that their IP will function as intended with the customers software and in the end system. Texas Instruments extended an agreement, giving them multi year access to our leading technology of both hardware and software design verifications, including our latest Palladium platform. ST Microelectrics deepened its Cadence relationship with a worldwide deployment of hardware emulation and acceleration solutions, choosing both the Palladium and Xtreme server platforms. Several of these customers served to tell us communication system design chain. They've begin to see value in having a consistent verification methodology throughout, that design chain, in order to minimize risk for their systems and customers. The advanced level verification methodologies proliferating our global accounts are increasingly adopted in our broader based accounts as well, and now that these customers are tapped into a more complex design. And the fourth quarter, these accounts stepped up their usage of our enterprise and design team solutions. They added process automation capabilities, which pulled additional simulation sales and drove competitive simulation displacement. We continue to have excellent momentum in digital where the strength of our technology differentiates us from the competition, particularly at the most advanced process nodes and on the most advanced design. During 2005, in order to better align our technology with our customers' needs we segmented our digital product line around design complexities into the entry level L and mid tier and counter XL. In December, as promised we introduced Encounter GXL, for our most advanced solution for designs of over 100 million gates incorporated power and yield aware technologies. We already see solid results from product segmentation. For example in the fourth quarter, Fujitsu announced that it has adopted our most advanced solutions using our complete Encounter GXL platform for 65-nanometer internal reference design flow. Fujitsu made this decision because on account of GXL's ability to handle new design challenges such as yields, process variation and linkage power. Product segmentation also allows to us compete successfully at the entry level as well. This was demonstrated in Q4 when Encounter L was a perfect fit, in terms of price and performance for customer's 0.25 and 0.13 micron mixed signal design and displaced a competitor. Encounter has received best in test award from Test and Measurement World magazine, and we announced collaborations with Spark, an atv provider as one and validated flows for test and yield diagnostics. The market is also recognizing the value in our kits approach targeted to key verticals. We were awarded the Editor's Choice Award For Portable Design for our AMS methodology kit at the consumer electronics show. Our substantial customer relationships with leading consumer electronic companies led to a strong initial presence at CES. There are four early observations on kit adoption. Customers choose kits when they are planning to enter a new market or they are new to a type of design, like maybe RF or they want to improve their existing methodology and drive consistency and efficiency across the company. This is especially true in analog mixed signals, and or they are accelerating the rollout of new technology, such as the ARM core to their design environment. We released the RF methodology kit in mid-December and have several more kits in the pipeline. I will be anxious to tell you more about kits' progress on analyst day. Our leadership in customized and silicon package board as a differentiator for customers who seek an enterprise level partner. During the fourth quarter we saw several customers choose Cadence on the basis of the way our custom and digital platforms perform together. Inter symbol communication, this is a supplier of ICs for optical networks and a veteran of analog design, deployed RT Compiler XL and Encounter L within its Virtuoso mixed signal flow to achieve higher design productivity and better quality silicon. In customized-c we will introduce Virtuoso 6.1, which will include advanced routing technology and take advantage of our latest features in open access in mid-'06. Our leadership with open access continues to be a substantial point of differentiation. And in Q4 it drove an important customized q-win, in a major North American semi-conductor to our company, that has been a long time customer of a competitor. Amcore is a contract manager for leading edge package solutions chose Cadence for Allegro package design tools for our ability to work with them on a new system and package technology. They can use this to enhance their package zone as well and reduce their cycle times and costs. We will introduce our new system and package solution and related stiff methodology kit in the middle of the year. More than a dozen major companies are now evaluating the Cadence physical verification system we announced at CDM live in September. Several are already committed for production deployment; obviously we are competing well across some of the traditional benchmark. We have also made investments in radical enhancement technology which is unique, because we are driving the litho modeling up into the Virtuoso design flow. And this week we announced the first release from our katin, excuse me katina incubation, called the Cadence Chip Optimizer. Its capabilities use after-place and routes, but before case out to improve the yield, manufacturing and performance of complex ICs. The solution is already had production success with API displaying it on more than 10 IP designs including the graphics processor inside Microsoft Xbox 350. IBM said, and I quote, " Cadence Chip Optimizers perform flawlessly on our 65 nanometer microprocessor design methodology. The truly collaborative partnership we have with Cadence Chip Optimizer team for the last three and a half years has been an ideal working relationship. The extensive time we spent together understanding and addressing the design per yield and manufacturing challenges was key. We achieved closure to our design goals on schedule in an automated and predictable manner." To summarize, we told you at the beginning of the year, that our strategies to expand in adjacencies, such as verification and manufacture abilities that offer incremental growth opportunities. For our core design business through technology, innovation and to pursue new business and product re-models. Throughout 2005, we delivered on the strategy, laying the ground work for future growth and market expansion in '06. Our goals for the year to continue to make our customer’s lives easier to grow media and beyond, and to demonstrate operating consistency. In executing these goals we expect to grow revenue, operating margin and cash flow again in 2006, so I'm going to let Bill tell you all about that. Thanks Mike. Cadence completed a very good year with strong financial results in Q4. Revenue, profitability, and cash flow all met or exceeded our expectations for 2005. Total revenue was up 11% for the year, non-GAAP operating margin improved two percentage points to 24% for the year, and operating cash flow of $426 million exceeded our $400 million goal. Book-to-bill seeded one for the year and we finished the year with a backlog of $1.8 billion in line with our estimates. We expect backlog to grow again in 2006. We finished the year with good momentum, our product portfolio is very competitive, our new initiatives such as kits and segmentation are starting to ramp, and our enterprise approach to doing business is helping customers meet the design challenges. Now, let's review our results for Q4 as well as the year. GAAP earnings per share for Q4 were $0.08 compared to $0.20 in the same quarter last year. For the full year of 2005, GAAP earnings per share were $0.16 compared to $0.25 in 2004. On a GAAP basis operating income was up 42% quarter-over-quarter and up 14% year-over-year. And in December 2005, Cadence received an extraordinary cash dividend of approximately $500 million from a wholly owned Irish sub, subsidiary of the Company, repatriating certain foreign earnings pursuant to the American Job Creations Act. We recorded an incremental tax liability of approximately $30 million, which is, which reduced GAAP EPS in the fourth quarter by $0.9 and in the full year by $0.10. Non-GAAP earnings per share were $0.29 for the quarter, compared to $0.26 in the same quarter last year, up 12%. For the year, non-GAAP earnings per share increased 26%, to $0.83 from $0.66 in 2004. Total revenue for the fourth quarter was $378 million, compared to $343 million in Q4, 2004, up 10%. Product revenue was $258 million, maintenance revenue was $88 million, in services revenue was $32 million. Revenue for the year totaled $1.33 billion, up from $1.2 billion in 2004. Revenue mix by geography in Q4 was 42% for North America, 20% for Europe, 26% for Japan, and 12% for Asia. As you can see from our geographic revenue mix, it was especially strong quarter and year for Cadence in Japan where we continued to consolidate with our major accounts and increase our penetration at our other systems and semi conductor companies. Overall we saw a good level of business in all geographies in Q4. In Q4, one customer accounted for 21% of revenue while a second accounted for 12% of revenue. For the year, no customer accounted for more than 10% of revenue. In the quarter approximately 74% of our product business was represented by licenses, for which revenue will be recognized over time. Approximately two-thirds of product revenue was generated from backlog in Q4, and for 2006, we again see, we can expect to generate approximately two-thirds of product revenue from backlog. Contract life calculated on a dollar weighted average basis, was approximately three years. Q4 total costs and expenses on a non-GAAP basis were $257 million, up $3 million from $254 million in Q3, due to seasonally higher incentive compensation. Non-GAAP operating margin in Q4 was 32%, up from 30% in Q4 of 2004. For 2006, we're looking for non-GAAP operating margin of approximately 28%. Year-end head count was approximately 5,000. Receivables quality remained high in Q4, with receivables of 90 days past due at 1%. Within our historical range of 1% to 3%. Total DSOs were essentially flat at 92 days, compared to 90 days in Q3. We expect DSOs to settle into the mid to high 80s by the end of 2006. Operating cash flow for Q4 was $177 million, compared to $139 million in the fourth quarter of 2004. For the year, we expect, or for the year we generated $426 million in operating cash flow, exceeding our goal of $400 million. Capital expenditures for 2005, were $72 million, yielding free cash flow of $354 million. For 2006, we expect to generate operating cash flow of at least $425 million, while capital expenditures should remain in the range of $75 million. Cadence repurchased 6.2 million shares of stock in Q4, at a cost of $101 million. Cash and cash equivalents grew to $861 million at year end from $619 million in Q3. As many of you know FAS 123R requires expensing of stock-based compensation. For 2006, we estimate pretax stock-based compensation expense of $100 million. Our non-GAAP measures exclude this item. Now, I'll turn to our outlook for Q1 and the year 2006. For Q1, we expect revenue to be in the range of $315 to $325 million, reflecting the normal seasonal decline from Q4. GAAP EPS should be in the range of $0.07 to $0.09 and non-GAAP EPS in the range of $0.19 to $0.21. For the year, 2006, we expect revenue to be in the range of $1.4 to $1.45 billion. GAAP EPS should be in the range of $0.47 to $0.55 and non-GAAP EPS in the range of $0.96 to $1.04. I also want to give you a sense of what the seasonal pattern will be in 2006. We expect to generate 22% to 23% of annual revenue in Q1, 22% to 25% in Q2, 23% to 26% in Q3, and 28% to 31% in Q4. Other income and expense for 2006 should be in the range of $38 to $42 million and approximately half of that amount should come in the first quarter with the remainder spread roughly equally over the last three quarters. So, as I look at our results for 2005, I'm pleased with our consistent financial performance and the great strides we've made in offering our customers the broadest and deepest set of design technologies on the market today as well as introducing innovative new approaches with segmentation and chips. We are better positioned than ever to pursue our strategy of becoming a true enterprises level partner to our customers. Operator, we'll now take questions. Thanks. Good afternoon. A couple of questions around backlog and bookings expectations. Bill, would you be willing to describe what you think your year-end backlog might be in 2006, versus the 1.8 billion you finished within 2005? Also by comparison to 2002, 2003 for yourselves and the industry, how much better do you think EDA and the, the R&D spending environment might be versus three to four years ago? And there's been a few years of rip, as R&D spending improvement, will that necessarily translate into commensurate increases in bookings or run rates somewhere you were two to three, and three to four years ago? Sure, Jay. In terms of the backlog estimate, I guess we said I expect to grow our backlog again, and it will be either in the $1.8 to $1.9 billion range. I don't think I will make a point estimate. And the reason I think we are continuing to grow value so it's not for us just getting to a certain size. It's trying to get the value to the customers and get kind of the appreciation for that and so that's why we were working the pricing piece of it. And the selling model that the team is working on is just incrementally adding that new technology to the customer. So it's better to kind of get it in when they need it; they recognize the value this trying to lop a big point of it on. In terms of the environment, I think we've seen pretty consistent R&D spending over the last couple of years. This year, again, I think it was, we expect to see R&D spending at least in the industry, of kind of upper single digits. 7% is what kind we have seen as a core over the last few years. I don't think that's going to change. It varies a little bit customer to customer. So I think that's pretty steady and if anything, I think the tone of innovation is continue to pick up which I think is just healthy for what we are seeing. Would it be fair to assume that in 2006, you finally get back to or surpass your last best bookings year which was 2002? Well, I don't think we want to, we always go back and forth on that. So I think we'll continue to grow the business. We're having very good success, but I'm not going to pick a point target for that. And then finally, for Mike, are you, in fact, seeing with the kits and the segmentation, the price yields that you hoped for out of the strategy? In other words, with your kits you know there's effectively no difference in principle between the price of a kit versus the a la cart approach to buying the product. I wonder if that's really the case in practice and whether the segmentation is, in fact, yielding the feature-based pricing differences that you have been counting on. That's a good question and I think it's probably still a little bit early days, Jay. We definitely, I'm very encouraged by the early results, been concentrated in North America for the sales, and so I would like to see, I think both Bill, and I would like to see the world's view of those, because kit applicability extends nicely into some of the emerging parts of world, where the intellect is high, and the experience can be bolstered because of the kit-oriented approach. And so we're kind of collecting data but I, I think we could unilaterally decide that we are seeing a pull through across the product for the kits. And that, that's good. And it’s, and it’s, bolsters the breadth argument that we make for the Company, and I think it's going to be very powerful for us in the broad base of customers. Good afternoon, and congratulations on a very well executed quarter. Turning to the geographies, AsiaPac was quite strong this quarter, almost doubling sequentially and I think it's, looks like a record quarter for that particular region. I’m curious to know which geographies were particularly active and for what end markets segments were some of these semi conductor companies targeting? Harlan, we're continuing to see if you look at our geographic breakdown, success in Japan and I think there’s a combination of factors. We have a very good set of technologies and we have a very good team there. That's one thing that's going well and I think the second thing is we are seeing the economy and particularly technology spending continuing to increase with the large electronics companies in Japan. And so I think it's just kind of our technology is fitting in real well and we are executing real well. So I think that's the biggest piece that you are seeing in terms of growth in Asia Pacific. And I think we are starting to get some momentum also in the other Asia areas but it's not showing as dramatically in the results. It's still early days. Well, I think that we just, we'll cross the, we're seeing good business in both US. and in Europe, in general and I think we're clearly seeing the impact of some of the large electronics companies in India, primarily and we are doing very well with the large electronics companies, some of the success, for example, we've had with STTI, other companies we have talked about; a lot of that also goes back to the success that we are having with the teams in India. And so that, on its, on its own, its really being very helpful for our total business. Okay Great. And then I know that you paid particular attention to this on the call, but the EDA vendor consolidation within the semi conductor industry just it may be becoming much more pervasive here, and other free scale deal your announcing queue far obviously been a very good example of that. We ourselves are hearing more talk about vendor consolidation, just I’m, talking with some of the 30 or so semiconductor companies that we cover. So I guess my question is that in addition to the IBM, are you seeing a similar trend amongst the established semiconductor companies? And then I guess as a follow-on, how much do you think the industry consolidation will be contributing to your bookings growth over the next couple of years? Yes, we, Harlan, it's Mike. We definitely have got some. They're hard to testimonial, but your intuition is right. It's across IBMs and established companies. And we have a kind of cost and flow of testimonies from companies like ATI, as you can see. We have targeted relationships for some of the new technology entrees like the Data Chip Optimizer with them, as well as the IBM, as well as IBMs and we do an awful lot of work with the foundry, our foundry partners. So I think that, that phenomena of cost savings may well be crystallized by the established companies. In other words that's a way of differentiating themselves from the IBM as a much more efficient way to operate, and that's a lot of the catalyst. It, both trends bode well for us. I think we're very confident of the breadth of technology that we have, and our size and financial scale makes us very partnerable and dependable when someone makes that big of a bet, whether it's a big company or a small company. And I appreciate you noticing the Free scale engagement. We spent a long time doing that and making it sure that it was going to be good for both of us and we were well engaged in many, many more conversations like that. Okay. Great. And then one more product question. I think as you mentioned on the call, Palladium has been, I think, continues to be, a very strong growth driver within your verification platform, and I know you can't give us revenue contributions from Palladium, but can you give us a sense of how this product segment actually grew in 2005? Well, certainly it grew faster and we said that we had just an absolutely great quarter for verification as a whole. The Palladium, business, is obviously strong. I think what, in my mind, as we called out that adjacency and kind of we show the value of the, of the rest of the acquisition that we made, what you really see is the continuum of technology from base simulation all the way through emulation. The spectrum product adversity has is very strong and it's a drag effect for emulation as emulation is a drag effect for that with the process automation platform. So it's really, I know it probably sounds like a cliche but it's a very good complement of those technologies working together, and I think one other element of Palladium, and we are always going to harp on this but since it's been probably our best example, segmentation is valuable. We have gotten good segmentation results, and upsell, coming back to Jay's question with Palladium, to Palladium II and now dragging across the Xtreme product line, and so it is a very good demonstrable because you can see one that's smaller or sleeker or more capacity and it's very easy to quantize the differentiation in the product. So that's what, we're watching it for all three of those dynamics, but the most powerful one is verification as an adjacency, it's a growth opportunity for the EDA market in general. It's certainly a huge growth opportunity for us and all throughout 2005, I think we could show that very quantifiably and it’s going to continue through '06. I think it is going to go faster. Yes, it sounds like it. Thanks for that, Mike. And then one last question for you, Bill. I think you said that other income, net in the first quarter is going to be on the order of $19 million to $20 million, is that correct? That's good math, Harlan and the answer is yes. We see a liquidity event for one of our investing companies and that going to be some extra cash that going to come to us in Q1, so we wanted to make sure that everyone was aware of it and always a nice thing to have. The other thing that's going to be generating very solid other income for us is interest income, because of the size of our cash balances. So that's pretty steady. We just want to make sure that everyone realizes that that's there for the year and we have a little bit of extra income that we are going to be able to take advantage of in Q1. Hi, thank you. Mike, can you talk a little bit about the R&D intensity of this business, and whether or not with a lot of the activity that you have in that domain, you think there is, in fact, a real opportunity to decrease over time spending in the R&D line, and this, I guess fundamentally, my question is driven by the observation that margins are now pushing up into the upper 20s, historically, none of the big companies have really run much above 30 and I'm curious if you think, I know it's early Bill, but if you think you can , you have an opportunity to push margins past 30, at some point, and what might allow you to do that. Well, Raj, many of you guys have gotten to hear Jim and recently Moshe kind of come out and showed you some of the programs. And I think those are very engaging, because you see not only passion but you see intellect behind them. I think there's an awful lot of leverage behind what we do. That's one of the reasons why we have driven the team, both in construction and focus to be internally innovative and hopefully the katina technology debut and the Cadence Chip Optimizer is just another example of a very powerful combination we have between our internally developed products, whether it's in the base machine or ,or through the incubators and you even begin to see more leverage out of the academic stuff that we do with the Berkeley labs and such. And that, itself, is a catalyst for us to be able to go and really, I think, take the Company to another level of leverage on the development dollars. And the, the cast of characters that we have across the Company from the base technologists to the management teams are incredibly focused on demonstrating that, and really kind of strutting our stuff. I think that's what leadership companies. Bill, do you have a comment on the operating margin? Yes, Raj, I do think, in our next milestone is 30, but I don't see that as the end point; I do see leverages, Mike does. In development, I think the leadership is looking for opportunities there and we'll find it. The technology that Mike referred to with Cadence Chip Optimizer was very, very efficient, as well as going to be very good technology and we're learning things from Jim Moshe and from experiences like that. So I think 30 is the next milestone but don't look at that as a cap. And you'll see us, as we develop that experience, we'll be able to give some estimates over time, but I think now, just know that there's place to go beyond our next goal. Hey, Raj, one more point too, I think you shouldn't overlook the sales and marketing team that we have. We have, I think, arguably the best sales and application engineering force in the industry. It's a huge force. We team that with the marketing and the strategies around segmentation and kits. You know that there's a lot of leverage in the applications engineering we think, because you don't have to have application engineers do you the program over and over and over again for every customer. And several members of our leadership team are focused on demonstrating that as well, since it's such a huge component. So I like our chances to be able to continue to demonstrate efficiencies across the whole functional elements of this Company. Could I ask one more if I might?. Could you talk just briefly about your strategy? We talked a lot about China and India and some of tease emerging markets. Can you talk about your strategy to develop those markets, particularly in the context of these kits? I know they are sort of less mature than the design community, certainly in North America or in Europe. Can you talk a little bit about how it is you are going to take advantage of what looks to be real secrope over there and long term, probably a lot bigger dollar opportunity? Yes, and I can never say anything briefly, but I will try for a second. India, China emerging geographies in general, I think are a great opportunity, and whether it's the IBMs and the multinationals going over there in Greenfield spaces. Those are opportunities for us. And I think as you point out, as we're talking before, the fabless community in general is a huge opportunity because it is a seed expansion and it's a place where the people are tremendous intellects. I mean, master's degrees, Ph.D.s are commonplace without tons of practical I will say, experience quote/unquote for having developed a wireless chip or whatever their target focus is. The sub developments in China represent huge opportunities around consumer electronics, automotive electronics and across all of those geos, it's all very, very good. So the thing that bridges that gap is the kit orientation, because you take the foundation what we've got and you take the methodology and then people just use it. They don't have to redo it. We are going to exploit that distribution-wise by a combination of three things, one, we're doing some stuff direct. We're doing that in the big opportunities, the big customers, with sales and application engineer forces as you are used to seeing from us. Then, we're doing it through an alternate channel as Kevin calls it, which allows to us take more advantage some of the value-added reseller base and we are doing that first with the most mature technology like front circuit board and then moving upscale and I think low-end digital is a good opportunity for that next. And then the third thing, we're going to pile some other models. We have talked a little bit about some kind of a, ASP models that allow us to be able to support software environment with also application support, that I think could be very engaging for that part of the world, so once again it bridges the gap, and sometimes these people want to spend money a little at a time as opposed to in big gulps. So, it's a complex strategy with lots of moving parts but I think your intuition is right. We see it as an opportunity for growth. It has to be packaged that way and I don't think doing whole drinkfuls is going to be the way to get the most effective leverage out of it. And I think we have got a good component of both technology and approach that makes us a good, a good possibility for, penetration. Significant penetration. Hi, thank you. Good afternoon. Bill, just a couple to start with for you. I believe you guided for operating cash flow in '06, about 425 million if I'm correct, this is about flat year-over-year but you are guiding to about 400 basis point of operating margin improvement in '06; can you explain why you expect of cash flow to be flattish? Well, I think Tim, what you are seeing in the past, if you go back the last year we started at least at 400 million and delivered 426. So the same thing, when I start at 425 this year. There's always a little bit of variability in just getting structures and cash, but I would expect to see the similar kinds of leverage that we got in the past, just, I guess, same thing as we started last year with top line, I think we were looking at about 6% or 7% growth and we did better obviously. So I would like to do the same thing with cash flow. We look for growth, but I'm keeping my, as a least saying, we should at least do this and hopefully we'll better. Okay. Fine, that's great. And on your guidance, I think you said in the past, you expect to grow the top line essentially in line with R&D in the industry, and then add about 2 or 3 percentage points on top from adjacencies over time. Looking a guidance for '06 and the fact that you mentioned R&D should be up around 6% or 7%, are you being a little conservative around the adjacencies and how much that's going to add to '06 or are you just assuming R&D's going to be a little below that 7% range? I don't think R&D's going to be really significantly below that range, the things that I have seen or that going to be in the 7% to 10% range, depending on where you see the analytics. What I think you will see is a bit of conservatism and we do want to make sure that we spend the time to develop some of these opportunities we have. And like we did this year, I think you will see that we should be able to, by some of the strength of the technology, have a number of wins in 2006. So I think you will see us be able to at least grow with R&D, and probably a little better than that. But this is all about for us execution and we want to see consistent execution, quarter on quarter, year-over-year. So I would rather have a little bit of conservatism in there and show you based on the customer examples how we are adding value and just growing the business and hopefully a little faster than we started out the year. Tim, I think there's real learning and in the analog of growing the value-based business like we have done with some of our big customers, there's an analog to realizing the value of the segmentation and kits, the same way and so we probably are factoring in a little bit more learning or a little bit more time for conservation there, but, boy if it was anything like we were able to demonstrate in '05, as Bill said, we kind of started off one place and ended off in another. There's no reason why we shouldn't be able to do that again, and I, I, we stand by our model that we have for the adjacencies and for the innovations that we have around the marking approaches being growth components above the R&D average spending line. Okay. Thanks for that and just one for you, Mike, if I could. You made reference in your prepared remarks about custom IC win that I believe was competitive displacement, and you suggested it was driven in part by open access. And I was wondering if you could just elaborate more on the deal, how it was that having open access gave you a leg up here, and do you expect other deals to come in and competitive displacements because of that, that partnership? Very good question, Tim. The, we enjoy very nice market segment penetration with our custom IC capabilities, and there's translating a few places in the world where we were not the incumbent and this is very impressive to me, because this was one of those. And open access, I think, is always one of the most forward looking things of the Company had done as I came into it and we're going to continue to drive that mantra and with big customers like this one and a few of the other components of it, it's a way for EDA companies to walk the talk of an ability to cohabitate for leverage tools that they either develop themselves or natively develop capabilities or maybe a few that are supplemented from other suppliers. And so this was one of the last actions where we really were demonstrating that and they've seen what we were doing on Virtuoso 6.1 and it was just incredibly encouraging to them. And as you could tell from the prepared remarks, there are customers of ours across some of the other digital and so they, the ability for those things to interact seamlessly, predicated on open access really delivered on every intent that we had ever made with open access and I think that other of our colleagues, competitive colleagues in the industry are going to try to emulate that strategy. Certainly if our big customers are any barometer, they want us to be able to be that way. And so we’re going to go follow through on it. I think the team is doing a nice job. I can't wait for to you see the Virtuoso release in the middle of the year. It's very impressive. I mean the early feedback from the customers is nothing short of glowing. So that's a the simple matter for open access. And, Tim, just one other, just point of clarification for the cash flow, operating cash flow, is with the dividend that we're having, we are going to be paying a tax of around $30 million in cash in the first quarter. And so that's another item and we will absorb that and move forward. But, just so you know, as you look at your modeling, that's one of the things that's also included with the '06 estimate. Hi, Bill, thanks for taking my questions. Just on the free cash flow, you said that DSOs are going to be down this year. Tell me what we should think about for CapEx. Is it going to be roughly flat or up from these levels? CapEx should be relatively flat, Vishal. We have been estimating around 75 million at the beginning of this year, we came in at 72 and I would think that that level, we are in that 75 million range, and its going to be continual. We're still investing and growing particularly outside of the U.S. in infrastructure, and so I think that will continue at about that same level. Okay. So a question for you or for Mike on uses of cash flow because I'm looking at what you accumulated on your balance sheet, roughly 820, by my calculation, you can generate another 400 million with relative ease this year, if you make plans. So any thoughts on, on prepared to see the buyback or whatever else you have for uses of cash. Great Vishal, I think what you saw in Q4 was that we did do some repurchase to the tune of $100 million, and so I, in the past year, I think what we have said is, yes, let's build up a little bit of cash balance. We will look for opportunities to grow the business and we'll continue to evaluate repurchase opportunities. So we, I think we did all three with varicity through the balance and system repurchase. And I think you will see us do the same thing in 2006. We have about $20 million left on our authorization for repurchase, and we're planning in our next board meeting to revisit that and to ask for additional authorization. So we're very comfortable with generating cash and think we'll put it to good use in the business, as well as repurchase is, as we see those opportunities ahead of us. Just last question, on the margin improvement you said that margins beyond 30% is doable for you. I just going to question you a little bit to see, what's a, sort of minimum level of margin improvement we should expect on an annualized basis? So just to get to the 30%, is it something that we can look forward to in '07, or is this kind of a, a more close to 50 to 100 beats a year? No, I think the, our near term objective of 30% was kind of an '06/’07 thing that we had talked about last year. So really, since we should get to 28% this year, it should be definitely in our sights for '07. I would be disappointed if we didn't do 30 plus in '07. Thank you. Just to revisit the vendor consolidation. Congratulations on the win at Freescale. On One concern I have heard raised about this type of deal is that as you, sort of these large customers are looking to reduce their overall spend on EDA by reducing the number of vendors and then gaining sort of price concessions with the remaining large vendor, do you feel like, one, there's the risk of sort of potentially shrinking the market as these deals happen, and do you feel like you held the line on pricing in Freescale? Do you have a hold on that thing? Yes, Rich, it's Mike. I think both Bill and I have been very outspoken that we would like to project and then realize value in the engagements with our customers and I don't know who will speculate, but I will tell you that we, that we mean that when, we meant that when we say it and I think while we can't disclose the details of it, we'll find that it's more of a TCO argument, like, total cost of ownership in the IP analogy as we've often used and that's why the discussion is protracted. I think that Freescale is an example of a very forward looking management team, not just predicated to try to reduce costs and kind of beat someone into submission, and they had the same kind of mindset as we did. How could we pick a partnering opportunity and turn it into a foundation that we will build on? I'm very confident that we are not only going to be able to talk about what we are doing today but that we have a lot of green field space to build on top. And that was our intention. And I think it was the intention of our customer and it bodes well for the industry. That same way that happened in the IT industry. And so I think this is much different than may have been happened a few years ago when it was kind of dog eat dog and people would do anything to get a point of market segment share shipped. It is just not our, our management mind-set and I think the breadth of our technology, really enables us to be able to do that. So you've got to, a rare combination of management and pen both sides and technological, bulk. Don't miss the fact that I think we are a very dependable partner by our financial strength and brass of support, too; and most of our customers like that are worldwide, we are worldwide, and they are expanding and we are expanding and it's a very kindred relationship that allows us to do it and I think we'll be able to demonstrate and improve value for us and for them and that will grow the industry. Yes, Rich, I would just like to add, this is Bill. In a lot of the large customers, it is rare that you get something of this size and scale that you do of Free scale at one time. There's a few of those, and so the majority of the business that we are doing is adding incrementally to our customers' capabilities. And so in adding to their capabilities at ST, TI and there we're adding capabilities when they see the value and when we see the value. So I think there's a lot of work that goes on across the whole large end, growing customer base to add value and it's not just these big, the concept of big contracts. I think that's a relic. That's helpful. Thank you. And if you could just maybe give an update on your new DRC to PBS, I know it's still fairly early. But anything sort of new to report there in terms of any progress made? Rich, a good question. Obviously, something that we're proud of it, we debuted it in September, more than a dozen different customers in various stages of evaluation. Just closed somebody who's consolidated on it across their whole designing continuum. My comments said if we obviously benchmark very well that's because I'm reading from some of our competitors that we don't benchmark worth a darn. Come on, guys. I mean, why would we introduce something like that? So it's, it's something that we are in no hurry to, to try to devalue, just to be able to have a competitive displacement, because you know that the foundation of that product has got a lot of head room in it. And so I think that's characteristic of a lot of the design for manufacturability penetration. You have to do these with big companies or targeting companies that have got a lot of influence in their manufacturing element, you do that in partnership, and we're, our motivation is to do it and demonstrate for the long term and we started with TBS. I'm very excited about the Cadence Chip Optimizer. You could see that was in place in demonstration evaluations three and a half years with one of our big customers. And if anything, I hope it answers a little bit of, are we missing in action in DSM? I don't think we are. I think we're extremely calculated about how we're approaching that with our customers and in the long term, it will parlay very nicely for us. Thanks. Hi, guys. A couple of questions. First, Bill, can you walk us through a little bit of how this term loan that you took for the dividends is going to work in terms of, is there interest expense that will flow through the income statement on a quarterly basis? And then just the repayments of it? Sure, Sterling. So in terms of the repatriation, we did see the opportunity to get a little leverage, so we could take $160 million term loan out. It is amortizable over three years. You should see us pay it off at least in two, if not earlier, just because of the strong cash that it will generate. And there is some expense. It's, I think, a pretty competitively priced loan, but that's already included in the other income and expense estimate I gave you. So it is not that significant and we'll easily be able to absorb it through, actually additional cash that we'll generate off the balance sheet. There's a little bit on top of LIBOR. So like I said look for us to pay that down quickly, but it's, we think it was a good choice, the repatriation cost is 30 million and if you think of the normal tax rate we probably saved $120 million, so we'll probably save as much as we are going to pay on the loan. And one other housekeeping, what, I didn't quite catch it, what should we think of in terms of tax rate for '06? I think we should be very consistent with our 26% non-GAAP rate. That's kind of our long-term rate, and back out a lot of the non-tax charges like amortization. So that's very consistent, and we don't see anything changing in the short term there. Okay. And then, Mike, a high level question. Verification was obviously an important driver to growth in 2005. As you look at 2006, what do you think the important growth drivers from the segment basis are really going to be? Yes, I continue to think verification is a, is a key element, strong across the rest of the business and then contributes in those, very important things that we were talking about on top of, I'm going to say, contemporary R&D spending. I like our chances too on some elements of the manufacturability segment. That's why we called it an adjacency is. We are going to be careful or thoughtful about unlocking the real value of that. Because anybody can give it away for gosh sakes and we are not going to do that. And I think there's, really good opportunity in the base of the customers, as Bill said, was saying, kind of ponying on, when we have a significant consolidation with a big or a small customer, that is really a, kind of a launching pad or a diving platform, to expand the business inside those companies and move up their value scale. And high-end digital, all the things that are there still good growth segments for us. RTL Compiler had a wonderful quarter this quarter too. So there's really no one big one but I think we continue to point to the adjacencies and strut our stuff on the physical concentration of specifically EDA and it bodes well for us in '06. This is Eric Grenadie for Sumit. A question for Bill, how much receipts for sale of receivables is embedded in your cash flow outlook for '06? It should be less, clearly, than we did in '05. We used a lot of our international receivables to fund our repatriation, so I would see it, I think, drop a fair amount in '06, but as you probably are aware, about, 24% 25% of our business is up front versus over time. And having that level of business, it makes sense for us to finance or to basically match the cash with the revenue, where we're not able to just work with the customers directly. So that we can just minimize the credit risk. So you'll see it drop in '06 but you will still see it as a reasonable amount of the business. Okay. And just clarification on your, on your outlook for '06, basically on non-GAAP operating expenses. It seems like your guidance is assuming at least, like half of growth on the OpEx segment certainly that’s been half at the revenue rate. Can you just talk us through that and clarify what's going on? No, I think it's very simple. For those of you who know me, that's basically our planning mantra is that we don't want to grow our expenses at any more than half our top line rate. And as we continue to do well on the top line, we look for additional investments. The reason I ask is because in Q4, it seems like your expense came in just slightly ahead of what you had and based on your guidance in Q1 of '06, with midpoints of 320, and that, other interests, income of 20 million, it seems like you are still not going to be able to make a big catch up on operating expenses in Q1. So I'm just wondering if there is a function starting Q2 or, or Q3 or No, you actually see expenses drop a little bit Q4 to Q1 because of some of the seasonality that goes along with incentive compensation. Obviously Q4 is our largest quarter from a business perspective, so we have more incentive comp there, which is a good match. So it will drop in Q1 and then the expenses will pretty much be fairly equal throughout the year. It'll pick up a little bit as we are doing some investments and we talked at our dinner which was web cast in December and we said we are looking at making a little bit more of an investment in some of the areas as opposed to pushing for a little bit more operating margin in '06. But generally, those expenses are pretty well laid out throughout the year. A little bit of the uptake at the end but not much. Yes, thanks for taking my questions. A couple of questions. First, in terms of what you are hearing from your customers, Q4 was a pretty good quarter for the semi industry and Q1 looks good as well. Are you getting a sense of a change in time from your customer that they may loosen up anywhere purse strings this year? I don't think there's anything that's polar one way or the other there's, some of those customers are doing good quarters and some of them are still rebuilding or restructuring or whatever term you want to use, and like Bill said before, we are that kind of I think the just of the analytical community is still in the high single digits for R&D spending. We looked at a five-year weighted average and it's been very consistent and so that's kind of the model that we use, and we are working equally aggressively with customers that are having bang-up quarters and ones that aren't. And I think it's an opportunity for us in both cases because most in that, in technology, where they can see differences to try to continue that or recover from business. And so it's there's no, there's no generic settlement that I can see that says, oh, my goodness, life is going to be great. It's kind of smooth and steady as we go. Fair enough. Now in terms of 65-nanometers what are your customers telling you in terms of your interest in adoption there; are the design paths, kind of slowing the adoption, or do you think it's beginning to accelerate here? I think it bifurcates. There is some of the biggest customers in the industry are moving aggressively to 65-nanometer. Heck, we are doing stuff at 45-nanometer with one of the giants. And saw in the prepared comments, Bill and I, we talked about a testimonial to 65-nanometers. We had quite a number of tape outs and we even had first silicon back on one. And I think those tend to be extremely high volume customers, where they are predicated to try to move forward on the process migration and they have also invested a ton of money in it. I also believe, though, that there's going to be a lot more sustenance at 130 and maybe even 90 nanometers for the analog and mixed signal components. Some of that technology doesn’t migrate very easily and it takes a little bit longer to do that. That's why I wanted to point out in my comments how the segmentation of the digital technology helps. We took Encounter L on a customer back in the quarter-micron, and the seamlessness of the continuing from the most complex designs to 65-nanometer back to 130 or quarter-micron is a value that we have that we have that I'm very, very proud of, and I think it bodes well for us. So, I don't think it all has to be about forward looking process and migration for us to be successful, but in general, if our, the customer sentiment that we are getting is any barometer, they are very impressed with our forward-looking high end, high performance digital, and Virtuoso, everything becomes an analog effect at 65-nanomters, it's not safe to be a wire, everything is in the transmission line, and I think our incumbency in those two and the leverage between them bodes very nicely for us. So, I hope that gives you a little insight. Yes, Stewart, the only other point I would add to that is the manufacturing aware design concept you're clearly going to see at 65 and for sure 45 and the Cadence Chip Optimizer really helps customers when they are getting down to those low levels and that's why it took three years to develop it, but when you hear someone like IBM say that it really helps at 65, you are going to have to have those kinds of capabilities to try to make it work. So that's one of the next thing that customers will need; it's not going to be just do it post layout, like in the past. Hi, good afternoon. Bill, I'm just taking a look here, at the balance sheet, the long-term deferred revenue is up pretty significantly both sequentially more than doubled year-over-year. Can you help me understand what's going on, on that line item? Sure, Matt. Really what it is, we were able to, with some of our customers get some payments earlier in the contract cycle, and so we're going to have some deferred revenue that's going to be coming out in the future. And that's really what it is. We've had, one of the things we do with our compensation is that our sales people get paid in many cases when we get paid so that helps with structuring. Okay. But has there been any change in terms of the overall term or length of the subscription contracts you are entering into this quarter? No, not at all. As I mentioned in my prepared remarks our weighted average contract length continues to be three years. So this is really just a matter of an opportunity to be able to get some cash, and we took advantage of it. It made sense for the customer. It made sense for us. And would you associate this cash with bookings that you received this quarter or even with past bookings that you have yet to collect on? I don't want to get into that level of specifics but we had a very, very good business quarter in Q4 and as you can see, we did pretty well in collections as well. Don't always collect something that you book in the same quarter. Right. Okay. And then maybe, I mean, I know you guys done really give bookings numbers but if you, you gave some seasonality expectations for the top line, what would you expect in terms of seasonality from a bookings perspective, as we move into '06. Should it be pretty much similar with what you have seen in past years, kind of 15ish to the first quarter ramping up to 30, 35 in the back of the year? Well, Matt, as we go through, we indicate about two-thirds of our business comes out of backlog and so about a third of it is something that we book and turn in a quarter. And you will see the same. That's a pretty good correlation between bookings and revenue. So nothing dramatically different than the road map we laid out in terms of the percentages. You wouldn't expect a slower bookings quarter you typically experience in Q1? It would be more in line with the revenue? Yes, I'm looking for the revenue growth and the bookings growth in '07. They both slow down in '06, compared to '05. So, why is that slowdown? I'm sorry, Rohit, we really couldn't hear you. It sounds like you're pretty far away from the speaker. Could you just repeat the question? Yes, Let me try again. When I look at the revenue growth from '05 to '06, that slows down to about 7%, based on the guidance, and given that you said the backlog would not increase a lot , it implies the bookings also perhaps slow down. So why is the slowdown? Is that a newer pipeline for ’06 weaker than it was for '05? Actually, I don't think there's a slowdown. I'd go back to my comments earlier, that, for '05, we started out the year at about 6% top line growth rate, and we ended up doing better than that.Inaudible I think possibly that you are seeing this year in '06, that we are taking a very measured approach and we are hopefully going to be able to do better than that. But I don't expect a reduction or a slowdown in our book of business. Well, and, again, Rohit, when we talked about this concept. I think renewals again are somewhat of a relic. We are continuing selling into our customers. If we go through and talk about some of the results that we had in Q4, for example, the customers we talk about, where we have very good incremental success Inaudible not only , one of our new technology, there was any type of a schedule, it's giving them that value when you need it. And we were able to grow the business over 10% doing that in 2005. So we think that same concept holds for us in 2006. You don't, have quote, the same predictability," but we going to have the same success because we have a very good pipeline of opportunities for us. It looks pretty steady to me, in terms of just when I look at our operating results or non-GAAP results. I will have to just look at that with you. I think it's actually been relatively steady. So And back to the licenses. How much was the term this year and was it about the same compared to what it was for '04 or did it change? The term percentage? The percentage of our bookings has been very consistent. This year, I think on average, it was about 75% for the whole year. Pretty much in line with what our estimates were. Which I think is pretty close to the average we had in '04. Running in that 75% to 80% range. But when you have that percentage, it's additive, so there are some of those customers we have existing business with, and then, so we do have subscriptions and term revenue to add on top of each other to get to those totals. But it's a big customer. You will get a predominant piece, which will be a term on top of level subscriptions. Okay and on the DSM product, how big do you think the market is now, after, like other competitors experimenting with that market for the past two years? It's hard for me to tell the whole size of that market, you're probably better analytically, I think you'll just see us make incremental progress there with our new products both in TBS and RDN and I think just watch out for chip optimization Really been very, very much a function of how people modified it. If everyone tries to give away the capability for whatever they think they can do, if it's $1 million then it'll be smaller. If you monetize it appropriately, I think it's got great growth opportunities in the industry. I wanted to thank everyone for their questions on the call. It is a pleasure for us to do this. I hope that we'll see people come to the analyst day on March 1st in New York City and we'll look forward to meeting you then. Thank you.

EarningCall_233925

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 E*TRADE Financial… …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 CDs, transaction accounts, and the Sweep account… 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. « Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »

EarningCall_233926

Good morning. My name is Luann and I’ll be your conference facilitator. At this time, I’d like to welcome everyone to the Infosys 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 “*” then the “1” on your telephone keypad, if you would withdraw your question please press “*” then the “2” on your telephone keypad. I’ll now turn the call over to the Infosys management team in Bangalore. Thank you. You may begin your conference. Good morning and thank you all for joining us today, for the financial results for the quarter ending December 31, 2005. I’m Sandeep from the investor relations team in Bangalore. Joining us today in this conference and events are, CEO and President Mr. Nandan Nilekani, COO Mr. Gopalakrishnan and CFO Mr. Mohandas Pai along with the other members of the senior management. Start with a brief statement of the performance of the company, the recently concluded quarter, outlook for the quarter in the yearend March 31, 2006. After that, we will open up the discussions for Q&A. Before I handover to Mr. Nilekani I’d like to remind you that anything that we state, as an outlook for the future the forward-looking statement as conjunctions or queries of the consequences (ph). Some statements are extension of these, results affiliated to the filings with the SEC, and found on www.sec.gov. I’d now like to turn the conference Infosys President and CEO. Thank you, Sandeep and a good welcome to all of you to this third quarter earnings call for Infosys for the quarter ended December 31 2005. Let me give you a brief set of highlights after which I’ll request my colleague Mr. Gopalakrishnan to give you some more highlights and then Mr. Pai will give you a peek into the financials. For the third quarter, our revenues on a year-to-year basis grew by 32%. Our revenues for the quarter where 559 million and our earnings for ADS increased to $0.50 from $0.42 in the corresponding quarter in the last fiscal, this quarter was a good quarter in terms of customer additions. We added 36 new customers during the quarter and also good quarter in terms of broadening the base of million dollar customers; million dollars customers went up to 206. This particular quarter we added gross employee addition of 5,135 which on a net basis was 3,226 employees. With this, our employee strength for the quarter ended at 49,422 as of December, 31 2005. Now on the employee front, we planned to continue to add, we expect to add about 3,500 employees for the current quarter ending March 31. And therefore, our total hiring for the year on a gross basis is expected to be 21,200 which is about 1,000 what we had said when we spoke at the last call. We’ve also given our guidance for the quarter and fiscal year ending March 31, 2006. We expect revenues for the quarter ending March 31, to be between $582 million to $584 million which on a year-to-year basis is a growth of, between 27.9% to 28.4%. And for the year, we expect revenues to be $2.14 billion which on a year-to-year is a growth of 34.6%. The consolidated earnings per ADS is expected to be within $0.55 to $0.56 for the quarter, which is a growth of about 17% to 19% and between 2.04 to 2.05 for the year that is $2.04 to $2.05 for the year, which is a growth between 29% to 30%. I think this quarter has been steady quarter, we have had 8.7 sequential growth under US GAAP, pricing has remain stable within upward bias. And I think the important thing is that the, the strategic direction is on track as we are finding a lot of alignment and congruence in a strategic direction all our initiatives in last two years and operational excellence are proving to bear fruit. Here, the big task in Infosys on capability building to ensure that our people has a right set of skills to deal with the challenges of the future. We are confident that this is going on well and our people are confidently getting re-skilled and rescaled for the future. And generally speaking, I think we are on the right track, we think that the global brand is now well-established, we have essentially, we can say, we are now at a point where we are equal terms with global players in terms of mind-breaking mission brand and timeshare, continue to attract lot of board room level meetings lot of business to Infosys at the CEO level. And I think, it’s really the strategic envelope of what we have to do is well-defined is really question of how well and how quickly we execute on what we have to do, and what we have to do is again a very open book for all of you. With this, I request my colleague Kris to continue, Kris? Thanks Nandan and good morning to everyone of you in the US. Let me talk about first, client, we have increased the number of million dollar relationship from 191 to 206. And in fact the $10 million relationship gone up from 48 to 51, we have 2 clients giving us revenue of $80 million, for this quarter it was 1 client. And if I look at the growth, Europe as a region has grown faster than other region. Europe is 24 points, 9% of revenues up from 23.6. Actually, last 12 months, Europe has shown a growth of 51.4% in terms of services many of our new services like package implementation or enterprise solution, consulting, testing, business process management for subsidiary Progeon, infrastructure management, all these revenues are growing and growing faster than the company average. Progeon has shown a growth of more than 100% in the last 9 months. From an industry perspective, banking and capital market, retail, energy and utility services, are the best three verticals, we’ve said growing faster than again the company average. For example, banking and capital markets in the last 9 months was 3.6%, as a pricing as well as Nandan said, we are seeing slight up-tick off-shore revenue per employee and overall as a blended level 0.1% as shipment. The pricing is stable as an upward bias utilization is the 78.7% as in the range, we want to maintain we want to make sure that we have sufficient number of people to accelerate growth as we see an opportunity and that range is around 78% to 80% and that’s the level acreage be on maintaining utilization, excluding trainees. Including trainees at 70%, we have sufficient number of people, each would go through comment infrastructure side also we are making significant investments. We have 3.8 million square feet of based on the construction; we can house another 16,500 employees. With this, I’ll pass it on to Mohan. Thank you, Kris. Folks, I’ll take you through the margins, this quarter. Revenues have been $559 million. Our gross profit has been 43% as same as last quarter even though the rupee had depreciated during this quarter, if you look at the components of cost of revenue the Indian Salary component has gone up from 13.1% to 13.9% what we have done this quarter is to accelerate the hiring for the quarter and that’s why if you look at the fax sheet, the total trainee person months is 15,175 as against 9,518 previous quarter, moving up from 7.4% of total person months for the quarter to 10.5%. It has increased the cost and a part of, a part of extra money that would have made has been put in, accelerating the hiring of people and putting them into training so that we could have more people as we go along, at the cost of revenue side and if you look at SG&A expenses, the expenses have comedown to 13.6% from 15.3% primarily because last quarter we had a provision for doubtful or volume for accounts receivable of 0.4% and now we have a trade of 0.1%, the change of 0.5% and in couple of heads, for expenses, actually expenses have come down. So, we have seen, for the benefits of economists here, like we spoke about earlier outcome, another issue which we would have seen is for our subsidiaries in, subsidiaries namely Infosys China, Infosys Consulting and Infosys Australia, the expected level of profitability has not come up with the budgets that we had and therefore those costs in a consolidated basis has to be absorbed in the parent company. Now our operating income has gone up to 29.4% from 27.7% driven by the version of SG&A and partly by the fact of the rupee also had depreciated at SG&A level. Non operating income, it was 1.9% of revenues previous quarter has come to 0.2% negative, we’ve had a foreign exchange difference of $12 million which have to be taken as a negative in non-operating income line, that’s because we had a increase in the operating income by about $10 million for the beneficial impact of the rupee depreciation and a corresponding negative impact was in the non-operating income line because we’ve had effective hedges to match all of that. The key issues in quarter was the rupee depreciated by about 5% and an average by about 3.7%, 3.4% and the closing rate depreciation was about 2.3%. So the hedges worked both ways for us this quarter, since rupee depreciated and came down. So overall, if you look at what we have done, we have achieved what we should have achieved, we are slightly affinitive of the hiring of people and another important factor you notice is the tax rate, the effective tax rate has come down to 11.2% because of the fact non-operating income which is subject to tax has been negative for the quarter. If you factor that in and the effective tax rate will be around 13.2%. Overall, for this quarter we are going to hire, recruit say at about 3500 people and take out the number of people 21,200 people, so includes, 21,200 people for this entire year up by about 1000 people and we will need to accelerate hiring. Going forward, we see a clear trend of trying to build a deeper bench because now we have about 15 horizontals and verticals and the market has experienced demand in many areas. It also seeing a new trend of clients coming and asking us to ramp up pretty fast, for example, for the ABN AMRO deal we had to have people ready and waiting on the bench for 3 or 4 months before we actually started working, just to make sure that the moment the green signal has gotten we could get to work and ramp up aggressively. Like that we’ve seen many large clients coming to us because they do believe that we have the capability to ramp up, to meet their expectation, in the shortest possible time, that means that there will be a need going forward for a deeper bench reduced utilization rate with a greater flexibility to increase a quantum of revenues that we could get, otherwise we could end up resources constraint if we run a very tight utilization like we are doing. That you very much and we look forward to your questions. At this time, we would like to remind everyone, if you would like to ask a question please press “*” and the “1” on your telephone keypad. We will pause for a just moment to compile the Q&A roaster. Great guys, and thanks for taking my call, Mohan your revenue growth in fiscal ’04 was about 41% than in fiscal ’05 you did 50%. Your sequential revenues growth quarter is adjusting annualized revenue growth somewhere close to the 30%. Do you think that is more of a sustainable growth rate then the growth rate you had over the last couple of years, is there sort of a secular growth rate that you think you are able to sustain in the current range? That’s a very noticed question, let me give you some top of the mind thinking, 2 years ago we had a much higher growth rate, but then we are coming off a very stagnant market and we have been answering the questions, question till then that in the case there is a slowdown in the markets. We will see an increase in revenue and after a gap, we did see an increase in revenue and that’s why you saw the increase in revenue in ’04 and ’05. Now of course, we have a much larger base, we have a much more complex suite of offering and we have a much more robust client list which is growing pretty rapidly. So, I think going forward, our ability to grow will depend upon, our ability to have a deeper bench and hire a larger number of people, train them, recruit them, keep them with us to meet the demand that we are going to see. Overall, for the future right now at this point of time, we do not think that demand is a constraint, but we do think ability to deliver on time, meet all the complex requirements of clients in various verticals and horizontals that is going to be the test for a corporation like that. I don’t want to directly answer the question as to what could be a sustainable growth rate going forward because, we are close to the next year and we need to, we will answer that question. But if you look at this year, if you exclude one quarter, where we had a low growth rate, if you look at this year, if you pick out one quarter where you had a low growth rate that is a first quarter, then sequentially the growth rate is compared to the last quarter of previous year was lower, the rest of the year has been pretty good. Historically, we see that the last quarter of every, of most years that is first quarter of the calendar year is the slowest quarter of growth for the entire year. So, I think the sustainable growth rate will depend upon the capability to off-shore players in next two years, deliver and will depend upon the growth in various verticals and horizontals and you will see that each of the verticals and horizontal grow at differential rates every quarter. I hope, we answered the question for on the sustainable growth rate, I will reserve judgment till April. Okay great and then a quick question on the margin, given that the rupee is trading below 44 per dollar. How do you think margins will be affected as you move into the March quarter? Can you give us a direction on that? Yeah, I think the margins, we’ve had a operating margin of about 29, I’m sorry operating income margin of about 29.4% and we’ve been holding between 28% to 27.8% over the last few quarters. So we’ve seen a jump up. We do think that a operating margin 27.5 to 28.5 would be a sustainable operating margin. If you see a jump up and the benefits coming through possibly a rupee depreciation, in the short-term they could be counter balance in the non-operating income level, the 27.5, 28.5 that could be range that one should aim for. The fourth quarter I think we should be in the range because Rupees down as it is; our projections are based upon 44.50 per dollar, that as average for the third quarter’s 45.30. Thanks and good morning. I’m sure Trideep covered more specific questions on the numbers already, on your local calls. I’ll focus on two more general topics, first there has been increasing chatter around company’s specific execution issues with all company that are getting larger deal sizes. So, I was wondering is your deal size are get larger what do you are doing internally in terms of QA for internal controls to minimize the risk associated with these larger programs? This is Shibulal, definitely over a period of time the complexity of the project, which we execute have gone up. Today we ran at, at any point with the aim around 3,000 projects 4,500 projects at any point in time. Many of these projects are large complex project. They expand multiple countries, multi lingual capability. So we have done a number of things. We have increased our process capability. We have implemented tools across the board, we have created new framework like Infosys Production Support IPSP framework. We have increased our compliance procedures and we have a process which will identify high risk sorted in advance. So we have a new process in place which will identify high risk projects and prevent them from getting into critical work, and we have a high risk frame, high risk cell which will monitor high risk projects continuously. This is Kris, yeah. So, from a strategic point of view, we are looking at acquisitions in consulting; we are looking at acquisitions to increase our geographical presence especially in Europe. We have done one acquisition in Australia, which was very well we believe for expanding our presence in Australia. At any point of time, we look at 2, 3 companies, we had discussions with them. And on our terms, you know this is very important for us. When we find the right opportunity, the right fit, the right valuation, we would do an acquisitions. We don’t want to be forced to do an acquisition. Because we are growing organically, you know we have, we believe a good growth. And any, you know the challenge in any acquisitions, especially in the services base in holding on for people. And you know the data show that maybe about 80% of the acquisitions do not deliver the value as expected, so we want to be very cautious when we look at acquisitions. In the last 12 months, we have added about more than 13,000 employees. So, just organic means itself, you know we are growing significantly and that’s why we don’t want to grow through acquisitions, we want to do acquisitions for strategic purposes; that’s our intent right now. Okay and then thanks for that. A final question for Mohan, you said demand is not a constraint right now. Are you saying the supply of workers be a constraint at any point now or in the near future? I don’t the think the supply is going to be a constraint but the constraint is going to be your capability to hire the right talent and train them at entry level. At the middle level you need to expect not more than 25%, 30% of all entrants coming in laterally. But that’s the pool of talent that’s available, as smaller companies will lose out larger number in future. But great majority will come in from the colleges; this enormous supply in the colleges but those companies who are built up a training capability those companies will have the faculty to train. Those companies which can train them rapidly and bring them up to scale and then they want to succeed. We have a training capability of about, let say 20,000 people a year 4,000 to 4,500 people being trained at anytime in Mysore, in Mysore, we’re expanding our capacity from 4,500 people at one time to nearly 14,000 people at a single time. We are going to spend about $150 million, leaping up our training capacity in Mysore and other places, just to make sure that we have invested adequately to meet the requirements of growth for the future. So the supply is not a constraint but ability to get them, train them enable them and empower them in the shortest possible time. To give an idea of the cost, it cost us $5,000 to train one fresher coming from the college and $1,000 to get a middle level lateral recruiters fee. If you hire 20,000 people and 15,000 of them the colleges that means you need to spend $75 million. And if you hire larger numbers, such a kind of training cost that we need to observe but we are capable for that. Companies do not make the investment, who cannot bear this cost, well they could receive a challenges? Thank you, you know Mohan you guys trying a lot of new business in the first six months of the fiscal year. I was wondering can you give us a sense for the pace at which those you know new contracts are ramping and any trends you are seeing that are they ramping kind of, inline with your expectations, or slower or faster than you would have anticipated. Hi David, if you look at the top few clients, there is a churn you know some times in any quarter would not grow as much as other clients. But if I look at the top 25 clients some clients have grown sequentially 39% you know the highest growth rate has been 50% in this quarter. So there is momentum in our top 25 clients just to read out top 5 clients have grown 12%, top 10 clients have grown 9.3%, next 5 clients have grown 7.4%. So now they, some of them are growing faster than the company average and there is still momentum left, in fact in this quarter alone out of the 36 clients we have added, 10 are from the Fortune 500. And in terms of, the actual, the new business that you have signed recently, are those contracts ramping the new customers inline with your expectations more quickly or perhaps slower than you would anticipated? See the contracts like ABN AMRO which ramp up very fast but most of the contracts are of the traditional nature where we do one or two projects but the difference the ramp up is much faster. Its starts with one or two projects but within a year, within 18 months as Mohan was saying, they are expecting us to grow significantly we have now multiple services through Progeon Consulting, infrastructure management, so we have lot more offer to offer those clients and they ramp up much faster. Sure. If we take ABN AMRO as an example I think you said around it can contribute only normally to this quarter and it think $3 million next quarter. Would, should we expect more of a hockey stick in fiscal ’07 from that contract and we would form, the other more traditional contracts? Okay, and as I have recalled in, that the December quarter had pretty sure work base sequentially. Is that’s correct, I don’t know, you gave a number, I think of what you thought the impact could be on the growth rate? Could you just refresh us on how that, is that in fact true? What impact that had on the sequential growth rate in revenue? We had three less working days. We had 61 days compared this quarter compared to 64 days of previous and those three working days had an impact of 3.1% on revenue of this quarter. So the revenue growth that has been in normal circumstances maybe about 9.8% or so. It is less because of working days are less compare to the previous quarter and of course David you are going to ask what about the next quarter, the fourth quarter. The quarter has same number of working days as the third quarter but just one day more in the fourth quarter compared to third quarter. But the key challenge in the fourth quarter that’s the quarter that we are here right now is a fact that it is a first quarter of the calendar year. We saw last year that the first quarter of the calendar year is challenging because clients just comeback from their holidays. They have a new budget, they close their old budgets and have to reopen new budgets and if you have more transaction-lead deals, not annuity of dealings like maintenance, and you have a larger number of developing deals or you have a larger number of enterprise solution deals that consulting deals. It takes some time for the work to ramp up and that’s why you are seeing on the US GAAP, our growth rate for this quarter is about 4.2%, which at this point time, we feel comfortable with. This is not a reflection on the state of the market; it’s not a reflection on the potential growth in the market. It just that, this is the first quarter of the year we saw that same last year when the first quarter was indeed challenging, and we feel comfortable with this number at this point of time. And actually Mohan, getting back to your commentary about customers asking to maintain a deeper bench, what impact is that having on your margins. If any I know you discussed in the second half of the year investing a 150 basis points in both growth initiatives and capacity. So, should I assume that the requirement for maintaining a deeper bench because it clearly got reflect in the utilization rates during the quarter and obviously the gross margins. Should I assume that, that was embodies in the 150 basis point or is there requirement for deeper bench about and beyond? David the bench of the offshore still the cost of that bench could be 50 to 75 basis point not much higher because I think the utilization that we have of about 79% or thereabouts. It should be ideally be something like about maybe 78% or much better at 76%, so that just give us a flexibility. Because we were operating for the large part of the quarter at 80%, 81%, we had people coming off training and getting into delivery in the last month. And that brought it down for the entire quarter to some extent. But overall, this number does not give the flexibility to meet client needs. We are finding this more and more because of the fact that we have 15 horizontals and verticals, many, many clients and each client behavior is difficult to track and sometimes clients come and ask us to ramp up fast and quote for work and do not have people to send them there, and the skills requirement of the various divisions are totally different, then there are visa commitments. For example you have a certain number visas for the US, the visas are close still September, and therefore you need to make sure that you can take up the work with people who have ready visas and to move them up from other units would be difficult unless you have more people in visas and bring down the visa utilization rate. Or if the client wants to work in Europe, it takes maybe 2 to 3 months to get a visa. So, I think the complexity in the business is increasing and in between that reduce the bench, I mean, increase the bench so that you can have the flexibility to grow more rapidly within the quarter every quarter there should be a flexibility of 3% or 4% for the quarterly growth and that should be in the number of people that you have so that you can take advantage of market circumstances and grow that’s come to ramp up rapidly. Now that flexibility is reduced and that’s what we want to build, that will cost us maybe 50 basis points to 75 basis points and once you have passed that, you can easily pay for itself, many times over. Great, to get it back to your comment earlier about you know investing a 150 basis point of revenue in these various initiatives did you kind of meet that expectations in the third quarter and is your fourth quarter reflects that as well? Yeah. I said that you may context that we will make those investment, our investment depends upon the availability of margin also, David. And what we do normally is that we can accelerate hiring to some extent, get people faster than what we anticipated because we are up to speed in terms of what we can do. We can increase our banding exercise; we can accelerate the hiring of people in the client-facing group and things like that. So they, you know, we use this flexibility to prepare for growth better, we do think that the issues that, the focus for the comprehension should be on growth. We have a great delivery capacity, the market demands remains good, we must have the ability for growth and we need to prepare for that invested elements. Great, I guess the question was Mohan, did you kind of, hit that target, in the third quarter and you kind of, expecting to hit that target at fourth quarter being able to invest 150 basis points. No, we didn’t invest that much, we didn’t have, we didn’t, couldn’t invest that much we probably invested about 75 basis points in the third quarter, in the fourth quarter we are looking to invest an equivalent number. Okay. And just one last question on the tax rate of fourth quarter, I know, it’s probably variable depending on, where foreign currency comes out, but are we still pretty much in that range as 13% to 14%? And for the fourth quarter 13.5%, because we have taken a non operating income which is normal, we got exchange differences of about $9 million. Hi, good evening guys, I just wanted to back and talk first of all about the change in the growth margin, maybe Mohan, if you can kind of walk through the individual components, if you look at the gross margin for the current quarter versus last quarter what was sort of the issues that had the biggest basis point impacts, because I guess relative to last quarter, where the rupee was, we would have expected to seen a little bit stronger gross margin performance. So, maybe can you just walk us through what, where the biggest basis point impacts where both from a cash and a non-cash perspectives if you were to focus on some of the depreciation items as well? If you look at the gross margin, our component called Indian Salaries has gone up from 13.1% to 13.9%. Since they are, they are paid in rupees, they are paid in rupees it means that the rupee impact would be higher because of this issue and it is about 0.8%. Our depreciation has gone up from 4.2 to 4.6. So that is increase of 0.4% there. And all this, all these has led to the neutralization of the benefits of the rupee depreciation at that level. Because, in this line item, of 56.8% of revenues, which is a cost of revenue 30.6% is spent on overseas salary and another 3% is spend on expenses abroad. So basically we have 34% out of 56.8% being spent in convertible currency or the dollar, you had about 22.8% which is spent in rupees where you had a beneficial impact of the rupee depreciation in terms of getting a larger number of, larger quantum of rupees. And we had a, have a depreciation rupee of 3.4%. So, 3.4% of 22.8% that is something like 0.8 or 0.9 is the benefit that we got over the rupee depreciation. So that is being gallant largely the hike in the Indian Salaries component because we absolutely do hiring and enhance training and the other expenses that were, which came up because of higher depreciation because of higher capitalization has been counteracted by slice version of that as of expenditure. If you look at, G&A expenses, the impact on SG&A expenses has been that is being downed by 1.7% primarily, led by a reduction in outside consulting charges by 0.3% and a turnaround in provisioning for doubtful accounts receivables of 0.5%. So, both of them add up to something like 0.8%. So, this is a big ticket items here apart from that there has been a small decline in other sides of expenditures, so overall it adds up to about 1.7%. Okay, what about the change in the overseas travel experiences, I was wondering, it looks like, it was down about, just on my calculation, its roughly $4.5 million to about $5 million. Is that something that bound comeback next quarter as we look forward? No it will remain at the same level next quarter because we don’t see a bump up happening in our foreign travel expenses or the Visas, because we had expected that to happen, that’s why I didn’t count, count on that because as part of what we have budgeted for in quarter three, because we’ve said that the US visas are closed and we are not going to invest in this US visas and the jump up in quarter two was basically because of US visas. So, okay, so you won’t see any impact in March quarter but going into June quarter you would expect to start investing again in that area. Yeah, in the June quarter September quarter we could expect more investments, in the March quarter, we don’t expect any official increase from where we are today. Got it, and I just wanted to go back to you previous point about carrying a deeper bench and I want, if you sort of make a connection in from that point to the second point you made about, the work being more sort of transaction-oriented, I guess the way we think about its being more discretionary nature. Whether its package implementation work or development work et cetera, what is the visibility that you run and maybe also the risk related to that, that you run in keeping a deeper bench when say more of your work down the road, considerably come from more discretionary areas, as you keep at bench and all of a sudden the work doesn’t show up like, how much visibility do you really have on this bench that you are willing to keep if more of the work is going to go towards discretionary projects? Well let me explain this because, the way we plan is to look at the potential revenues for four quarters based upon what our client facing group thus does in the market potential and look at the number of people that we need to have willable and then work backwards to see how much time we need, to hire them and make them and empower them to make them willable. So that’s the model we do, we work on a very tight model. But because of this issue, we will possibly accelerate the hiring from two quarters down to now and carry them longer so essentially looking at carrying cost for maybe two quarters, because the third quarter down the line, we could cut the number of people that we are going to hire from the market, in case it doesn’t come up to speed. So, like I said, the additional cost could be 50 basis points, 75 basis points of revenue and it will normalize in about three quarters time, because, there is a lead time for hiring, there is a lead time for training and apart from the offers that we make at the college level, for example next year we have made offers about 6500 at the college level gross offers, you are going to see how many of them join and the balance we pick up from the market both at the lateral entry level, but that way we could fine tune. So a risk, if at all, two quarters. Got it, okay. And then finally on the top clients, I just want to double check is the top clients that you reported this quarter the same as last quarter? Yeah thanks, I wanted to focus a bit about some of the ongoing initiatives whether it’s China, Australia or the US consulting side of the business. Can we get an update on where these initiatives are in terms of scale, the expansion and then also in terms of the ability of some of these units, they’re kind of, for their profitability to come at power with Infosys as a whole. Thanks. We have about 400 employees in China, China is doing on target for local market work, that is in the Chinese market, we are doing on target with respect to the plans we have, with respect to the global markets, we are slightly behind, we are trying to catch up, it also requires little bit more scale because, global market require multiple technologies, multiple capabilities and things that are having a small unit in China with 400 employees it’s slightly difficult to meet all the requirements and so, it takes a little bit more time to really service the global markets and so we are slightly behind there. But overall, its satisfactory with respect to capabilities we are finding that on newer technologies for example, capabilities in Java, capabilities in coding, et cetera, the resources, the people we find are very, very good, in project management, in their knowledge of business industry vertical, ability to do complex assignments et cetera, as expected, the Chinese DC is behind and that’s why we are combining the management capability from other DCs with technical capabilities in the China DC, to service some of the projects. Can you also talk a bit about Australia and US consulting side of the business, I am just curious is there anyway for us, for you guys to give us a feel on when do you think we are going to start seeing the margins or the profitability of these units too, actually ramp up and kind of get to the same levels as the whole company in terms of where it is today. I’ll talk about Australia consulting and then come back to your question on margin. Australia standalone is doing actually very well in terms of attacking the market and getting new business and things like that. From a margin perspective, they need to have, they need to improve little bit more, it is positive margin, positive and that we are not loosing money in Australia it is positive, but it has to come up to the onside margin for rest of Infosys, Infosys Consulting did $10 million revenue looking at $13 million for the revenue in Q4, we were hoping to breakeven in Q4, but we may accelerate the recruitment and there maybe a delay in breakeven for Infosys Consulting, but its on track up to now, with respect to its business plan. Overall, if I look across the various subsidiaries Progeon is doing very well with growth of more than 100% this year, operating margin of 24.7% almost 25%, the company average is around 23%, so that’s very close to that, next is Australia which is positive but it needs to improve little bit and China and consulting are on investment mode, and we still need to support them at this point. You had $28 million of revenue this quarter from Infosys Australia, Infosys Consulting in China, and we had a loss of $2.4 million on this $28 million, since we have a 26% net margin, around 26% on this $28 million, if it was a Infosys parent company business, we would have earned something like $7.5 million net and if we add the loss of $2.4 million to that, we have made an income of $10 million on the parent company, which has gone to subsidize the losses of the 3 subsidiaries, so overall the group profit is about 26%. The $10 million on the parent company, parent company revenue, revenue of say, $500 million, $510 million is approximately 2%. But the parent company should have a normal margin of 28%, now these are all the investments that we have made, which will bear fruit later, emancipated that Infosys China and Infosys Consulting would breakeven in the fourth quarter, we do think that breakeven possibly 2 or 3 quarters on the line next year, because its still subscale and they still need to grow and we have to make more investment. Thanks for the details Mohan. And then last question can you comment on the recent departure from Progeon, is there anything specific that Infosys is going to make sure that we won’t see more of these departures that we have been seeing? Thanks. I think this is a, very difficult issue including that people and the key thing what we can do as an organization is to make sure that you have a bunch of leadership. You have succession planning and have leadership because that’s the only long-term sustainable thing. For example, in Progeon Akshaya is leaving us, Amithabh who was COO is here right now and he has stepped in as CEO, Amithabh has been here for 3 years and Amithabh was a natural leader, we had the change in our head of sales in Infosys as Basab left, Hema left, we had the capable people stepping into the beach. Despite the key issue, is we have a deep management layout. Nandan, do you want to add anything? I think, first of all I think, we have to look at the, these departures in terms of the scale of the organization. The company has, close to 50,000 employees; it’s the company that is growing as you see at over 30% a year. And it actually has a very deep bench of leaders and to that extend that we can, we are trying to expose all these leaders to you, and there are many more leaders who are, I mean this, this company is not a one man show or it’s not about a few star. Nearly about a broad bench of leaders who are working out there in the trenches to make this happen. So I think, back to philosophy we, we believe that every one of these people who left was the good person and definitely very capable and we certainly miss them. At the same time, our effort for the last 25 years is to build a platform, a platform with high quality people with great systems, processes, brand and we think the platform is really the fundamental source of our strength. And you have, in each of these cases we have ensured that we have a better or more than adequate people, replacing them and as you will notice in, and none of these function have we even miss the beat in terms of our business performance. Also, I think if you ask the question, are we going to see more of this frankly I can’t answer that question, there is no way anybody in this room can answer whether who is, who will leave tomorrow and those kind of questions. All we can say is that we have built a strong bench of leaders; we have built a very biggest business model, we have built a platform and we believe that Infosys is impervious to this kind of thing. Moshe just as you can see the kind of people that we have and need a larger number of people and I think, you could test the velocity of the statement, that are large number of people are extremely good and the, the good thing that you see a few faces, you see me, you see Nandan, you see Shibu, you see a few people and is either more, only a few people in the press. But you must visit us and see a larger layer of people who are there in the leadership team. Okay great. Hoping you could may be go into little bit more detail on the taxes, in the sense of obviously it came down, maybe explain, why when the other income line is negative change in the absolute tax rate from March, may be some guidance for fourth quarter and also what do you think in general might had for ’07. Well in the other income line we have a negative of $12 million because of exchange differences. And we have a normal income of something like $9 million to $9.9 million as interest income and we have about $2 million coming out of other income basically from interest on tax free points or whatever it is, which is a small recurring right into some extent. So this $12 million as against in normal income of about 10 to 11 gave us a loss of $1 million. The next quarter, we don’t initiate anything like this because the total hedges that we have is based upon options in the range and that is fully marked to market. The extreme volatility of the rupee movement created an increase in the operating income level and declined in foreign exchange differences except the foreign exchange differences was higher by $2 million. Now, the tax rate is based upon the normal income plus the income that comes from the interest income which is substantially taxable. If you net it off, without the tax impact on the non-operating income will come to an effective tax rate of 13.1% or 13.2%. By going forward, the core business is substantially exception from tax in 2009. The exception is dependent upon, the units which have been in business for not more that 10 years. Next year, a few units will come of the tax holiday for the total revenues form these unit is a very small part of the overall revenue. And the tax holiday is completed by the end of fiscal 2009. Now, we have one unit running in the special economic zone in Chennai and that unit has got 1000 people is ramping up. We have another unit which is been approved in Chandigarh where a building capacity of 3000 people and expanding later. We have another in principle approval for a campus in Pune for SEZ and also Mangalore where we have to build a new campus. So, we do think a substantial, very substantial part of the incremental growth in fiscal 2008 will come from the special economic zone. So when you come of the tax holiday in 2010 the effective tax rate will depend upon the quantum of revenues that come from special economic zone at this point of time, there will be 3 years of incremental growth, 2008, 2009 and 2010. What would be the component of these 3 years to the overall income will determine the effective tax rate. I think we need to wait for some more time before we come to a conclusion, we don’t think there will be a separate jump in 2010 at this point of time because SEZ schemes gives full tax holiday for the first 5 years. Okay how about, okay how about ’06, how about ’07 in the sense of, you basically add 14.7% taxes in ’05, look at this year is coming in at about 12, or you wish to go back margin of ’05 level. Yes I would think that may be, may be around 14, 14.5 or between 13.5 to 14.5 would be an effective rate for next year. Yes good evening. It appears to be some noticeable pockets of weakness, more than the usual in the rest of world segment, the consulting and testing services as well as the telecom and transportation verticals quarter-on-quarter that is. Could you explain what might be contributing to this? Transportation is because of one big client which is come off and continues to come off and we are making up for that, in transportation our consulting is just a flux of business, we don’t see its end. Nandan? I think the real way to look at consulting is to look at consulting and package implementations together, because I think that, that could be the way to look at it. If you notice the consulting, yes you are right in saying that the consulting revenue is at 3.1%, but you will notice that these package implementation has gone up from 15.8% to 16.3% and then frankly when the legacy companies talk about consulting, they actually talk about package implementation as much as consulting so if you really look at these two together its close to 20%. And to that extent, I think and one of the big endurance in the last year has been to make a consulting and our package implementation services work seamlessly together to create an end to and value relation capability. That is working very well in the field and this combination enabling us to bid for global conformation projects with the large client. So, I think I would see package implementing and consulting together, that is the strength of the service offering for us. I think actually, I think testing is, I think is doing well I don’t know, perhaps we have to look at it. Yeah, it’s not enough material. I think the telecom, the telecom in fact is growing well, again let me go back and bring up the telecom. I think telecom is really probably if you look at it some of it could be related to the R&D side. But certainly telecom service provider segment is growing, booming for us, we are now working with one of the world’s largest telecom service providers and these includes large comps in the US, it includes firms like BT in UK and so forth and we think that that is going to be a growth area for us Ashish. Okay and very quickly, the strong demand environment has translated into 14% year-on-year increase in offshore wages in April. But only 1% year-on-year increase in offshore revenue productivity. Should we expect with this gap will narrow and to what extent in the future? Well, we’ve been seeing for some time that, prices, prices are growing up for new business, (2) we’ve been saying that new bill is coming in a 3% or 4% and (3) All you folks have been asking show it to us in the first half side revenues and we’ve been saying that is the portfolio impact and is looking its way through. This is a very interesting piece of data. You see the first half side revenue this quarter compared to the last quarter is flat, very small change, small up-tick in offshore small downside in onside not big very, very small. But 70% of revenues come from time and material contracts and this year we had, this quarter we had 3 less working days. That means the total number of billed hours will be less compared to the previous quarter that obviously means that some of the rate in fact is coming through. So, there is a real rate in fact upside in the whole model. Now, how do you estimate this for the fourth quarter or the future going forward? We have to wait and see, because this quarter in the fourth quarter we have a small increase in the number of working days of 1%. So, we have to see how it works through the portfolio impact. But, if we get beyond the figures, all this is beginning to show and what a period of time is showing the much more operand manner. Good evening. This is Sam Saunders on for Jamie Friedman. Just wondering to dive into the headcount additions of just more, I think you’ve done a great job explaining how those who support the strategic decision going forward. Could you just comment on to what extent those head count thus from eluded of those make sure of those headcount additions are competitively driven. Well this year we will have 21,200 peoples gross. We started off the beginning of the year by saying we will have about 13,000 people. In the July guidance we increased it to 18,000 people, in the October guidance we said it will be 20,200 people and now the January guidance we said will be 21,200. So obviously the ramp up is not showing up in the revenues primarily because, we had we have extended some of the training period because we are giving more specialized training to people as we have to need them to join many more different internal units, so the training is getting more specialized. And like Shibu has told you we are in the mix of a larger certification guide for the middle level, so that people develop dual expertise and people develop more capabilities to go of the valid chain. But the total contemn of training in the system has increased this year to better prepare for our future. We had 1.34 million of applications for jobs. We tested 146,000 people, interviewed 44,400, offered 19,500 and 15,520 joined. So yield rate has gone up to 1.2% from 0.9% the previous fiscal year. Now the key question is, are there enough people in the system, there are enough people in the system. We’re largest hirer from the college education system for the next year, we made more than 6,500 offers for fiscal ’07. People have joined in the second and third quarter of the next fiscal. But like I said earlier the key challenge for company should ramp up and get the source in India is going to be the ability to get them and train them and invest in them for training. For people who don’t have the cost of increase. So shall we worst at fiscal ’06 as an investment year and perhaps that utilization rate should increase next year or is this, is something that’s going to be endemic to the business for sometime now? Well I think the utilization base we should bring it down to have increase flexibility in the model. We are looking at a fairly high utilization rate. And when we look at the utilization rate, we work on a 12 month basis. Please remember that we work on the 12 month basis. Out of the 100% that a person could work for the year about one month will be the leaves that 8.33% gone and about 4 to 5 to 10 days or 15 days trainings that’s 4.3% that is 12% that you need some kind of bench. A normal bench for people who get our projects go to a new project. So if you look at that you have an effective capability of a something like about 88%. We are at 79% to 80%. So the flexibility of the system is very, very limited and we want to increase the flexible take care of the market. I think the way to look at this is how do we, leave the cost of the downside of having lower utilization versus the upside of having the flexibility to respond to rapid market conditions and I think that’s a really the question. And I’ll give you that in an expanding market where there is tremendous opportunity. It’s worth the training for lower utilization and the cost of that are relatively small, compared to what we can get on the upside, by having really availing of all the opportunity in front of us, in that balance that we are trying to achieve. I’m now handover the mic to Sandeep. This seems us and being with us at the end of this earnings call. Thank you for joining us today and we will look forward to talking to you again next quarter. Yeah thank you very much. This is Nandan here, signing off I think we are very delighted that all of you have come on this call and have some really searching and incisive questions. And we look forward to sharing this again with your quarter from now. In the mean time all the data will be put on our website. You also please feel free to send us email questions on Investor Relation, so that we can get back to you at the earlier. Thank you very much and good night.

EarningCall_233927

Here’s the entire text of the Q&A from Cisco’s (ticker: CSCO) 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. Dennis, when you gave us gross margin guidance last quarter, did that include the impact of FAS 123? I think, if I recall, you said 67% give or take. You had some one-time items that created great strength in gross margins last quarter. Again, was that included in the guidance? And the question going forward is when you talk about 67%, same question, is that taking into account the impact of 123? And if the guidance was in fact not taking that into account, what changed, why was it better than what you were expecting? Sure. Paul, the number that we gave was on a pro forma basis. It was not taking into account the potential effect of the stock option expense. And we were very pleased with the great progress that we saw in both the manufacturing and the engineering to keep our costs at a, in fact, improve on our costs over the previous quarter. And the second thing that was a good thing for us this quarter is the lower discounts than what we've had in the previous quarter. So, both of those were positive, and that's the reason that we saw it stay at the same level as it was from the previous quarter. Thank you, Paul. And by the way, congratulations to your team and Randy and Angel's team as well. Real nice focus. I was wondering if you could give us a little color on the product basis when we think about the revenue trend into the next quarter. Advanced technologies clearly should continue to show good growth. How does switching and routing fare out in terms of the trends we should see? Thanks very much. Sure. Brant, what we saw was a good balance in Q1 about those routing and switching, and that's why I watched the bookings. The revenues tend to go to up and down, the lead times and when the orders come in, etc. So, routing and switching was both at the lower end of double digits, so in the 10 to 12% type of numbers from a booking perspective. Advanced technologies were solid across most of the advanced technologies, and Charlie, feel free to jump into it. Q1 is usually a little bit slower for us than other quarters in terms of the advanced technologies, and they were weighted pretty heavily by optical, where we're going to stay focused on certain areas of optical, but refocus on our margins there. So I would expect advanced technologies in Q2 to grow at a higher rate than we saw in Q1 from an overall perspective. So, good balance there. The routers, as you know, tie a lot to our service provider business. The switching ties more to our commercial and enterprise type of business if you are trying to draw the correlations, Brant. Thank you very much I have a question on OpEx guidance. I think from the guidance, it implies that it's going to be around 37% of revenue again, sort of flattish in absolute dollars going forward. I was wondering, what kind of a headcount addition, if any, you have baked into the Q2 guidance? This is Dennis. I believe that we're going to see, as I mentioned, a slight increase over Q1 in terms of percentage and in absolute dollars, as we continue to add additional resources, and particularly in the sales area, focusing on our emerging markets and in the commercial sector. So it's the areas where we see tremendous growth opportunities. Chiang, what I said in my part was I said headcount very similar to being up slightly versus just like we saw in the last quarter, where there was roughly 850 people added. I think the categories will be largely sales reps, which I think all of us on this call understand, either producer or not, in three to four quarters, and that's a very self-correcting type of group. And secondly, we are going to invest in both advanced technologies, a wider range of advanced technologies, and emerging technologies. Those will not have the same type of relatively quick payback. Those are usually two to four years out in terms of the payback, Jiong. Thank you. Hi thank you. Just a quick question on sort of your guidance looking forward here. It looks like you had a pretty good growth rate in every geography, with the exception of Japan and Europe. Japan certainly wasn't a surprise. So how much of the sort of guidance looking forward is some nervousness still about what is going on in the European theater? I think it is the balance of that, John. The U.S. is, as I alluded to, two of the key takeaways from this quarter was U.S. performing better than we expected, and I think with the appropriate caveats, we feel good about the momentum on that, better than perhaps we would've anticipated before. Asia-Pacific is kicking, and they are hitting it in all areas, and while I don't expect as good a balance as we saw this year in each of the categories, that feels very good as well. However, Europe is, normally runs about from 23 to 26% of our business. And so we are concerned on that one, and it's too early to see, to call this, whether it's a bump in the road or not. But you would expect us to build in a little bit of caution, given what we saw in Q1 in Europe. To answer the indirect part of the question, the forecast from the field is roughly 10 to 15% year-over-year growth for Europe, which if you were to ask us just four months ago, we would have probably had that in the mid to upper teens. You know, historically, we see Europe always moving up significantly from Q2. And the Q2 growth that we're forecasting is in line with some of the things we would see in the past, a little less, based on some of the caution that John mentioned. But, oftentimes, you come into this New Year with the summer holidays and the first quarter is a concern. We're just very much aware of the overall macro conditions and paying more attention to that and being a little bit cautious until we see what, how Q2 unfolds. Thank you, John. Just in summary, though, Rick, we've got a real seasoned team in Europe we have a lot of confidence in. So our issue there is they will get what business is there, and we, time will tell if it was a short-term blip or a little bit longer challenge. Europe has been leading the way for us for the last three years. A lot of good experience. So, we are confident there. John, we went from 10 to 15 to 10 to 12, and now potentially 8 to 9. What's the likelihood that this trend continues? Do you feel you're adding enough new markets to offset the decline in some of your mature markets or mature regions? If you could just help us understand the longer-term trends? Sure, Mark. If you look at it overall, our guidance for the year did not change, with the appropriate caveats. That stayed at 10 to 12%, in spite of challenges in Europe, which three or four months ago, we would not have anticipated. And if you were to look at it the reverse way, from a positive perspective, if Europe had been where we would expect it to be, it would have been one heck of a quarter. And so, it does speak to that balance, both in terms of strategy, but also the ability to either grow together or to handle some of the bumps that do occur, Mark. So, our overall guidance did not change. In terms of this quarter, where we still have some book-to-bill challenges versus the year before, bookings by definition would have to grow just like it did this last quarter above revenues, if it plays out the way that we think it does. But, again, repeating the common theme, on bookings we said for this next quarter we would anticipate 10 to 14%. That's just down slightly versus what I would've forecast you three or four months ago. And in terms of our overall revenue guidance for the year, it did not change, in the 10 to 12%, once again with the appropriate caveats, Mark. So thank you. Hi guys, thanks. Just curious on the gross margin commentary, your guidance of 61% in the current quarter. If I look at products gross margin, obviously that was very strong, and what you guys alluded to was some lower-than-expected sales discounts. Is there a reason why I should think that gross margins on your products should come down, and is there other areas that were a driver, i.e., component costs in the quarter that helped gross margins on the product side? There's a number of different factors that can impact the gross margins. So let me take just a couple of them in the interest of time, and I will be fairly brief on this. But I think on the cost side, for this next quarter, we will see some continued improvement. I think that our manufacturing team and our engineering team are working very well together to not only come up with new reengineering that drives costs out, but also working in each one of our areas of commodities to continue to see reductions in costs. On the other side, we are also impacted by things that happen such as mix, and those are difficult to predict, mix in terms of geographies, mix in terms of the nature of the products, that can also impact margins. So I think 67% plus or minus on that is the appropriate guidance to give for this next quarter. Thank you. Just a question on the commercial business. Obviously, the investment there is starting to pay off a little bit. Could you give us a little color on the product side? Is this something that you think will drive the core business more initially, or will the advanced technologies lead the way there? If you could just give us a color on what you would expect on the product side and, as a consequence of that, maybe the impact of margin as commercial grows to a bigger piece of the business. Thanks. I'm going to take the first part, and Charlie, ask you to talk a little bit about how you see the products evolving. So, Tim, what we used to do is develop our enterprise products, and as an afterthought, sell them in the commercial market, and it literally was that way looking back seven or eight years ago. Charlie led the original focus on the commercial marketplace, pulling together the teams and focused on it. And what you're seeing, Tim, is now we're starting to develop products specifically for the commercial marketplace, as well as realizing that this network of networks that we talked about for years is happening. So, in the commercial marketplace, we will come at the commercial marketplace both from a commercial marketplace strategy perspective, how does it tie into our service provider strategy and how does it tie from the home up. So you will see us begin to think about what we do with the Linksys brand moving in this, the low end of small to medium business in the commercial marketplace, and you'll see us continue to expand the product breadth and depth that we drive in the commercial marketplace. And then as a setup to Charlie, something that's been a little bit of a surprise to us is the top 10% of our commercial customers actually are more aggressive in terms of technology adaptation, both in terms of percentage of revenue, but also new technologies than actually our enterprise accounts are. So, with that, Charlie, talk about a little bit about, without preannouncing products, how you see this playing out, because I know our product portfolio looks very solid over the next 12 to 24 months in terms of what's in the pipeline. Absolutely. I really would break it down into three things. One is that the marketplace itself, the commercial marketplace continues to grow at a faster pace than the enterprise for products like ours. Second is that marketplace grows both for what I would call our forms of our standard products, and we're making modifications to those standard products. But third, to repeat a little bit of what John said is that the commercial market actually is a tremendous market for some of our advanced technologies, and they really are early adopters of some of the advanced technologies, especially in what we call the mid-market case, 500 to 1000 employees. And if I could just add one or two more things there, what we do see is we see new opportunities for ourselves with some new advanced technologies in that area to really address the smaller side of the SMB market, and we're going to be very aggressive there. And our experience has really been that the returns, both gross margin and operational returns that we get from focusing on this market, are very similar and very much in line with the rest of our overall opportunity, even in the service provider and enterprise. So, we've not seen, often, the SMB market is talked about as a lower-margin market. We've not seen that. I think one other quick thing, we have a very successful channel partner program. It's received a number of awards in the industry, and as we build out for the commercial market, that's a tremendous multiplier effect for us and really impacts our growth. When you think about it, Tim, and if you look at the potential market share gains, we're, while we are in the number one position in the commercial market overall in most product categories in total, we're probably, Charlie, in the 35% range. So this offers both the fastest growth that Charlie and Rick alluded to, but also the potential for market share gains to be executed properly, Tim. I want to go back to the guidance. I know some other people asked the question, but if you look at this quarter, there was a lot of negativity on the street going into this quarter. The book-to-bill wasn't that bad, just slightly below 1. You actually did the high end of your guidance and the gross margin beat plan. Yet the guidance for the next quarter of only 8 to 9% doesn't seem to reflect all the positive stuff that was mentioned on the call. So, I'm trying to understand why do you think you'll only grow 8 to 9%, and if that's the case, in the second half of the year, you're going to need a big, big ramp to hit the 10 to 12% guidance. So, can you just elaborate why the conservative guidance, and if you think that's the case, why does it get better in the second half? Sure, Nikos. Thank you for the question, because I know it's on lots of people's minds. From my perspective, you begin to see the second half of the year book-to-bill actually work in our favor and get more run rate of what your orders are versus what your revenues are. And so we're struggling through that for the first two quarters, as we articulated before and used examples of, and even in this challenging quarter, it was clearly 12 to 13% in terms of orders. And so, when we look at going forward at the current knowledge that we have, we are saying we expect orders for the quarter of Q2 to be in the 10 to 14% range, but we haven't changed the year of 10 to 15%, as I said in my guidance overall. And so, the second half of the year begins to work in our favor, where booking growth should be very, very close to revenue growth or revenue growth actually ahead, and then going into the future years. And this is why I focused on orders. And I realize there are people on the call that go the other way and focus purely on revenues. But I want to articulate very crisply two things. First is I do not run this Company on a quarter-by-quarter basis or even year-by-year. Most market trends take you three to five years to catch and really get the leverage out of, whether it's new advanced technologies, the commercial market, the emerging technology areas, etc. And to the second part of it is we have not had a quarter, and I've lost track, Dennis, I'm just thinking back 10 quarters, I'm not referring to quarter 11, but for 10 quarters that hasn't been in the 12 to 20% range. And so the revenues tend to jump up and down, as they did this quarter and as they will next quarter, but our order growth rate, Nikos, has been remarkably direct on that in terms of 12%-plus. And so either the markets see something we don't see, which is very possible and with appropriate caveats could be accurate, or you will see the revenues align with what the booking growth is as we begin to keep our lead times short and tight and going forward. So that would be the way I would answer your question. Time would tell if we are right on that and there's always the possibility we would not be. We feel pretty comfortable in our projections and our ability, as we did this last quarter, to handle surprises along the way. I'm going to pile on this. By my calculation, I think I've listened to 80% of your quarterly conference calls. And if you add up some of the positive comments that you've said during this call, it doesn't add up to flat to up slightly. You said in the last quarter that what would hurt you in terms of seasonality in October would help you in January, in the January quarter. You have service provider, which was 25% of your revenue, that reflects even a weak Japan, that should grow in the fourth, in the calendar fourth quarter because of budget flush. Consumer should grow. The U.S. is positive. Advanced technologies are positive. That covers about 75% mostly of your business. So, when historically you've grown in the mid-single-digit range, I'm not sure how you can get the business to be flat, even with Europe being down from you at this level, when it should pick up at least a little bit next quarter. Okay, Christin, good, fair, tough questions. But let's stay with that approach. Giving you the math, you are right on the math. In terms of Japan and Europe, that adds up normally to a 25 to 28% to 30% range. So let's say 25 to 30. So 70% of our business is going well and our product balance is good. Secondly, you're right that in Q2, Europe is seasonally stronger. So, you can do the math. Let's assume just for the purposes of discussion that Europe is up sequentially 20 to 40% over Q1. You need almost 20% of that increase to balance what normally occurs in federal. So federal has a very good Q1, which we finally saw with year-over-year increases of 30%, I want to get my sequence numbers for year-over-year balance. So, Europe tends to have a couple of hundred million extra to balance what occurs on the federal. And then Europe usually is very strong in Q2. So I predict which one of your peers asked the question earlier is a little bit of the caution in Q2 in part to just watching how Europe plays out, the answer would be yes, because we do need a solid Q2 in Europe, at least in the 10 to 15% range. And normally, we would've been expecting probably in the 15%-plus type of range. So that's where it balances out, Christin. You are right that it does turn not in the January quarter, in the Q3, where our book-to-bill comes working the reverse way, where our book-to-bill was above 1 in Q3 and Q4 of last fiscal year, and therefore, revenues should grow at or most likely above bookings if we execute as we expected. So, that's where you see the guidance overall in terms of the approach. Thanks for getting me on here. I have a question about the upcoming guidance as well, and just a comment on the last piece. Doesn't also the U.S. see a nice sequential increase in enterprise, which you don't seem to have factored into that calculus. So that should be up sequentially on a budget-wise. But my question is on the guidance you're giving for the January quarter, are you assuming, then, that you are narrowing the book-to-bill back toward the 1 in the January quarter? And shouldn't the book-to-bill in the January quarter generally be at or above 1 in order to buffer the seasonality that normally shows up in the seasonally weaker April quarter? How do we think about that narrowing of the book-to-bill? Do we need a book-to-bill above 1 in order to have visibility that you're going to grow in the 10 to 15% range on revenues going forward? Can you address that? Sure. Again, overall concept, as I understand that everyone wants to focus on just the next quarter or two, and that's a lot of the challenges that we all face in the market. We don't lose track of where we want to be one, two, three, four years out, and that's how we make all of our decisions. In terms of the Q2, last Q2 of last fiscal year, again, we had book-to-bill below 1. So, this Q2, I would be disappointed if bookings do not grow faster than revenues, and by definition, therefore, would be reflected in the book-to-bill type of number. Within that, you are right that Q3 looking back perhaps three, four, five years ago has traditionally been our challenging quarter, and when surprises, if they do occur in the market, often have occurred there. However, as we said last Q3, what appears to be a trend, and it's actually the service provider market appearing to balance this, is that we've seen the quarters and the growth in terms of bookings and revenues stair-step up each quarter throughout the year into a seasonally strong Q4. So, as we said, I think in the last conference call, I'd have to go back and look at notes on it, but we said that you would normally start with the Q1 that follows a strong Q4, seasonably weaker in Europe, stronger in the U.S., and the federal business would then build throughout the year, as well as the sales reps gaining new experience in the territories from the changes that occur. So, that's what I need to explain a little bit better. If it plays out the way that we think it will, each quarter should build on the next. But we do have, again, the exact same issues on book-to-bill and a year-over-year comparison for revenues that would not match, and we'd be extremely disappointed if the bookings match the revenues for this next quarter in terms of year-over-year growth, Alex. But just so I get it straight, that would imply that the book-to-bill number would improve enough that we would not be looking at the same issue in the January quarter next year of having to further improve the book-to-bill, i.e., orders growing faster than revenues? If we do our job right, Alex, and we keep the lead times small and we don't have a problem with issues in terms of Rick's teams forecasting accurately and manufacturing having the component issues that we ran into looking back 12 to 24 months ago, where actually we exceeded forecast again and again and we couldn't respond quick enough, we want our book-to-bill to be pretty close to 1 as we go forth when we can, and the surprises hopefully will be mainly positive surprises in terms of anything there. Our lead times, to the indirect part of your question, Alex, are where we want them to be. So, there's no reason to improve on that at all. They are exactly where we want them overall, although there will always be some variance on individual products. Just one maybe just suggestion, John, you've mentioned a lot and often on the calls on the orders and bookings, and I think it would be great if we want to focus on that for us to look at absolute numbers, because that's a teaser for the investors to gauge and it's been always a big topic that you as a company guys talk about. So, if we could, just a suggestion, if we could get these absolute numbers, it would be much easier for us to kind of keep ourselves gauged of performance. But, the real question actually I was curious, you mentioned that Germany and France were also a little weak. To what extent do you see all this competitive environment changing there? We saw a few quarters ago Siemens signing a distribution deal with Huawei as well as 3Com, and I know they were pretty big resellers for you guys and they're a pretty big force in Europe. Is that changing, or do you think the economy is slowing or a combination of both? How should we think about that? I would think about it, having been through Germany and France already this year and a pretty good feel for what our competitors are doing, we're being very successful in our architectural approach, and this is gaining very strong traction in most all of our markets. The way our competitors, since they chose going back three and five and seven years ago to compete, was individual products and to combine those products from a system integration function. So, you are right in terms of your assumption that people who view us as the competitors and who are also systems integrators will tie up with many of our other peers within the marketplace in terms of their approach. As I alluded to earlier, I've got a real seasoned team across Europe. I mean, Rick and I are really comfortable with them and we haven't changed that team. So this is the exact same team that led us globally with the exception of just moving Rob over here to the U.S. for the last two years. So, I think they will execute well. You may have some differentiation on when we get something versus somebody else, based upon some of the big bids, which you are well aware of, across Europe, and that is a factor as we move forward. But I think our strategy and our architectural is working. Our peers are therefore balancing it the other way, coming together in terms of trying to present a loose architecture with a systems integration type of approach. To me, it's obvious which one wins over the long run, if we execute right. But we may not. So, Wojtek, I hope that answers your question. Just to kind of go into the European thing a little bit more, you talk about I believe you said carrier service provider orders in Europe were down year-over-year. But if you look at the CapEx trends, they are pretty solid there. Is there an issue in terms of losing share there either in edge routing, core routing or optical? Or do you feel this is just a larger market issue? Thank you. Time will tell, Tim, in terms of the approach, and Dennis is giving me a signal. There are a number of you still on the questions, so I'll make my answers a little bit tighter. But if you watch in terms of our European service provider business, I'm just looking at the numbers now to make sure I've got the data to back it up in a constructive way, we usually do very well there, and our business has historically done very well across the key carriers in Europe. To the best of our knowledge, whether you are talking in generalities across Telecom Italia, the Telefonicas, the Deutsche Telecoms, the BTs of the world, we are doing well. And in terms of the other secondary carriers, we think we're doing well overall, Tim. So, while orders and service providers especially are lumpy, as we've said many times before, whenever a service provider has a great quarter for us one quarter, the next quarter you can bet they are not going to. That does tend to substantiate that type of behavior. So my view is probably not on market share over a sustainable period of time, but on a given quarter, we will probably pick up in certain categories versus our broad range of competitors, from the Alcatels to the Siemens to our traditional individual products competitors. But, to the best of my knowledge, I do not see a trend here that is headed the other way. However, it might vary dramatically by quarter based upon whether you get large orders or you do not. I'll be more than glad to address it again in the next quarter conference call, and we will take a note to put a specific follow-up and give you the detail on it, Tim. John, it sounds like certainly a lot of your growth that you're looking to come from is coming one, from commercial, and two, from international, it sounds like both Europe and certain parts of Asia-Pac certainly seems to be promising. When a lot of your competitors go into Asia-Pac in various places, you said specifically India and China seems to be strong, there always seems to be some sort of a margin hit that they have to take. I've never quite understood it, but it seems as though the markets seems to be more competitive over in Asia. The growth that you're looking to get in places like India and even Australia and New Zealand and China and places like that, how are you seeing the margin structure and the competitive environment? I know that it is slightly different, but do you think you can maintain the margin structure that you have, both in the U.S. and Europe, as you get larger in Asia? I think once you get past a certain base, Ehud, it actually works in your favor in terms of that. When you first start penetrating into a country and you've got to cover resources and you haven't earned your trust factor with your key partners, and I'm using India as an example, the calls on the top service providers, the calls on the top players from the Reliances of the world, the Tapis of the world, they have calls on the key banks, etc. We're earning that trust and business relationship. So, I think overall, our margin focus is not dramatically different there and is sustainably over the long term. However, there will be deals and we will not walk away from them where our competitors lead entirely with price, and we will not let them get away with that to take a key market from us. So, as appropriate, we will be aggressive on a transactional level, but most of our customers focus on cost of ownership and what business we can bring to them. That does vary by country, however, in terms of that competitiveness, Ehud. Thank you. John, you mentioned one of your concerns was low-priced competition from the Asian suppliers. How soon do you expect that to become an impact on the business, and what can you do now, what are you doing now to counter that? Bill, I just want to correct one thing on one of the prior questions. Our U.S. market was actually one of the very positive things out of this quarter. And I want to make sure everybody understood that. So actually, the U.S. is going very well versus internationally. It's very positive, especially when U.S. and Canada is 53% of your business. To the second part, Bill, we've seen this coming for a decade. I've been doing business in China for 22 years, always very profitably, almost always from the number one position. Secondly, we knew they would come at us on price on individual products. We're going to come at it on architecture, cost of ownership, the ability to pull the customers' projects to have a higher success rate, and for them to lower the risk in terms of flexibility as they move forward. We believe it will be a tightly integrated approach. They are coming at it with individual pinpoint products. We believe architecturally that we can form a tighter relationship with customers to help them achieve their goals and therefore focus on our gross margins, which was why we put in the new support evolving model. And it's why we brought down price performance at a faster pace than Moore's Law. Charlie, you've seen it again and again mathematically. So, no surprises here, Bill. We're actually doing pretty well in terms of it, either where we need to compete on price we will, but mainly, it's a total cost of ownership basis and I think we've seen it coming if our architecture is right, and that's the key issue. If the products are loosely and then tightly tied together and routing and switching and wireless and security does blur the way we think, we think we're positioned very well versus the players who come at us purely on price. But, the next wave of competitors will come out of Asia. There's no surprise there, Bill. Okay. I will make it really long, then. This question really has to do with guidance, but also seasonality. Seasonality, is it becoming less of a factor for you, John? I mean obviously, coming into the October quarter, that was one of the issues you thought would be more of a factor, and in December, it probably does not seem to be as much. And I understand managing orders versus revenue, but going into April and July, you need to have some fairly big sequential increases to make even the low end of the 10 to 12% range. So, I'm just wondering if seasonal factors are just becoming less of an effect on your business? Yes, the answer is the seasonal factors are becoming less of a factor on our business. I want to give you a caveat and then summarize it from that perspective as well. What we're seeing is that Q2 is usually balanced from seasonality. Q1 Europe is usually weak, Q2 is usually very strong. That's a little bit of a caution that you're seeing in this quarter. Q3 has suddenly become more predictable to us. That assumes good service provider orders in Q3, which we have seen in the last two years and we would anticipate seeing again this year. And then it ends with a very solid Q4. And I want to say here that after a good Q4, Q1, as we said in the last call and should've probably said before that, will always be sequentially down in terms of orders because of Q4 runs, people ending the fiscal year, driving hard, it would drop off a little bit off of that. If you look at where we are, part of the seasonality also issue balancing out is commercial does not appear to be near as seasonal as our enterprise business. And the consumer segment that we play in, while it has its ups and downs, or actually cycles that are back to school, etc. And as you get more balanced across the geographies around the world, different countries have different year ends, they have different holiday seasons, Chinese New Year, etc. And so the balance is good. And that really is I think what we're attempting to do as a company, is to get our balance across those five theaters, across the four customer segments, across a broad range of products that balance each other. Now, when you get surprised like we do on Europe, you've got to take into a little bit in consideration and balance that. But it is what we think will be the future. So to answer your question, Subu, we do think it is going to be more of a steady step throughout the fiscal year, a slight adjustment in Q1, steady step going forward, unless one of our theaters or product areas get a surprise. So in summary, we were very comfortable with this quarter. We did get surprised. We think we positioned ourselves well going forward versus our competition in this market. And we actually think that over time, much of our IT direction will come to the network. The network will become not only intelligent throughout, but I believe the platform. We think we're positioned well on how the market transitions will occur. Time will tell if that position is right. And we will always make our decisions from what we think is one, two and three years out as opposed to just next the next quarter and do abnormal things from a quarter-by-quarter basis which are not in our shareholders' or our customers' or our employees' or partners' best interests in the long run. So I want to thank you all for the healthy give-and-take, and it's fun; it's where we learn. And Dennis, let me turn it back over to you for closing comments. Okay. As a reminder, our next quarterly conference call, which will reflect our second quarter of fiscal 2006 results, will be on Tuesday, February 7, 2006, at 1:30 PM Pacific Time, 4:30 p.m. Eastern Time. Please call an Investor Relations representative with any follow-up questions that you have from this call. Thank you for your participation and continued support, and this concludes our call. Thank you, participants, for your participation on today's conference call. If you would like to listen to the call in its entirety, you may call 866-357-4205. For participants dialing from outside the U.S., please dial 203-369-0122. Again, 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_233928

Good afternoon my name is Ved and I will be your conference operator today. At this time I’d like to welcome everyone to the Plantronics Third Quarter Fiscal Year 2006 Conference Call. All lines have been on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press “*” then the “1” on your telephone keypad. If you would like to withdraw your question, press the “#”key. Thank you. I’ll now turn the call over to President and CEO of Plantronics, Mr. Ken Kannappan. Sir, please go ahead. Thank you Ved. Good afternoon and thank you all for attending our conference call. On the line with me is Barbara Scherer, our Chief Financial Officer; and Jon Alvarado, our Treasurer and Director of Investor Relations, as well as other members of our finance in IR team. The agenda we will follow today is that I’ll give you a quick synopsis of our results, which you all should have received by now and a business overview and update. Now I’ll turn this call the over to Barbara to go through the financial results in more detail, and following that portion of the call we will open up for questions and answers. I want to remind you during this conference call, we may make certain forward-looking statements that are subject to risk and uncertainties, specific forward-looking statements include our outlook for revenues, gross margin, operating margin and earnings for the fourth quarter of fiscal 2006. There are important factors that could cause the actual results to differ materially from those anticipated by any such statement, including fluctuations in demand for our products, the related revenues earnings and cash-flow consequences, or such fluctuations. The market price of our common stock did fluctuate substantially these results and other unforeseen factors. For further information, please refer to company’s Form 10-K, 10-Q, Annual Report, recent press releases and other SEC filings. As I’ve highlighted before, the risk factors discussion in these filings are not standard at all times. We update these risk factors every quarter adding and dropping language and changing order depending upon the timing and differential impact to be concerned that we foresee. The benefits of freedom and mobility continue to be validated. The revenue growth we achieved in the December quarter demonstrates the growth opportunities in our markets. In particular, our No.1 business priority is the growth of our office voice communications business. We achieved 20% sequential and over a 100% year-over-year growth in our Wireless Office product. A number of initiatives contributed to this continued growth and success from the Office Wireless product. We had a full contribution from our new Voyager 510S office system, the first which allows easy conversations coming back and forth your desk phone and your mobile phone. We had some successful European market efforts and of course we had the impact from our US branding and advertising campaign. We are still testing the effect of our national marketing campaign, we do believe that’s added to our revenue growth and that it increased category awareness and consideration to purchase Plantronics. We also believe that we should be able to improve the effectiveness of this campaign going forward. Our current intentions are to continue with our strong marketing program focused on Office Wireless throughout fiscal 2007. So that we do not achieve the returns we are hoping for we could modify that plan. Consumer interest in our markets continue to expand as we saw strong increases in market demand the Bluetooth Mobile Headset, consumer VoIP headset and audio accessories for the iPod. The general tone of CES was very positive with retailers planning the both a greater portion of their marketing efforts and planning ramps towards technology and accessories that provide a complete solution to their customers. This opportunity is clearly exciting to our competitors as well, and we believe we are facing significant competition, price, product innovation and marketing. Our new Bluetooth products represented substantial improvement in product design, up through the continuation of our reputation for high quality sound and we won innovation awards for all three products with this forum also winning innovation awards from CES of the Discovery feed of over 2000 products from 37 countries win the very prestigious Industry Forum or iF Design Awards in the TV telecom segment. Our new consumer VoIP headset with that Audio 450 also won an award at CES, this is the newest number of our Office Wireless lineup, the CS55 and we had a very favorable reaction of these products. The Audio entertainment business had a very strong December quarter behind the unexpected strength of over 40 million Apple iPod sold in that quarter, lifting AEG revenue to about 40 million in the portable speaker category of 61 million in total. Altec Lansing also had two new products nominated for CES best of innovation awards the XT2 and the iMT1. Against the backdrop of terrific growth opportunities across our business and rising competitive threats; we have to improve our execution if we are going to increase our commercial market share and our profitability. In particular, we believe our manufacturing cost, supply chain and marketing receptiveness with great opportunities, more improvement in the under labeled efforts in these areas. With that, let me turn it over Barbara to go through the numbers and our outlook for Q4. Thanks Ken. We’re pleased to report record revenues both in total and for each of our segment in comparison to the third quarter a year ago, revenues were up approximately 72 million with 11 million of that coming from the Audio Communications Group, and 51 million from the Audio Entertainment Group. The Audio Communications Group grew 11 million or 7% to a record 161.5 million. This segment essentially represents the historical Plantronics businesses and its growth came from our Wireless Office and Bluetooth Mobile Headset, partially offset by lower revenues from gaming and corded mobile headset. Wireless Office Headsets represented about 25% of segment revenue about 40 million, in comparison to just under 13% or 19.2 million a year ago. Revenues from headsets produced with mobile phones were down 15% in comparison to the year-ago quarter, due to a decline in corded headset, mostly but not entirely offset by an increase in revenues from our Bluetooth Headset. Revenues from Bluetooth products were approximately 50% in comparison to the year-ago, as a result of the Suite, which began shipping in the September quarter. The year-over-year decrease of our computer and gaming product was predominantly driven by shipments of our Halo 2 edition of the GameCom headset for the Xbox headset not repeated this year. Within the ACG segment, international revenues increase 27% in comparison to a 3% decline domestically. Both the EMEA and APAC regions were up sharply with growth in nearly all product categories that the Wireless Office and Bluetooth Mobile Headsets markets were particularly strong. The domestic decline was the result of the gaming revenues being sharply lower than a year ago. As the result of the for billing domestic revenues represented 61% of the total within ACG in comparison to 67% a year ago. The Audio Entertainment Group, which essentially represents the acquired Altec Lansing business achieved record revenues of 61 million. Within this segment, the portable category defined as our speakers that work with portable digital players, for example, iPod or mp3 players, amounted to 40 million or about 65% of the total. The other major product categories within AEG today are the powered category, defined as speaker systems used for computer and other multimedia application systems, headphones and headsets for use with PC. Those are the groups make up the bulk of the remaining 35% of revenues within that segment. Geographically, about 73%of AEG revenues were domestic and 27% were international. Sequentially, consolidated quarterly revenues increased by approximately 50.3 million, with about 39 million of that growth coming from AEG. Please note that Q3 represented the fourth quarter for AEG in comparison to about a half quarter in September. Within ACG, revenues increased by 11.2 million or about 7 % with nearly all the net growth coming from Wireless either for the office or for Mobile Bluetooth products offset by continuing decline in mobile quoted revenues. And revenues from our professional great corded headsets were also up 1.5%. Our sell-through stacking of the US commercial distribution channel for the communication segment indicates that sell-through increased approximately 26% versus a year ago quarter and was up by approximately 4% sequentially. The point of sale data we received from our US commercial distributors also indicate a record sell-through for the quarter as a whole. And please remember that this sell-through data that I am talking about here is just a portion of distribution revenue within the communications group, its US-based and that channel in total represents about 28% of the ACG segment revenue. Turning to gross margin, on a blended basis gross margins were 42.3% in the quarter with the Communications Group at 46.4% and Entertainment at 31.3%. Gross margins in the Entertainment Group were negatively affected by 3.3 million of non-cash purchase accounting related charges that positively impacted by operating leverage on strong revenue and a favorable produce mix. Within the ACG, gross margin of 46.4% compared to 50.1% a year ago. Relative to the year ago quarter, the principal reason for the decline was higher manufacturing costs, in part the result of expanding capacity for anticipated future growth and in part the result of yield and unit cost on new products not yet at target level. Higher warranty cost and a larger provision for potentially excess in obviously inventory were the other key factors for the decline relative to the year ago quarter. Sequentially, within ACG gross margin improved by 9/10ths of a point from 45.5% to 46.4%, relative to the September quarter warranty cost was stable, requirements for E&O were substantially lower, yields were higher and manufacturing costs were lower. On operating expenses compared to the year ago quarter, OpEx was up 15.5 million with 10 million of that being the operating expenses associated with the Entertainment Group. The rest of the 5.5 million in OpEx growth was attributed first to the advertising expenses, which were 3.3 million and $2 million to fund the higher level of investment in our new product pipeline, especially for Wireless product and the growth of our offshore design centers in Mexico and China. Within the Entertainment Group, the quarter-over-quarter increase in operating expense reflects a full quarter’s results consistently half quarter result in Q2. And of the 10 million in operating expenses approximately 0.9 million of that expense was purchase accounting-related and SG&A, and 2 million to ongoing Research and Development work on new products. Turning now to operating margins, consolidated operating margins were 15.7%, 16% to the Communication segment and 15% for the Entertainment Group. Without the purchasing accounting charges the Entertainment Group’s operating margin would have been 21.9%, which would have been a very strong result helped by the operating leverage and the seasonally strong December quarter. Please note however that the amortization of intangibles assets acquired which were accounted for in cost of revenues and in SG&A expense will continue for many years and are expected to run about 1.8 million per quarter with about 1 million heading cost of revenues and 800k in SG&A. And below the operating margin line we had 0.6 million of other expense, down from the prior year ago quarter income of 2.1 million primarily due to FX losses in comparison to FX gains in the year ago, owing to the rates decline and decreased interest income due to lower levels of cash to invest. Our consolidated effective tax rate for the quarter was 35.9% compared to 35% in the September quarter and 28% in the year ago quarter with the Communications Group at 27% versus 28% a year ago. The acquisition of Altec Lansing had a significant impact on our consolidated effective tax rate increasing up to 35.9% for the quarter and 32.6% for the nine-months ended December 31. This is due to the impact of the non-deductible expenses of purchase accounting and the higher underlying effective rate of approximately 41% for the Altec Lansing subsidiary. We currently expect the tax rate for the Communication portion of the business to come in at about 27% for the year. And that the underlying effective rate for the Entertainment business to be at about 41%, and over the actual GAAP tax rate for AEG will continue to be much higher because of the ongoing purchase accounting charges of approximately 1.8 million are not deductible for tax purposes. And our tax rate can also be affected by the mix of profits geographically. And a result of all above, our consolidated net income for the quarter was $22 million or 9.9% of revenues compared to net income of 24.4 million or 16.2% of revenues a year ago, with consolidated EPS of 46 versus 48. In terms of business outlook, our guidance for the fourth quarter is a revenue range of 200 million to 210 million, an EPS of $0.39 to $0.44 on a GAAP basis. Included in these estimates is our expectation, as mentioned that we will incur a further 1.8 million in purchase accounting charges. We are expecting revenues from AEG to decline, generally consistent with historic seasonal trends and for the ACG business, the communication business to grow modestly primarily due to anticipated growth in Office Wireless. Although we have not completed a full financial analysis of the national branding and advertising campaign, we feel we have sufficient information to conclude that it is appropriate to continue the campaign although at a reduced spin level during the fourth quarter, and help maintain the increases we’ve seen in awareness consideration in revenue growth. For the fourth quarter, we are targeting an investment level of approximately 10 million. While we are evaluating all the results, we are planning how best to address demand generation for Office Wireless products for fiscal 2007 and as Ken mentioned, we do expect to continue to invest in branding advertising and demand generation for this category next fiscal year. When turning to the balance sheet, cash and marketable securities decreased by 33 million during the quarter to 58.2 million from 91.2 million at the end of September. The decrease was primarily the result of 22.4 million used for stock repurchases, 9 million pay down on our line-of-credit, 9 million in capital expenditures and dividends issued of 2.4 million. Offsetting these primary uses of cash during the quarter, we generated 8.5 million in cash flow from operation and 1.7 million in proceeds from the exercise of stock option. Overall, we believe our financial position remains strong and in that context our Board of Directors declared our 7th quarterly dividend in the amount of $0.05 per share. Our accounts receivable balance increased sequentially from a 115.1 million to 126.2 million with the Communications Group receivables remaining relatively flat for the record cash collections in the quarter, while the Entertainment Group increased by about 11 million due the higher quarterly revenues, which is typical for this business during that December quarter. Our DSO decreased to 51 days from 60 in the September quarter and part of this decrease is due to having the fourth quarter results of Altec versus with the half quarter in September. We certainly believe the net receivable balance is collectable and that we have sufficient reserves to cover our exposure, anticipated exposure to bad debt. On inventory compared to the prior year, inventories were up 7.4 million and inventory turns increased from 4 to 4.8. This improvement in terms is primarily attributable to fourth quarter results of Altec Lansing, increased sales volume during the holiday season causing a reduction to Altec Lansing inventory, as it goes up in September, and it was offset by an increase in the Communications Group inventory. And finally, capital spending was 9 million in the quarter, with 2.7 million of that for our China plant, and depreciation and amortization were 6.8 million for the quarter. Our project to-date we’ve spent 17.2 million on our China plant and design center and we have just taken the keys to the plant. After the Chinese New Year holidays are over, we intend to move in and begin production shortly thereafter. The plant was completed on schedule and within budget and we look forward to starting production there. And we also look forward to beginning to make progress for getting the plant loaded and towards our long-term goals of low-end cost and improving our supply chain, even flexibility. With that, I want to turn it back over to Ved, the conference facilitator for the Q&A session. At this time I would like to remind everyone in order to ask a question please press “*” then the “1” on your telephone keypad. We will pause for just a moment to compile the Q&A rooster. Thank you. Hi, first on the out performance on the office side of the equation, you’ve mentioned that the marketing campaign contribute to that, any quantification of that? We have tried extremely hard John well, we look at all types of data and its very hard to sort out what exactly is due to the marketing campaign, the problem is when you have a new product as we gave with the price in there, it makes sense to use that as part of the whole announcement to have a new product, we have marketing messages and its very hard to distinguish exactly what is coming from what source. In addition we had, there is a lot things that we look at and when we really try to segment out its just really hard to tell, there is a lot of noise within the data and we don’t really have a good control as we’ve had in past experiment. The sequential growth was 20% in Office Wireless, that’s about $6 million of growth and within that growth the majority of the growth did come from the CS50 and the CS60, the 510 has contributed that’s the majority of the 6 million sequential growth was from the already existing products. Regarding the gross margins within the Communications Group and as that relates to the China plant what are your thoughts on the operating expenses, that the additional operating expenses you are going to incur for the China plant as it ramps us and how do you categorize the potential, how much potential improvement is possible for those gross margins? Well, so over the long half first let me say that, I still feel reasonably comfortable with this target model we’ve had of 47% to 50% on the communication side of our business, it does obviously depend an awful lot on mixed and what happens in the Bluetooth market and how much of that we participate in, but overall, I still feel like I’ve got the right range. On China as we start to load the plant here, I think we are going to start turning the corner and see the impact of China going but there will be less of the drag on gross margin going forward and our goal is within the year to at least get that to a breakeven and then move from there. And then stepping back to the marketing side of the campaign or side of the equation for 2000 or ’04 the fiscal year of ‘07, you are talking about moving forward continuing with that and adjusting as you go along, is that benchmark continue to use 10 million from marketing spend or is it 8 million, given the lower spend this upcoming quarter? Well we were using about $10 million over a six-month period. So it’s really a slightly higher run rate than what you’ve got anticipated in that comment. Hi, good afternoon, can you guys talk a little bit about on the Entertainment side with the great volume we had this quarter, the margins excluding the charge, kind of stayed up from a gross margin perspective as that volume drops back down, what will happen to the gross margins in the upcoming quarters? I will let Barbara speak to it in a minute, I mean it principally relates to the fixed cost benefits you get as the revenue ramps. Yeah, I mean, it’s true that we had the 3.3 million in cost of revenue this quarter and that will drop to about $1 million next quarter so that’s a good guide but we also expect the revenues to fall quite a bit and they do have fixed cost of a manufacturing plant and so that will move in the other direction. Our model for that business is 10% to 30% to 35% gross margin target, including the anticipated purchase accounting targets, I think they will probably stay in that, in that range. Okay and then on the Communication side, if you go back a quarter ago, you guys talked about some of the same issues in terms of adding capacity and yields and the warranty charges and so on and so forth. You saw a sequential improvement; can you talk a little bit about going forward? Are these same issues that you highlight? Do you see each of them getting better or there are some that will just potentially hang out there for a while? Can you just talk directionally about how you see those issues impacting the margins on the communications side? Yeah, I mean, the warranty costs as I said in September, they are about 2% of revenue and that is kind of a normal level, it was lower than that in September, a year ago and in December a year ago but September of this year and December of this year, it’s stabilized and I think we’ll probably, generally be in that 1.5% to 2% of revenue on warranty cost. So and then E&O just tends to fluctuate with market conditions. I do think as we ultimately reduced this improved supply chain flexibility and in more platforming, we can hopefully at least limit the growth in E&O and those things help but the big net is on manufacturing cost and there we certainly are working to reduce those and improve the cost position. The China plant is part of that but we do need to get that plant loaded and up in running and we also have some key opportunities on component costs that we are working as well. And Barbara as you said with the China facility, you’ve taken the keys to that now. Is that something that will probably be a little bit of drag on margins in the near-term or how should we think about the China plant as that ramps up? There will still be a little bit of drag on margins but I hope for that it is going to get to be, kind of less of a drag each quarter and so that we actually maybe talking in a year-over-year context of it being a favorable factor. Do you understand what I mean, because we’ve been in the startup on mode where there was really almost no absorption coming out of that, out of there, until as we move forward, I think its going to be, its going to be less and less and eventually get to our contributor. Okay and then just one final question from me, you guys given some consideration or can you give us some idea of what you think the options expense might be for fiscal ’07? We haven’t put that out yet, we have done a lot of work on it internally but we haven’t finished reviewing it with our auditors and with our Board and we certainly want to do that before we communicate externally. Hi guys, how are you? Just a quick housekeeping question on the tax rate, where were we’ve been without the impact of the charges? We actually don’t have that handy, we haven’t done the non-GAAP version and I don’t really think that is, I mean, I don’t think that we need to do it. I am just thinking of what a normalized rate would be, you know with the 1.8 millions going there that you have a couple of million out of there… So that would be, if we didn’t, if we didn’t have any purchase accounting and we will have that one for a long time, its 27% on the Communication side and 41% on the Entertainment side so if you just blend. And I’m trying to figure out what the non-GAAP EPS would have been for the quarter, kind of assuming that those charges, the purchase accounting charges weren’t there. $0.08 higher, okay, that’s all fine. Alright and the gross margin outlook for the March quarter, I would assume that the blended margin should be better in the March quarter only because we have a higher mix of the ACG which should have a strong quarter whereas AEG should have a weak quarter, am I missing anything there, is there any impacts on mobile, negative or positive? No you’re not, you’re not missing anything there, but we are not giving guidance specifically on the gross margin because of the directional factors. In other words, the only thing that goes negative obviously is that our volume improves gross margin and this is lower volume. Right, right, okay and then we, I guess the questions for the results for the December quarter and then Ken, you could speak for this, what kind of surprise you guided, what I thought was fairly conservative and I kind it kind of beat you guys up last time. And I feel somewhat vindicated, but Ken maybe you could comment on what the price it should be upside the most? Yeah, many people are more right about our business than ourselves so I am, but I congratulate you for that. You know couple of things, on the office side obviously, we did not know exactly what to expect, I think there were a couple of things made the pattern interesting. One was that we had it usually, with July and the September quarter and then it was kind of finished with a particularly strong September and so given that unusual pattern, it also made it hard to understand what we were going to see during the balance of the quarter. We are also dealing with some benefit in the business from Hurricane Katrina that were hard to measuring the steps. So that those were couple of things and of course we didn’t know exactly how much impact to expect from the marketing campaign, those were few of the variables instruct me the significant from that side of business. On the AEG side, I think actually everybody was surprised with the share number of iPods were actually sold, 40 million was ahead of the estimates that we have, in addition to which the nano had come out as a slight surprise with the heavy black to white colored preference and everyone now just does had white products with a slightly different size form factor then there was kind of the issue at the back, backwards and how that reflects the tax rate. So, those things went up going a little better than we had expected across the Board, but those are kind of some of the issues. Well, we have a little bit better success particularly with the discovery of products than we had expected, it’s a slightly higher priced product then it’s sort of being in terms of being in design statement in that market and so we weren’t we always do a little bit of market research with the elasticity of demand, but I think that the design in that was very captivating the customers and the sell-through level went a little bit better than we hoped. And I would say also that the category as a whole was stronger than we would expect that it would be, be embracing with Bluetooth in some of the newer markets and some of the – and some of the promotions buying the phone were all a little bit stronger than it has been expected. So would you expect some seasonality in the mobile business in the March quarter, I know historically you’ve had seasonality but you do have these new products, what could you tell us I know you didn’t give segment guidance but what’s your general on the March quarter more seasonal in with mobile? Well, first as you note, we are beginning, we have been particularly good at forecasting the business, and I don’t know that we will right now. I think that there is seasonality to the mobile business, but it is not as seasonal to be sure as the Entertainment business and yes, there is, there is certainly some lift there, we are still hoping that Bluetooth is rolling out some of those products but at the same time the sustained fund, we would also acknowledge that one of the things we saw was, that even though our products were kind of, I think widely viewed as being the best-designed products in the industry and was the best performance in many respects in terms of audio quality and reliability, there’s a lot of people out there you know with the hope in grabbling business with bundling, and with significant cash offers and that makes forecasting the business much more volatile in this quarter. So I expect, a smaller seasonal effect in the March quarter, but you still have some seasonal effect. Hey last question, just on the mobile gross margins, Barbara I know I don’t break that out, but could you at least give us some sense of, how they did sequentially just on that particular segment, and how we should be thinking about your mobile gross margins I know historically they were in the 35% to 40% quoted and with Bluetooth, obviously they are lot lower, but could you give us at least some direction there or some help? Alright, well so they are lot lower than where they were unquoted, when there was decent blend of retailing career but the good news is, I think what I’ll say is that, margins improved sequentially and, the products, they’re certainly profitability at the gross margin levels so that, that’s a good stuff in the right direction. Thank you, good afternoon, I’m just wondering if we can focus it on the AEG business for a moment, so I got a few questions. First is, Bob you talked of mobile seasonality on a sequential decline going in from March quarter, can you share with us what the sequential decline was last year and just I’d say good comparison anyway given the growth of the category? Sure. We’ve been looking at their quarterly patterns and to be sure, you know there’s always changing environment, changing environments but in fact, it looks to us like the patterns have been fairly consistent as it have been induced from a consumer side until we do actually think that a typical December to March quarter seasonality effect is appropriate. And bear in mind, that that although the, in the analysis much of what we’ve seen at a year ago with the earlier stage of iPod growth still representing, a good secular trend, overlaying the seasonal effect. Okay, and can you talk just little bit about your tax rate for the category. I mean, 14 million iPods, do you have a sense of how many of those iPods are actually attached to these devices. What share of the market you might have, and whether or not it’s a concurrent purchase or lacking purchase obviously that might, mitigate this seasonality a bit. We do have some of that in information, but not all of it. And, but the nice thing is that there has been a significant portion of people who do accessorize their iPod. The Altec is not the #1 player in this category; when we are talking about specifically accessorize and with respect to speakers. But having said that is amongst the market leaders with around of 20% to 25% range of the business. Well I again, I do have some of that information but I don’t want to pass along for couple of reasons. First, not a 100%, sure that it’s going to be twice the same way that you’re going to be thinking about it, and so, I prefer not the answer, but we can come back to you on that later if you would like. Sure got it, okay, and then last question is on the AEG side, do you offer price protection and as you think out that the business, is that factored in to your guidance, I am sure if it is this relevant. With respect to, basically sell all through, typical retail which does have price protection, but they really don’t lower, I mean, occasionally they do lower prices but, its not, its more like you bring out a new product out of a new price point. And so, with price protection, the way that works is when you make a decision that, you are revocable; then you must immediately record the estimated price protection. So, if they are thinking that they might get price pressure and need the lower prices. Then they would go about into their forecast that, you don’t want to actually take it, when you actually make a decision. Ken last quarter, on the call of last quarter, you talked about seeing, potentially seeing some pricing pressure on the call center and office space and with 20% sequential growth, its certainly doesn’t appear that it showed up that this quarter, are you still concerned that there maybe some pricing pressure there? No. We are still concerned about that, I would have to say that perhaps in the December quarter, we didn’t see as much as we feared as we look out longer term, it is still a concern at a risk that we see in the business. Okay, and then also last time you talked, I think some of the Mexico manufacturing facility, was having some difficulties and you lost some sales, Bluetooth product sales. Looking back now is there a way you can quantify those sales? Not it’s a really, really hard to quantify that type of stuff, because what happens of course is first of all if you are late with the delivery, you missed a certain amount of sell-through and then replenishment activity and its hard to really know, what that was for that period of time. You know, we had difficulties with their yields and those have clearly improved and then we had difficulties with component shortages as we were trying to struggle to catch up with the quick demand. The overall manufacturing environment is clearly improved into our run rate at this point in time, reflect the end-market demand for business, obviously we are hoping to further to penetrate additional accounts by the end of the quarter, there was no limitations from standpoint of supply in terms of our gaining distribution. Sure, and then on the advertising campaign, just lastly, any potential plans there to maybe expand that to support maybe brand awareness on the consumer Bluetooth product or maybe even to the Altec Lansing brand name? Not in the significant manner and I will just give you our basic strategy which is that we are the market leader in the office of which communications accessory business and believe that there is a significant opportunity for a long-term adoption in that category and think that if we do not make the effort to promote adoption, that it probably won’t happen and so it’s really important to us to drive the industry growth. On the consumer sides of our business, we believe that there are lot significant market players with the enormous brand spending and follow it in consumer reach that are already setting those balls into play. And so, for us to try to make, a very small speak amongst the very loud roars of the elephants. I think would be, kind of lost in the noise, and so our primary strategy there is to compete successfully for market share and to try to be as profitable as we can, given again the price in economics of some of our competitors. Much of our focus there, to the extent we’ve spend marketing therefore is really around making sure that the value that we have to offer is clear to the consumer, because while again others may have larger brand names, we clearly have a better quality product. And that’s a hard message to get out and get through, but we are not reliant just on spending advertising. We can rely on better education; we can rely on better packaging, better point of sale materials, just a lot of ways to try to get that message across, without trying to spend the ad dollars against people with much larger budgets. Can you talk about the marketing campaign again, the I believe on the last conference call, Barb you spoke about $20 million I think with, much it was calendar ’06 or for fiscal ’07 and any idea how much you were anticipating spending? Would it be better to assume that, right now the outlook can spend less than that or? All right, so Manny that, there were I think 20 million for fiscal ’07 is kind of the right ball park number, I wouldn’t think of it just as advertising that is demand generation in a broad sense, including some branding and advertising. The 2 million for the fourth quarter is, so that’s above what we’ve planned for this year. We had originally planned, 9 million in this year, 10 million for this kind of first stage. And we’ve completed that, but we don’t want to dark in Q4, because it takes a while to get awareness to take some repetition. And so we are planning to continue that a lower level and Q4 was about $2 million spend. Figure out, how to first change the campaign and kind of take it to the next level if you would. And then start again in fiscal ’07. To 20 million, okay, and then the, talk about some synergies between ACG and AEG, the, do you have any plans or can some of the distributions that you use for ACG, sell some of the AEG products, that happening now, is that something that could happen? Yes where those segments overlap and those would be principally segment such as in the mobile space where you are now seeing the convergence of, cellular phones with audio entertainment and the forms of these mp3. Cell phones which, it’s clearly embryonic state, they perhaps that are fully growing in popularity with some of the new model. Few questions first on the Altec Lansing business can I know you said, you couldn’t talk about the specific attach rate. But, can you talk about the directionally is it moving higher and if you think it is moving higher than what would be the factors behind that? Further for the iPod speakers. Yeah, I do not I do not I don’t recall being trend data that shows that is moving up significantly higher someone have to get back to on that. But I think that the, the general trend of people to accessorize their iPods as they can root and is having increasing focus on the part of the retailers as well as on the part of everybody involved in the eco system. We are trying to create a more complete experience for the consumer. And so, I think that with that trend is got in pretty well established already and so that the largest growth I think has been driven by the growth with category itself rather than that the, speaker segment in particular is having, we are having the significant increase in the attach rate in the December, quarter. But if we look over a longer time period, then there has been increase in the attach rate specific speakers. Okay and then moving on to the office and contact center business. If I look back, typically, you’ve seen a decent up tick in the March quarter, just because it, it seems like its because of the, a fiscal yearend. Now, quarterly the Cordless Office Headsets will grow but, if I look over the last three quarters the corded business has been flat to down slightly. Is there any reason that could actually pick up in the March quarter, just because it again the fiscal yearend? It’s a good point and historically you are right that the professional great corded headset business usually was up sequentially in the March quarter and the March quarter would kind of set the pace, for the rest of the quarters for the year. And not that was, I would say a pretty established pattern over maybe a decade or more, but I do also think there are lot of things, have changed with because some of the office market, is clearly buying Wireless product and I think a greater percentage of our corded products go into the contact center probably when they did, 5 years ago, when at least when a bigger portion was going into the office market. So, I think it’s little harder for us to estimate and it is tend to be something that we don’t count on any of that because if, for long, it could make a difference in terms of their earnings. So that’s one that we tend to think of more as, flat growing slightly. Great, I guess my question, some companies typically give their sales people, a bigger incentive to close out the year with the banks sort of speak? Okay. Then my last question again so professional corded was up sequentially this quarter, can you talk about how much of that was volume versus pricing? Okay terrific wanted to come back quickly visit, the, our manufacturing cost on the Audio Communications Group gross margins, can you give me an idea of what steps are you taking to lower some of this higher manufacturing costs? Sure, I’ll give you a few. First of all, of course, we have always devoted effort to component cost production and to manufacturing engineering and some of the times those are longer cycle project because we are meeting to do some redesign of the product, we needed to do some qualification of particular components and so there is a variety of reasons that can represent greater cycle. But we have a fairly significant effort there right now. I think we have fairly significant opportunity there across some number of our Wireless products what we’ve really, are early in the types of silicon solutions we are using relative to what we think we can build. A second thing is really in terms of design for manufacturing, we, I think entered to world wire for the first time; we have some real cutting edge designs that are winning these awards. And at the same time, that is slightly immature process from our standpoint in terms of doing that effectively from a customer standpoint and also doing it effectively from a, the cost standpoint and from a, ease of manufacturing yield standpoint. So that’s a learning curve that we are trying to move down, will hit a price still take this for a while but we are certainly trying to make progress in moving down that curve. Obviously, I won’t reiterate any of the things with the China plant. Because it’s probably speaks for itself. But certainly we are hoping it and expecting to get, better cost there. How would you rank those in terms of the importance or in terms of magnitude, design to manufacturing the component side of the equation in China Plant? Well, I mean I think that are crucial and by the way I’d mention one more which is, how effective through the platform products which can lower our tooling and testing and another costs as well as producing cycle tend to market, I probably have to say that the, the product cost itself with the single largest item, but I haven’t said that on a, on an ongoing sustaining basis its probably more, the, as the platforming than anything else. Okay, and two final ones, one clean, if I could Barbara on the American Jobs Creation Act, you’ve valuated that potential to repatriate some cash and you decided not to do that, is there any tax impact associated with that going forward? No, there would have been if we had decided to do it, but we actually concluded that it, it didn’t, it wasn’t, it firmly compelling for us, and so there won’t be any. And then, lastly as I looking to 2006 from a calendar standpoint, the two large trends out there one, certainly Voiceover IP adoption particularly, on the residential basis? On the residential side and in your strategic path, as for as a new product introduction to focus on that market and then secondly of course, we’re expecting two new gaming consoles in 2006. As well as Xbox ramping, is that something you look at more as potential upside or catalyst potential and maybe we might see another cabling tool? Okay so first on the, on the VoIP side actually we’re very pleased with our new product line up and I think we’re generally getting a pretty positive response to that product line up and so we think we’re well positioned there and, clearly at that market, market expands as we hope, will get some participation. Having said that, I’d like to caution people about the, the VoIP market because there is two forms of that market and I don’t know, you know this, but I just want to make sure everyone clear. In one form of the VoIP market, people are using in APA and then it’s quite invisible relative to the terminals that you are using in their home, so they can use their existing phone and they don’t have to have a headset, of course the headset, the buyers certain benefit if they don’t have to use it, when they are using their computer as a terminal that it tends to increase the attach rate for headsets in the home and also typically the free services. And obviously, just because you’re using VoIP doesn’t mean your necessarily using the free service. Relative to the gaming opportunities, we don’t see another cable or two coming having said that, candidly, when that one came we didn’t see it very far in advance either something could always come out of the blue. But the thing to remember is, in the gaming industry, you don’t have to help at this specific core of the game, so what we hope that this does represent a long-term opportunity, we also don’t expect it to be as larger portion of the total revenue opportunity in the coming year. Well we, we are rested in the residential market and we do have a kind of a Wireless headset telephone, that we use as well as the potential for between greater use of Wireless headset with, socom Bluetooth-enabled wireless phones as well as with personal computers, so I think that there is some potential in that market although, we don’t expected again to be a significant part of our, of our revenue mix. Hello? Hay guys just on the, on the taxes again, just want to make sure understand for the March quarter the, the guidance does, it includes about 1.8 million amortization charge and the fact of the tax rate. For did you not get any benefit from tax is it right? If I would have trying to estimate the impact from the tax, I’m not being able to deduct the taxes, I just take the 1.8 million and divide it by the share count, is that what I do? All right thank you very much, I would like to thank all of you for attending our call as always we’re available if you have follow up questions. Thank you again.

EarningCall_233929

Here’s the entire text of the prepared remarks from CDW Corporation (ticker: CDWC) Q3 2005 conference call. The Q&A, which followed the prepared remarks, 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: we have paid to have this conference call transcribed, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. As a result of the truly superb efforts of all of our CDW coworkers, we delivered another quarter of record performance in the third quarter of this year. We continue to profitably outpace market growth while setting new records for total revenue, average daily revenue, net income as well as diluted earnings per share. In addition, we had the best ever revenue week in the history of the company during the last week of September. My belief is that our consistent focus on the customer has been the key to this continuing track record of performance. Our 21-year culture is based upon giving customers a superior customer experience, and we continue to try to perfect this core company philosophy each and every day. Customers come to CDW for a full range of responsive service. This includes the knowledgeable advice of the industry's best-ranked sales group, industry's best products, and best solutions, next-day product delivery, as well as quick resolution to inquiries after the sale. Please turn to the third slide of the webcast presentation to take a look at our financial results. As you can see, total revenue was 1.67 billion in the third quarter of this year compared to 1.51 billion in the third quarter a year ago, an increase of 159 million or 10.5%. We also had an increased average daily revenue of 10.5%, up to 26.1 million over the period a year ago. Also, annualized revenue per coworker was 1.62 million in the third quarter this year, compared to 1.61 million a year ago. Gross profit margin was 15.3%, operating profit margin 6.7%, as you can see. Net income was up 12.2% to 73.1 million and diluted earnings per share were up 15.8% to $0.88 a share. For the month of September, we grew average daily revenue 12.5% at 28.2 million. Total revenue in the month was 593 million compared to total revenue in September a year ago, 527 million. Barb will give you many more details on the financial results in a few minutes. If you turn to overhead No. 4, you can see our return on equity, as well as our return on invested capital. In the third quarter of this year we achieved return on equity of 22.1%, which was 1.7 percentage points above the third quarter a year ago. Likewise, our OIC was up in the third quarter this year to 44.4%, compared to 44.1% in the third quarter a year ago. These numbers, I believe, are outstanding numbers compared to any company in the industry in America. Consistent with previous quarters overall, IT demand remained relatively stable during the quarter. Activity from different customer channels, and that's different customer segments within CDW, can vary from month to month, but we did achieve growth in every customer channel for the entire quarter, including the federal government channel. In order to continue to take market share and achieve growth in the future over the long term, we need to make significant new investments to prepare for future growth. So we want to talk about some of those investments at this point. First, we continue to make significant investments in our sales organization, to develop our customer segmentation model. Last quarter we announced the creation of a dedicated healthcare team, which will be part of our public sector group. This initiative is part of the customer segmentation strategy for specific industry verticals. During the third quarter, we successfully consolidated over 10,000 healthcare accounts from across our entire sales organization and transferred these accounts to the new team in the public sector group. The transition was well executed and we are pleased with the results. We believe that by leveraging our existing expertise in the healthcare industry, we will become increasingly well positioned to serve the unique IT needs of our healthcare customers and take market share in this growing vertical. As you already know, we are also making significant investments in our infrastructure to position the company for more growth. Our biggest new investment course is the new North Las Vegas distribution center, which is also on track to open by the end of this year. We believe that this new world-class facility will set industry standards in terms of productivity as well as efficiency. While the project was initiated out of necessity, since our Vernon Hills facility is operating at capacity, we believe there are a number of new advantages we will gain as a result of opening this new facility. First as an ideal location, not because it was just in Las Vegas, but because Las Vegas is 1 day away or less from many of our vendor, distributor, and carrier partner facilities, as well as less than a 1 day trip from the important port in Long Beach where most of our inbound product shipments come into the country. We will also be closer to our largest customer base. Usually our number 1 revenue state is the state of California. Second, the extra space available in the new distribution center will enhance our purchasing power. We are out of room in this facility, and as a result are not able to take advantage of large product buy-ins when they are available. We've had to restrict our ability to do those, or operate in very tight facilities at Vernon Hills. So this will be a new advantage as well. In addition, our configuration center in Vernon Hills, which all of you know about and which was doubled over the past 18 months, is also at capacity, and we are building an even bigger configuration center in the new Las Vegas facility. And fourth, we do expect to get shipping efficiencies by leveraging both locations as we are choosing which location to ship from to our customers. So we know that we'll have good enhancements, better customer service as a result of this significant new investment, but it is significant. So investments in our infrastructure and in our organization will add to our expenses in the short-term and Barb will go over those with you in a little more detail in her presentation. We do need to move forward with these initiatives since they are necessary to provide the room for future growth, but we want you to know that our philosophy of never being satisfied is as strong as ever, and it is just as applicable to earnings per share as it is to customer service, so we will work hard to leverage these additional expenses as quickly as possible. We believe firmly that our approach to customer segmentation will continue to pay off and we will continue to execute our key strategies for growth, which are enumerated on overhead No. 5 of the webcast presentation. They include improving productivity, growing our customer base, penetrating existing accounts, optimizing our product mix, strengthening our brand, and selectively pursuing strategic transactions. Finally, I want to give a big thank you to each of our CDW coworkers who delivered another record quarter by doing a great job for our customers. With that, I would like to turn the presentation over to Harry Harczak who is stepping up to the plate to give you his near term outlook, which is White Sox Win the World Series. I will now turn the call over to Harry to discuss baseball, philosophy, sales and product trends for the third quarter. Thank you, John, and from a baseball perspective what an exciting time it has been in Chicago. Now on to business, both the corporate and public sector segments achieved new quarterly sales records in the third quarter of 2005, and all customer channels grew compared to the same period a year ago. These results reflect a restatement for the consolidation and transfer of all healthcare accounts to the public sector, which is attached as an addendum to our third quarter of 2005 earnings press release. In the corporate sector, total corporate segment sales were 1.117 billion in the third quarter of 2005, compared to 1.018 billion in the third quarter of 2004, representing a 9.7% growth over the prior year. Average daily sales in the third quarter of 2005 were 17.4 million, compared to 15.9 million in the third quarter of 2004. Both quarters had 64 billing days. We experienced normal seasonal patterns in the corporate segment during the third quarter. Corporate sector growth, which outpaced the market, resulted from the continued execution of our key growth strategies that John outlined in his section, such as penetration of existing accounts and new customer acquisition. We believe our performance was positively impacted by our continuing investment in our specialist teams and on going training for the entire sales force. Our public sector segment, CDW-G, generated total sales of $554 million in the third quarter of 2005, compared to 494 million in the third quarter of 2004, representing a 12.2% increase. Average daily sales were 8.6 million in the third quarter of 2005, compared to 7.7 million in the third quarter of 2004. In our August monthly sales announcements, we indicated that federal sales were flat for the month. Federal sales grew in the third quarter of 2005, compared to the period a year ago, due in large part to our focus on funded opportunities within the federal customer channel. The third quarter has historically represented our strongest quarter due to the federal government's fiscal year end on September 30th. As we examine the potential impact of hurricane Katrina on the third quarter 2005 results, net net we found the impact was minimal for both the corporate and public sectors. On September 30, 2005, our sales work force numbered 2061, which was 9.6% higher, versus 1,880 on September 30th of 2004. We are on track to add 100 to 125 net new sales force coworkers in 2005, which includes, account managers, specialists and field sales coworkers. We have also continued to increase the number of our advanced technology specialists, which now number approximately 260. Sales force retention continued to improve versus last year. In the third quarter of 2005, the percentage of sales force turnover was in the high teens, while a year ago it was in the high 20's. On slide 6, average daily sales per average sales force coworker was approximately $13,000 for the third quarter of 2005, which translates to approximately $3.3 million on an annualized run rate basis. On a year-over-year basis, we maintained our productivity levels and on a sequential basis we increased average daily sale per average sales force coworker by 6.6%. This metric is affected by both the timing of new hires and sales cyclicality. As we continue to grow the sales force, we remain focused on improving productivity across the entire sales organization. I'll now turn to highlights of product trends. Slide 7 shows our product mix for the third quarter of 2005, compared to the third quarter of 2004. Software remained our largest product category comprising 17.3% of sales. Data storage devices was second at 13.9%. Desktop computers and servers were third at 13.7%. Notebooks and accessories was our fourth largest category 12.9% and printers were 5th at 12.2%. Product revenue growth rates are shown on slide 8. Data storage devices increased 17.8% versus the prior year period, and desktops and servers grew 16.6%. The trend of server consolidation positively impacted both these product categories. In addition, demand for storage was driven by the ever increasing amounts of data to be stored, threats of data loss, and increasing government legislation surrounding maintenance, access, and security of stored data. Growth in servers was positively impacted by increased sales of higher ASP technologies such as blade servers and dual core processors. Strong desktop growth resulted from our PC refresh campaign that focuses on the productivity gains of upgrading old desktops. Netcom products grew 15.7%, and the category was positively impacted by demand for security products, routers and switches, power and telephony. Software grew 14.8%. Application suites, operating systems, and security software were standout drivers of this category. Printers increased 6%, with solid growth in faster color laser printers, multifunction printers, and printer supplies. The video category had double digit unit volume growth, but total revenue was impacted by declining ASPs, especially for LCD, displays, and projectors. The notebook and accessory category decreased slightly by 0.2%. Notebook CPU growth of 2.2% was partially offset by lower sales of hand helds and PDA's which are included in the notebook and accessory category. Slide 9 shows the change in revenue, unit volume, average selling prices for notebook CPUs and desktops and server CPUs. Notebook CPU revenue increased 2.2% and unit volume was up 11.8% compared to the third quarter of 2004, with the average selling price declining 8.6% from a year ago. Notebook sales were impacted by product mix. ASPs on some notebook lines were significantly lower but these prices allowed us to be more competitive in the marketplace, driving unit volume. In addition, Apple was focused in taking more business to direct sales channels. In the fourth quarter of 2005, marketing efforts will be focused on a notebook refresh campaign that promotes the productivity benefits of updating older notebooks. We also expect to expand our notebook category offerings, and will continue to concentrate on further penetrating this category with our existing customer base. Revenue from desktop computers and servers increased 16.6%, and unit volume was up 12% from the third quarter of 2004, with the average selling price increasing 4.2%. Slide 10 shows that the web generated approximately $455 million in direct online sales for the third quarter, representing 27.3% of sales in the third quarter, an increase of 12.3% over the third quarter of 2004. We want to drive more customer web usage so we'll continue to enhance the functionality of both our website and customer extranets. Barb Klein will now comment on third quarter financial performance. Thank you Harry, and good morning again. As John mentioned, the third quarter of 2005 was another quarter of record, in which we outpaced market growth and delivered solid financial performance. Gross profit margin in the third quarter of 2005 was 15.3% compared to 15.1% in the third quarter of 2004, and within our stated objective range of 14.75% to 15.5%. The increase was primarily due to stronger product margins. Additionally, a larger amount of cooperative advertising funds were reclassified as a reduction of cost of sales, due to both an increase in marketing activities and because virtually all cooperative advertising funds were reclassified as a reduction of cost of sales in 2005. The positive impact from these items was partially offset by reduced customer charges for delivery, insurance and handling, and a lower level of vendor incentives. The company restructured and simplified its charges to customers for delivery and insurance and handling in the first quarter of 2005. We expected these modifications to be offset by changes in product pricing and expedited delivery charges over the course of the year and we have made progress on this objective. Vendor incentives were lower in the third quarter of 2005 versus 2004 due to changes in vendor program. Advertising expense was $29.8 million in the third quarter of 2005, and $24 million in the third quarter of 2004, an increase of approximately 24%, we continue to execute the integrated branding campaign that was launched earlier in the year. Slide 11 shows our operating statistics. As CDW's business continues to evolve, we periodically evaluate the relevance of metrics used to measure our performance. As we have discussed before, CDW's business has become less homogeneous over the years. The metrics for invoice size and number of invoices have become less meaningful as the business has changed. For example, an invoice could contain a single item such as a printer, or it could represent a multimillion-dollar billing to a customer. Additionally, a single order could be fulfilled through multiple shipments and invoices. Since invoice size and number of invoices are no longer as relevant as measures of our operations, this is the final quarter we will provide these metrics. Selling and administrative expenses were 6.8 % of sales in the third quarter of 2005, compared to 6.5% in the third quarter of 2004, an increased 15.1% compared to previous year. The increase was due to increased expense for the additional profit sharing contributions to the 401K plan of $1,000 per coworker announced earlier this year in conjunction with the modification to the company's stock option program. Approximately $1 million of expenses relating to the preparation for start up of the company's new distribution center in North Las Vegas Nevada and increased payroll cost for a larger number of coworkers to support a larger and growing business. Our operating margin was 6.7% in the third quarter 2005, compared to 7% in the third quarter of 2004, and was within our stated objective of 6.5% to 7%. Inventory turns on an annualized basis were 25 times in the third quarter of 2005, compared to 24 times in the previous year. Our objective remains at 25 inventory turns annually. Accounts receivable days sales outstanding were 37 days at the end of the third quarter 2005, compared to 33 days at the end of the third quarter of 2004. The increase in day sales outstanding was due to a higher percentage of sales on terms as our commercial customers continue to represent a larger portion of our sales. As a note, over 99% of our customers are commercial customers for the third quarter of 2005. The increase in September 2005 revenue of 12.5% compared to the prior year, and the inclusion of sales taxes collected from our commercial customers in accounts receivable, which permanently added approximately 2 days to days sales outstanding beginning in the second quarter of 2005. Our DSO target is 35 to 37 days. The effective tax rate for the third quarter of 2005 was 36.9%, compared to 39.6% for the third quarter of 2004. The tax rate of 36.9% for the third quarter of 2005 reflects an adjustment to the overall effective tax rate, to arrive at combined rate of 37.4% for the first nine months of 2005, which is the rate we currently expect for full year 2005. The primary reason for the year-over-year decrease is the result of collecting state sales taxes, which began in the second quarter 2005. CDW had to register to do business in all states in order to collect sales taxes, which makes the company subject to state income taxes. Income tax rates and apportionment factors vary across state. The revised effective tax rate is estimated at 37.4% for full year 2005, which is slightly down from the estimate of 37.8% we provided in the second quarter of 2005. The difference is due to an increase in estimated tax-exempt interest income from state and municipal securities that will be earned in 2005. Change in effective tax rate increased earnings per share in the third quarter of 2005 compared to third quarter of 2004 by approximately $0.04 per share. On a sequential quarter basis, the effective tax rate that we provided in the second quarter for the remainder of full year 2005, compared to the actual tax rate for the third quarter 2005 increased earnings per share in the third quarter by approximately a penny per share. We repurchased 124,000 shares of our stock in the third quarter at a total cost of $7 million. Year to date we have spent $219 million for share repurchases, at an average price of $56.76. In the second quarter of 2005, share repurchases of approximately 1.5 million shares were more heavily weighted towards the end of the quarter. The full impact of those repurchases was realized in the diluted weighted average number of common shares outstanding in third quarter of 2005. On a sequential quarter basis this positively impacted earnings per share for the quarter by approximately a penny per share. We have approximately 2.9 million shares remaining under the current share repurchase authorization, which expires in April 2007. Slide 12 shows our share repurchase and dividend history. And in total, we have returned over a quarter of a billion dollars to shareholders in 2005. We ended the third quarter with approximately $590 million in cash, cash equivalents, and marketable securities. Cash flow from operations was approximately $67 million in the third quarter of 2005 and $238 million in the first nine months of 2005. Working capital increased in the third quarter of 2005 as the business continued to grow, which we also saw in last year's third quarter. As John discussed, we have fully transitioned our healthcare accounts to creating new customer channels within the public sector. Results of operations on a quarterly basis for 2004 and the first two quarters of 2005 have been restated for the corporate and public sector segments to reflect this change. The addendum to the financial information in our press release provides these restatements. As a result of the transition, corporate sector operating margins did not change significantly, however, the public sector operating margins were generally positively impacted because the margin on sales to health care customers was more similar to an average corporate sector customer than an average public sector customer. In the third quarter 2005, corporate sector sales increased 9.7% and operating income increased 8.9%. Public sector sales increased 12.2% in the third quarter, compared to last year's third quarter, while operating income increased 3%. Operating income for the public sector increased at a more modest rate due to lower gross margin on certain government customer sales and an increase in selling payroll, primarily for field sales coworkers to support the increase in sales. Headquarters and other expenses increased from $6.7 million in the third quarter of 2004 to $8.6 million in the third quarter of 2005, primarily due to larger number of coworkers to support a larger and growing business and increased depreciation expense related to software investments made in the second half of 2004 and hardware investments made in 2005. John also talked about our second distribution center in North Las Vegas Nevada, which is scheduled to open by the end of 2005. Since we are at capacity in our existing distribution center in the Chicago area, we are investing in this new facility to prepare for future growth. The Las Vegas distribution center will be approximately 500,000 square feet compared to our current distribution center of 450,000 square feet. Over the next few years we will leverage the new space and balance shipments and growth between the two facilities. To ensure that everything is working smoothly, the operations in the new distribution center will be ramped in a controlled and deliberate manner. During the initial stages, we will begin to ship to those customers in the western most states, such as California and Nevada. Gradually, we'll begin to serve those customers located west of the Mississippi river out of the new facility. We estimate capital expenditures of 35 to $40 million for the facility in 2005. By the end of 2006 we anticipate utilizing 30 to 40% of the facility's capacity. As John indicated, the Las Vegas distribution center is an investment to support future growth. As we have stated previously, the project will increase SG&A expenses. In the third quarter of 2005 we incurred approximately $1 million as start-up cost and in the fourth quarter of 2005, we expect approximately 3 to $4 million of start-up costs. The total expected start-up costs for 2005 of approximately 4 to $5 million is down slightly from our previous estimate of 5 to $6 million. In 2006, there will be added expenses including rent, depreciation, coworker costs, facilities and supplies. Some of these costs like rent and depreciation are straight lined for accounting purposes and are not tied to shipping volume. In addition to the new distribution center, we will be adding leased office space primarily in the Chicago area for sales and support functions. As we continue to grow, we will need more space to accommodate more coworkers. Rent and depreciation are straight lined for accounting purposes, regardless of the fact that the additional costs provide for future growth. The new distribution center and additional office space represent infrastructure investments that are necessary to support CDW's future growth. However, these investments will impact SG&A expenses and operating margin in both the fourth quarter of 2005 and full year 2006. Total SG&A expense for these investments is estimated at approximately $25 million in 2006, and approximately $17 million incrementally over 2005. Primarily as a result of these investments, our operating margin objective is modified to a range of 6.1 to 6.6% for these periods. At this time, our goal is to be at the higher end of this range in the fourth quarter of 2005 and the fourth quarter of 2006, but we'll probably be at the lower end of this range in the first quarter of 2006. As we have typically done in the past, we'll continue to provide our operating margin range objective on a quarterly basis during our quarterly earnings conference call. Also as we have done historically we will not update this objective during any quarter. As John indicated, we will focus on leveraging the additional expenses from these infrastructure investments. Our goal is to work our way back as quickly as possible to our previously stated operating margin range objective of 6.5 to 7% in 2007. We will do this through additional customer segmentation, and the execution of our growth strategies, which, again are, to improve productivity, expand our customer base, penetrate existing accounts, optimize our product mix, strengthen our national brand and selectively pursue strategic transactions. We've been able to consistently take market share and achieve profitable growth in all economic environments, and these objectives remain firmly in place. Thank you for your attention and we will now open the line for questions.

EarningCall_233930

Here’s the entire text of the prepared remarks from Genzyme’s (ticker: GENZ) 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 Elizabeth and I will be your conference facilitator today. At this time I would like to welcome everyone to the Genzyme Corporation third quarter 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. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Ms. Curly. Please, go ahead. Sally Curley, Genzyme Corporation – IR Thank you and welcome to Genzyme Corporation's third quarter 2005 earnings conference call today. I would like to remind everyone that the earnings release in this call are available on the investors page of our website at Genzyme.com. Today we will discuss Genzyme's business outlook on the call. Forward-looking statements include our expectations regarding the timing of regulatory responses on our Myozyme marketing application, anticipated progress of several clinical trials, drivers of our future growth and financial trends. These statements are subject to a number of risks and uncertainties and our actual results may differ materially. Please refer to our SEC filings on file for any information that could cause our actual results to differ. If during this 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 also like to remind everyone that our fourth quarter earnings conference call will take place on February 15th at 11:00 a.m. Eastern time. You may access the live webcast on our website. Lastly, as always, please limit yourself to one question per turn during the Q and A in order to allow others to participate. Thank you, and I'd now like to turn the call over to Genzyme's Chairman and CEO, Henri Termeer. Henri Termeer, Genzyme Corporation - Chairman, CEO Thank you very much Sally, and thank you very much everybody participating this morning. I have with me a number of different executives of the corporation who will be available for Q and A, and Mike Wyzga, our Chief Financial Officer, will go through the details of third quarter. Third quarter was an actually, excellent quarter, very strong quarter following pretty strong performance in the second and the first quarter earlier this year. Revenues were up 24%, non GAAP earnings per share were up 38%. It's very clear now that we will end out the year well on the high end of our guidance. We will not provide guidance for '06 in this call. We will do that in January, as we usually do. But I can state that we're maintaining our goal to grow earnings per share, non-GAAP earnings per share at 20% per year. We've been doing so for quite awhile now since 2003, not always in an entirely linear way, but certainly in a very consistent and sustainable way. And that's really the picture that's now developing around the Company that explains the continuation of very good performance that we are seeing. Since 2003, we have really fundamentally transformed the corporation. We now have three drivers for sustainable growth. One is product diversification. We have a number of different products now in the market that are each, in their space, standards of care products that are very reliable in terms of their performance that still have, in most cases, very long legs left with a lot of market share and a lot of convergence still to take place, and where the most mature product, Cerezyme, that has been with us since 1991, is still performing very well as well. We are continuing to invest in Cerezyme and in _____. As the press release indicated, we are about to enter the phase 2 clinical trial for small molecules that will further support this marketplace, but it is a mature market. We are treating pretty much all patients that we are becoming aware of, including many patients that we are treating free of charge because they are in areas where there's no healthcare support. It's our objective to meet that responsibility to continue to look out for all patients wherever these patients are, and make sure that they find the right kind of clinical support. The second platform driver for growth in the future is manufacturing. We pretty much manufacture all our products, and we recently brought on line two additional, very significant manufacturing operations in Europe earlier this month. I opened a plant in Belgium, where we now are starting to produce Campath. In the future we will also be producing Myozyme there. In fact, all of our proteins as a backup to our Allston facility. We expanded the Allston facility by 50% in order to bring Myozyme into that, in fact, we are running Myozyme in that plant right now. And we also opened a very significant state-of-the-art biological fill finish facility in Ireland. Manufacturing is a very important component of the corporation, and a very, very important component behind our continuously stable but improving gross margins, which improved to 78% during this last quarter. We have a global reach. This is something we've built early on, and we continue to expand on it. Our revenues in Europe for many products are exceeding our revenues in the United States. In Japan we have a very successful operation where we sell most of our products directly ourselves through our own sales force. We do our own regulatory and clinical work in Japan, and we are in the process of developing a presence in China. We are opening an office in Shanghai and Beijing shortly, and we are looking at many different opportunities in China to become a participant in what we believe to be a very important market over the next 10 years. Similarly in India, as we speak, we have a team in India to look at opportunities to become an active participant in the Indian market. Not necessarily looking at India as an inexpensive resource or source for manufacturing, but really looking at India as a market. We believe there's a tremendous opportunity for our whole industry between these two countries given the population, size and the speed of economic development. There's tremendous leverage as a result of these platforms that we've been building, and in the third quarter a number of things happened that further emphasize that. We filed Myozyme in the United States in July, and expect action during this year and early next year. We filed Myozyme in Europe late last year, and also there we expect action late this year, early next year. We fully expect to launch Myozyme in the first half of next year, pending positive outcomes of regulatory reviews. I have long said that Myozyme, which, of course, leverages all we've learned in enzyme replacement therapies for Lysosomal storage diseases is maybe our greatest accomplishment in this space. It's a an extremely serious disease. It is a very, very complex picture from a manufacturing point of few as the doses are about 20x, the dose that we use for instance for Fabrazyme indicates a _____ disease. So our manufacturing capabilities and our ability to do clinical development in these very rare diseases has really been tested in this area, and we are enormously gratified that we are now reaching this point, where hopefully in the early part of next year we can start to make this product available to this population. In the case of Renagel, a product that has been doing very well for the corporation over a number of years, during the quarter we released top-line data on a very large trial comparing Renagel against calcium for phosphate binding, and looking at mobility mortality, and at the ASN, the American Society of Nephrology, meeting, coming up in Philadelphia in November, we will be showing in a peer environment what these clinical results really are. We are very excited about those results, because for the first time as a result available now in this space, end-stage renal disease, where a product shows mortality benefit. Earlier in the quarter we closed the transaction with Bone Care International that brings Hectorol as part of the Company. We booked only 14 million in revenues for Hectorol during the quarter. That's primarily a result of us taking a view on the inventories in the field as we have done for Renagel, minimizing the inventories in the field, to avoid the kind of problems that we experienced many years ago, indicates Renagel was too high an inventory. So, we feel quite gratified that this product did perform in terms of scripts, according to plan, and we are very much looking forward to the coming year to market Hectorol because of Renagel in this particular arena. Also, Hectorol is not currently marketed internationally, and that's a fairly open opportunity for us. Earlier this month we talked about Campath in M.S. Very exciting. There we showed 75% relapse benefit against Rebif, obviously tremendous show of efficacy, also showed some severe adverse events, and it's now up to us in the Phase III trial that we will start first half of next year to absolutely show that we can manage these patients safely and so we can bring this level of efficacy to the marketplace. This is a longer term opportunity. It may take three, four years to go through this process and to go through the process of regulatory approvals, but we're enormously determined to get there, and we think it does change a very important part of the corporation. Again, adding a very severe disease into the picture with a very, very significant product moving at really creating a step function in terms of therapy of that disease. Very similar to what we've been able to do in many other diseases such as the Lysosomal Storage diseases. There were different announcements around genetic diagnostics. On the Oncology front, we made the statement when we did acquire the oncology business of Impasse. It was our intent to try and help the process to get to more targeted medicines, diagnostics, of course, are the difference there. And we've started to bring the first products to market to accomplish this. We think this will have a very long future as more and more products become available where targeted diagnostics are going to be playing an important role. During the quarter we had an interruption of our Tolevamer trial for C. difficile colitis as a result of comparative products being recalled, difficulty of one of the suppliers. I'm very happy to say that that trial is now rolling forward again. We have replaced the product, supplied new kits to all of our clinical investigators around the world. It is the largest trial that we've ever undertaken, in terms of the number of centers involved. Very, very exciting product, indeed, which we believe has potential to completely change not using antibiotics the way that C. difficile colitis is being handled in hospitals. All these products in many different ways are playing off of the platform of skills and capabilities that we have developed over the last three or four years, as far as our manufacturing and products and in terms of global marketing. And I think they're going to be playing a very important role in our ability to continue to grow the company along the lines as we have described with the kind of earnings goals that we have. We do want to maximize our R&D investment. We see many opportunities, too many to go into in this particular call, many opportunities for investments, and we will maximize our ability to make these investments in new products while still meeting the earnings expectations that we have set for you. With that let me now ask Mike Wyzga to go into the financial details. Mike. Mike Wyzga, Genzyme Corporation – CFO Thank you very much, Henri. We're once again reporting very strong top and bottom line results. As Henri mentioned, and as you can see from our press release, our overall revenue increased by 24% over last year. And, while the revenue increases in Renagel, Synvisc, Fabrazyme continue to be really the key drivers, if you really break it away, all of our product areas increased on a quarter by quarter and on a year by year basis. Our top-line performance and the leverage that we're now getting in the infrastructure is really driving the bottom line. Compared to prior periods, our bottom line has increased for over 15 consecutive quarters. And, as Henri mentioned, this sort of underscores the consistency that we're now seeing on the bottom line. Cash generation remained strong. Cash from operations and proceeds from options were about $330 million in the quarter. A little over $200 million generated just from operations. So we're seeing some very nice cash flows from operations as well. As you can see by our press release and our attached earnings per share crosswalk, our diluted GAAP earnings per share was $0.43 and that includes impact of the convertible debt. The EPS impact of this convert was about $0.01 for the quarter. Amortization was $51 million. And during the quarter we completed the acquisition of Bone Care International. Associated with this transaction, we had a charge of $12.7 million for in-process R&D. Our non-GAAP net income, which excludes the impact of convertible debt, amortization and IP R&D, was about $160 million, and that comes out to $0.61 per diluted share. Non-GAAP net income increased by 38% over Q3 of last year. And if you factor in the increased shares associated with the ILEX transaction and the in the money options, our Non-GAAP earnings per share increased by 24% over last year's Q3. Now, our earnings per share was really driven by three major factors. The first was the top line revenue increases. Again, in all product areas. Secondly, as Henri mentioned, our gross margins have really increased. They came up to about 78% this quarter from 73% in Q3 of 2004. And while we continue to invest in our businesses our operating expenses were very well controlled during the course of the quarter. The diversity that we're now seeing in our product set continues to drive our top-line increases. Cerezyme revenue came in at $238 million. Now this product line continues to mature and decrease as a percentage of our overall revenue. Over the past 12 months it's declined from 37% to 34% of the total Genzyme revenue picture. Going forward we anticipate Cerezyme will continue to decline as a percentage of total revenue as the other products and product lines continue to step up. Cerezyme patient numbers increased to over 4500 patients worldwide, with the largest percentage increase in new patients have been in the Genzyme international Charitable Access Program. Fabrazyme's revenue increased 36% to $79 million with continued very strong growth worldwide. In the renal area we increased by 30% over Q3 of last year with inclusion of Hectorol. Renagel alone increased by 15% despite increased competition. As Henri mentioned, Hectorol came in at $14 million as we took the opportunity to reduce our inventory levels in this product line. Synvisc revenue came in at $58 million. Now to remind you that we believe this business is somewhat seasonal with second and third quarters being the strongest. Diagnostics products and testing increased to $85 million. That represented a 9% increase over last year. With the stabilization of the FX particularly in the euro there was very little impact if any to the foreign exchange of our P&L. In the third quarter our gross profit increased to 78%. Now that continues the trend that we saw in the first half of the year. Compared to last year our margins improved due to the purchase of the Synvisc marketing rights. The increased margins associated with Renagel as we brought in the manufacturing in-house. And the continued leverage of our manufacturing facilities of greater capacity absorption, most of that due to volume. Within our operating expense, our Q3 R&D expenses before the impact of FIN 46 came in at $121 million or about 17% of revenue. R&D expenses in the quarter reflect the impact of our recent strategic collaboration with a company called RenaMed. The R&D expense also includes the impact of Bone Care International into our pipeline this quarter. Increases over prior year are predominantly the incorporation of the ILEX pipeline. SG&A expenses, again, before the impact of FIN 46, came in at $202 million, and that represents about 29% of revenue. These expenses reflect the impact of the Bone Care acquisition this quarter. Versus prior year, we did have SG&A expense increases associated with the headcount programs related to the acquisition of the Synvisc marketing rights. As well as Impasse and the ILEX acquisitions. Within our equity method income we saw continued acceleration within the Aldurazyme revenue. Aldurazyme was doubled versus last year to about $20 million. And this really drove a material improvement to it's joint ventures profitability. Our tax rate before amortization came in about 30%. Our share count increased by about 30 million shares over last year. That's due to two major factors, the first being the ILEX acquisition, which we closed off last year. The second is the increases associated with the option exercise and employee stock purchases. With the rise of the stock price we also showed in our diluted EPS an increased amount of in the money options. Our capital expenditures for the quarter were $52 million, with most of the expenses again taking place in Ireland and Belgium facilities. As I mentioned, our cash is in a very nice position, our ending cash came in about $950 million. Now, this reflects the increased cash that was generated from operations as well as option exercise. That was somewhat offset by the purchase of Bone Care which came in about $600 million of net cash and marketable securities. During the quarter we also took the opportunity to pay down a $350 million on our revolving line of credit, so now this is completely paid off. And as we exit the quarter our balance sheet reflects only about $30 million of short-term debt. That's mostly in the form of capital lease obligation. I'd like to remind you that you can find the line item detail reconciliation’s that are either attached to the press release or on our website. So let me stop there and turn it back to Henri and open up to questions and answers. Henri Termeer, Genzyme Corporation - Chairman, CEO 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_233931

Good morning, my name is Towanda; I will be your operator. I would like to welcome you to the Garmin Ltd. Fiscal Year 2005 earnings conference call. Our 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 star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two. Thank you. Miss Schwerdt, you may begin your conference. Thank you. Good morning. We would like to welcome you to Garmin Ltd 2005 fourth 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/stocks. Additionally, this call is being broadcast live on the internet and a replay of the webcast will be available until March 24, 2006. A telephone recording will be available for 24 hours after this call and a transcript of the call will be available on the website 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 Ltd. 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 earning call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning 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 Ltd. this morning are: Dr. Min Kao, Chairman and CEO, Kevin Rauckman, Chief Financial Officer, Cliff Pembie, Vice President of Engineering and Andrew Etkind, General Counsel. The presenters for this morning’s call are Dr. Min Kao, Cliff Pemble 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 just finished another record year. We recorded our 15th consecutive year of (inaudible). Total revenue for the year increased 35% to just over $1 billion. EPS was up 51% ARP 32% excluding the effective of foreign currency. We delivered 55 new products in 2005. The results to our portable navigation devices was especially strong, resulting in a triple digit increase in the sale of automotive product line. Over 3 million Garmin products was shipped in 2005 raising our total to 14 million units shipped to date, the significant benchmark of the strengths of the Garmin brand. Our worldwide employees increased to over 3,000, R&D accounts for nearly a quarter of our total employees. We continue to expand our patent portfolio with 257 issued and 171 candidate applications. In an article published in the December 26th issue of BusinessWeek, the quality of Garmin’s patent portfolio was given a very high ranking. Since our formation of the Company, our strategy has been to grow our business through continuous product innovation and expansion of our target markets. (inaudible) we feel that we have achieved that target goal by delivering consistent goals every year. Some highlights of our 2005 achievements. In the aviation market in addition to the 7 new AR brands that was certified with G1000 cockpit. We won several additional programs. Most significantly, the Emory Light Jet is a very light jet. And we completed our first flight control (inaudible) was a very significant accomplishment, making us the only general aviation provider that can offer (inaudible) to a single highly integrated system. And we deliver ARPS 60,000 GNS quarterly 530, a very significant milestone in aviation industry. For Marine, we experienced strong success with (inaudible). We spill in (inaudible) for the entire US. In other markets, we retained our leadership position in a heavier market and continued the success of our leading fitness wearable product category. In the automotive market we introduced three products,(inaudible) with innovative features. All have been well received, and we won numerous programs in various markets. We look forward, we anticipate another year of excitement and success. We reported in our earning release beginning in 2006 we will provide results for four business segments internally we are also organized in our teams to align with these four markets with a goal to maximize growth opportunities of each market we serve. We will continue to invest heavily in R&D to take advantage of opportunities in both existing and new markets. We expect to introduce over 50 new products in 2006, many of which were introduced in the Consumer Electronics Show in Las Vegas with a very positive response. And we expect to introduce additional new products at the CES show in March. We have just purchased our second Taiwan facility in order to meet the anticipated increasing demand. The position of this facility also allows us to expand our R&D capacity in Taiwan. The demand for portable navigation devices continues to show a significant expansion. In order to capitalize on this opportunity, we are expanding our marketing and sales infrastructure including the acquisition of a new facility in the UK. We will continue to promote a Garmin brand through expanding modern and unusual marketing and advertising campaigns. In summary, we are pleased with our 2005 results. For 2006 our total revenue is expected to be at least $1.3 billion with double digit goal for every business segment. With that, I would like to turn the call over to Cliff Pemble who will present our product and profit strategy. Kevin Rauckman will then discuss our financial result and fiscal year 2006 budgets. Thank you. Thank you Min. I’m really excited to talk about our product highlights for the fourth quarter as well as some recent product introductions that occurred since the beginning of the year. During the fourth quarter, we introduced the nuvi which is one of the most exciting on loaded products on the market today. The nuvi offers features not previously available to customers, such as travel guides with reviews of restaurants and hotel destinations as well as a language dictionary and translation tool. The nuvi recently won an editor’s choice award from PC magazine for its innovation and Garmin’s promotion of the nuvi at the 2006 CES show helped us earn recognition as one of the top 33 booths of the entire show. During first quarter we also introduced a new addition to our I series line the 3 pilot I2, this product includes all the features of the I series that is packaged with a monochrome display, making it an ideal offering as a promotional product or as a solid portable navigator for value oriented customers. Finally, we introduced the latest in our windows mobile lineup the IQM4. This product features pre-loaded maps and high sensitivity search star 3 GPS receiver. In addition, we’ve updated our Q application suite to provide finger touch operation, much like the C series and the nuvi. During fourth quarter, we announced some exciting promotional opportunities with major automotive OEM and rental car companies. In the UK Garmin was named the exclusive provider of portable navigation devices for all BMW and Mini dealerships. As far as this promotion, BMW will be offering both our Street Pilot C series as well as the nuvi to buyers of BMW and Mini vehicles. In Germany, Garmin landed wins with both Ford and Mercedes Benz. Ford is offering our I series and C3 products, while Mercedes is offering our C series products. In Taiwan, Garmin won a deal with Ford (inaudible) in which a Street Pilot C Series was given away with new vehicles sold before Chinese New Year. This program has been very popular with buyers and was promoted heavily by Ford. On the rental car front we secured relationships with Dollar, Thrifty and Enterprise in which a version of our Street Pilot C Series was offered to customers for daily rental fee. The rental business is an exciting opportunity to expose new customers to our easy to use products and to the Garmin brand. These new partners join an extensive list of opportunities we are serving in the automotive market and speaks highly of the capability of our products and the strength of our brand. We are proud to be affiliated with partners like BMW, Chrysler (inaudible), Dollar, Thrifty, Enterprise, Ford, Harley Davidson, Honda, Kenwood and all the others represented on this file. Going forward, the automotive market continues to offer significant opportunities for growth in our business. During 2006 we expect the T&D market to approximately double in size. To address this opportunity, we will continue in our strategy of offering products with a broad range of price points, appealing form factors and innovative features to suit the needs of every buyer. Our goal is to retain market leadership in North America, while increasing our market share in Europe. During fourth quarter we introduced exciting new additions to our FRS product line, the Rino 520 and 530. These products offer all the great features of our existing Rino product line and added 2.2 inch color TFD display, additional memory for uploading map information, turn by turn routing capability and higher transmitter power which allows communication at distances up to 14 miles. At this year’s CES Show, we announced an updated hand held product line called our X series. This new product line features a removable memory card which enables the user to expand the memory available for mapping. To complement this product line, we created a comprehensive set of preprogrammed maps for our customers which allow them to easily mapping content to the product without complication of using a computer. We offer pre-programmed cards with helpful information, detailed inland (inaudible) data, and also our blue chart marine data. The GPS Map 60 CX line and the GPS Map 76 CX line also feature a high sensitivity search star 3 receiver which will expand the utility products for our customers. We have also introduced a completely updated line of fitness products. The Forerunner 205 and 305 offer an improved watch like appearance and features a search star 3 high sensitivity GPS receiver. The 205 offers basic speed and distance capabilities, while the 305 has a heart rate center. The Edge 205 and 305 are totally new GPS solution for cyclists. This product is the first of its kind to combine GPS with bike specific features. 305 offers basic GPS speed and distance capabilities along with innovative features such as the virtual partner which helps user stay on a desired pace. The 305 has wireless heart rate and cadence sensors. Customers can expand the utility of Forerunner and Edge through our motion based web portal which allows users to share workout information with others around the world. In the marine market, we have been working on a new family of products that will hit the store shelves in March. This family of products includes new Fishfinders that can detect underwater objects in vivid detail and refresh that information at high speeds. In addition, we’ve expanded the number of marine products with preloaded map information for both offshore and inland boaters. Our new G2 Offshore Marine Cartography provides faster redraws, perspective view and improved cartographic presentation. In addition, we now offer a comprehensive set of photographs depicting harbors, marinas, approaches, and significant aids to navigation around the world. This new data allows Garmin customers to visualize and anticipate potential hazards long before they are actually encountered. For the US market, we have created an all new inland lakes map which includes detailed shore line and depth contour information for over 3,000 lakes across the Country. This map will be preloaded into our new GPS map 329 and 398 product line. Our new Fish Map Finder technology includes digital signal processing which provides highly detailed view of objects beneath the boat. This product can be interfaced with our GPS Map 3000 series of network chart plotters. In addition, we’ve updated the entire Fishfinder product line to include fast scrolling of information and improved performance in shallow water. Moving to the aviation segment, we continue to see strength in our G1000 Integrated Cockpit system. We are honored to have been selected as the integrated cockpit provider for Embraer Air, on their new Phenom Line jet which was announced at the recent MBAA trade show. In the piston market, Columbia Aircraft announced the selection of the G1000 Integrated Cockpit system for their 350 and 400 model aircraft which was recently given an editor’s choice award by Flying Magazine. This is a beautiful aircraft and is now complemented by an automotive style instrument panel designed by Garmin. In the retrofit market we introduced the GMA 347 audio panel which includes some of the great features found in our G1000 system, such as clearance recording, digital squelch control, and ability to accommodate additional audio input. Garmin continues to build strength in the OEM market with a host of world-class aircraft manufacturing partners. During the fourth quarter we delivered 333 G1000 systems to our partners. Also during the fourth quarter Raytheon began deliveries of the G36 and G58 aircraft which includes the G1000 with our new digital autopilot system. In addition, the G58 aircraft offers terrain warning system as well as our new weather radar system. At Cessna we are making steady progress in the development and certification of the Mustang integrated cockpit system. In the single engine area, Cessna recently announced the G1000 is now the standard avionics offering for the Skylane 182 and the Stationair 206 aircraft. In summary, I feel that we had a fantastic year for our product introductions and in forming new relationships with partners. During 2006 we expect to introduce between 50 and 60 new products that will continue to provide innovation and value to the market. Thanks Cliff and good to talk to everyone this morning. I’m as you can see from the fourth quarter financial summary, fourth quarter we posted solid financial results both at the top line where we experienced a revenue of just over $319 billion, a 45% top line growth and also strong bottom line growth of 38% earnings per share after the effect of foreign currency. There were a couple of unique items that did flow through our financial results, the one I just mentioned being the ($8.5) million foreign currency loss which effected our earnings per share of about 7¢, 87¢ per share after that foreign currency impact. It does also include the other impact of favorable tax rates during the quarter. We experienced 8.9% effective tax rate during the fourth quarter, about 9¢ EPS impact due to that favorable rate. You can see from the slides that our gross margins were better than expected due to the stable pricing during this period and also favorable product mix within our entire business. Operating margins came in at about 31%, which was down from last year, but better than expected. We also saw SG&A at about $44 million, which was due to higher than planned advertising within the European business .At the bottom of the slide you can see that our nits shipped to just over 1 million during the period. Incidentally, our average selling price during Q4 was about $310 per unit, which is flat with the fourth quarter of ’04 Looking next to our segments during the quarter, our fourth quarter segment revenue you can see we had strong revenue across both segments with both consumer and aviation. Our consumer growth actually doubled our aviation segment growth on the strength of automotive products. Automotive revenue overall grew well over 100% during the fourth quarter of 2005. When we look at the sales of our products that have been introduced within the last 12 months, we often use as a metric to determine how well the new products have sold, in Q4 the sales of these new products actually came at 60% of our total fourth quarter revenue. That compares very favorable with our historical rates. In fact, you may be reminded that during Q3 that number was 44%. So fourth quarter sales over 60% of that should go to new products. Turning to consumer growth during the period, our consumer segment now represents 81% of our total business. Looking at the revenue by geography, Garmin Europe actually outpaced our North American market growth and therefore represented 29% of our total business, up from 22% in the prior year. North American revenue was up 29% while our European business actually increased nearly 100% during the fourth quarter. Overall, as I stated, we experienced a 45% top line growth during the fourth quarter. For the year, we exceeded $1 billion in revenue, above our expectation due to the sizeable expansion in all geographies. Europe for the full year was up 61% over 2004. Looking next at our margins by segment, you can see that our fourth quarter consumer margins exceeded our expectations coming in at 47.7%, which was 100 basis points above Q3 of ’05. As I stated earlier, both pricing and product mix were the main reasons that our fourth quarter gross margins within the segment were stronger than expected. Fourth quarter consumer operating margins were down 230 basis points due to increased advertising during the period. Garmin invested $27 million in advertising during the period, about $5 million higher than expected Looking next at our aviation segment. Our aviation gross margin came in at expectations near the 55% level, very similar to the 64.7% during the quarter. This results were 100 basis points down from the third quarter of 66.5. Our aviation operating margin was down 300 basis points due to the reduction of gross margin and an increase in (inaudible) during the quarter. Looking next at our operating expenses, you can see that R&D was flat in dollar terms, but as a percentage of sales, (inaudible) of 6.3%. We did add 142 engineers to our team during the year including 47 engineering associates during the fourth quarter. We nearly doubled our advertising spending as a percentage of sales compared to Q3 up to 8.5% of sales. Garmin ads were seen and heard through print, radio, (inaudible) advertising and TV campaigns around the world. Our other SG&A stayed flat as a percentage of sales at 5.4%. Overall, our total operating expense is just about 20% of sales. Looking next to our 2005 financial summary, you see again our top, top line strong mode at 35%, just over $1 billion, bottom line 32%, gross excluding foreign currency. We also when we look at the full year experienced 11¢ EPS impact due to the foreign currency gain of $15.3 million during 2005. As I mentioned, we did have a favorable impact to the tax rate of about 9¢ per share on our full year basis also. Even without that, our earnings per share grew at 28%. Both margins came in as expected at 52.1% which is down 180 basis points from 2004. We achieved a 32.9% operating margin driven by the reduction in gross margin on the full year basis and increase in SG&A, again primarily due to the advertising spend during the full year. We invested over $69 million of advertising during 2005. On a full year basis, we exceed 3 million units shipped during the year. Our average selling price during full year was $339 per unit, which compares to $331 during full year 2004. Looking next at our 2005 segment revenue, we experienced consistent growth across all segments as we exceeded $1 million in sales. We grew the entire business right around that 35% consistently during the entire year 2005. Again as I mentioned, consistent revenue growth for each segment due to the 61% top line growth in Europe, Europe became nearly a third of our business, that’s 31% of our total revenue during the year. We do expect to increase our market share in Europe as Cliff mentioned during 2006. Looking next at our Balance Sheet, cash balances remained above $700 million, even after our $64 million dividend payment in December. You can see from this side our accounts receivable increased due to increased revenue and accounted for approximately 60 days of sales. As we continue increasing our business within our consumer and become more of a mass market, you’re likely to see pay out days around the 60 day level. We can look at dollars collected in 2006 on our AR balances at the end of the year, we have now collected 96% of that $171 million AR balance through today, so AR is in line with expectations. Our inventory dollars did increase on an absolute dollar basis, but came down on a Dave metric that we’ve given through the last couple of quarters. At the end of 2005, we now hold 114 days of inventory which was down from 121 at the end of the fourth quarter. Product availably continues to be a key strategy as we manage our inventory and our supply chain. Looking at specific inventory balances by the type of inventory, we enter the year at $65 million in raw materials, or 34 days of inventory, $28 million in WIP, and assemblies, 16 days of inventory and $121 million in finished goods, approximately 64 days of inventory. We did end the year with $15 million in inventory reserves. Although our retail channel inventory appears to be clean as sell through as most of our products was strong during the fourth quarter Q4 holiday seasons. Looking next at cash flow, cash flow from operations during the fourth quarter was $71.7 million. Free cash flow during Q4 was $65 million. On a full year basis, $219.9 million. (inaudible) at $6.6 million of capital expenditures during the fourth quarter and $27 million of CAPX during the full year of 2005. Cash flow from investing was $20 million of cash during Q4, made up of CAPX I just mentioned, purchase of marketable securities, purchase of intangibles and also the acquisition of motion based technology during the period. Cash flow from financing was at $48.5 million use of cash during the fourth quarter, primarily driven by the dividend payment that I mentioned earlier. We did post an effective tax rated of 8.9% during the fourth quarter. Our decision to repatriate subsidiary cash balances beginning in the 2006, created significant tax credits during the period. Our overall tax rate for the year 16.5% compares favorably to our 2004 rate of 19.4%. Going forward we expect our 2006 tax rate to be approximately 16% as we expect to repatriate nearly $200 million of cash to our parent company in 2006. Garmin Ltd. did pay out 50¢ per share dividend on December 15th, which was a $54 million use of cash. We had no share repurchases during the fourth quarter of 2005, although we do have approximately 2.3 million shares remaining available to purchase on our existing outstanding share repurchase plan. For the full year, Garmin did grant 831,000 stock appreciate rights during 2005. We also recognized approximately $900,000 of expense related to those cars during 2005. In conclusion, our full year guidance we have expectation of approximately $1.3 billion in revenue. Double digit growth across all four of our newly defined business segments. We expect 19% earnings per share growth up to $3.26 excluding the 7¢ per share of expensing of stock options under FAS 123R. We expect to spend approximately $5 million of CAPX including $10 for our new Taiwan facility that Min mentioned. $10 million of additional production equipment during the year, leaving approximately $30 million of maintenance CAPX across our business. We are continuing to look at an expansion of our European facility but it will likely be a lease, not a buy, so we’re still in negotiations on that deal so we have excluded that from any kind of capital expenditure forecast for 2005. We have assumed a stable outstanding share count of approximately $109 million, or 9 million shares, excuse me. Due to the alignment of our internal recording structure, we will begin providing results within these four business segments with our first quarter ’06 10Q filing. Than ends our formal presentation. We’d like to open it up now for questions as is customary, so please bring your questions to the front. Thank you. At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Again, that’s star then the number one on your telephone keypad. John Bucher here. First an administrative one. When you file your K are you going to show the segment reporting in the new format? As I mentioned the K will be based on the existing consumer and aviation segments. We will not post any four segment results until the first quarter of ’06. Okay. Very good. And then, understand that the favorable tax treatment is due to the repatriation of dollars I guess as it flows through that new Dutch facility that you’ve put in place, that’s effectively lowering the tax rate. What do you view is the pro forma going forward tax rate that you have? Again, we expect 2006 to be around 16% effective tax break, so pretty consistent with what we had at the end of the year 2005. But that’s because you’re repatriating $200 million. I’m just wondering when you’re, I mean do you expect that repatriation to be an on-going thing that we should be using this on a going forward basis? Or once you’re done repatriating – Again, this is going to be a consistent theme as we take our subsidiary cash and continue to repatriate every year. That’s not the entire answer for why the rate is what it is. Long term, we would expect you know our effective tax rate, and long term not being 2006 and beyond, we’d expect our effective tax rate to be closer to 20% because it kind of ramps up over time. Okay. And then, on the aviation side, in terms of the Turbine G1000 shipments, can you give an idea just how many you’re expecting in 2006? I’m guessing there’s some that are going to start in the fourth quarter especially with the Mustang. Can you give me any idea as to the volume level on that? John, I think Cessna does plan to deliver some number of Mustangs in the fourth quarter, but I think they’ll be ramping up production so I wouldn’t anticipate it to be very high. I don’t have a specific number off the top of my head, but I believe it’s a very low number. Kevin, I was wondering if you could talk a little bit more around the guidance you give for the auto and navigation division in particular the 60%. Can you talk a little bit about what that assumes for minutes and Ad P’s and also can you talk about some of the seasonality we should expect in the first quarter. I think we’re not going to give specific guidance on units, but we would expect unit as Cliff mentioned, the overall P&D market is nearly double during this period, so there’s a lot of variables in that function. But in general units slightly higher than overall revenue growth is what we would expect in that number. And then the second question was, remind me again? We’re not in the practice of giving quarterly guidance any more. Just expect the overall market to continue to grow. Sequentially, our business is going to be down for quarter Q1, because our strongest season is clearly the holiday season with the second largest quarter being the second quarter tied in with the consumer and marine selling season. I don’t think we can look at past history to predict the future, but you know anywhere from last year I believe we were around 13% down. Again, I don't want to lean toward using that as a guidepost for the future. Okay. And just one last question. You talked a lot about the increased focus on Europe and expanding your sales and marketing initiative to expand share. Can you outline some broad parameters around where you think SG&A as a percentage of consumer could go? A lot depends on how fast the market grows, so that’s a roughly 30% level at $1.3 billion. We would expect that SG&A would be fairly consistent. It was flat for over a year. ’06. We really don’t want to comment on just gross margin other than we’ve given it kind of a broad operating margin at, at least 30% next year given our top line growth rate. A lot depends on how fast the market grows. But I think it’s probably not an unreasonable assumption. Again there’s a lot of variability between the four different business segments that we’re going to be announcing results on. Clearly automotive is driving a big part of that. Good morning everybody. Congratulations on the quarter. Let’s see here. Cliff, I thought I heard you say that you though P&Ds could double in ’06, I don’t know if you were talking units or revenues and how does that compare with your revenue guidance of 60% year over year? The market projects that unit volumes have doubled in 2006 and our revenue growth projection assumes that the present continues to come down as the market expands. Okay. That’s good. Specifically, in Europe with respect to P&Ds, you said you spent a lot of advertising dollars in Europe in Q4, there’s some data out there that suggests that you didn’t really take market share in Q4, I’m wondering what your thoughts are about your market share in Europe in Q4, and if you think you’re getting good yield on your advertising dollars at this point? I think there’s various sources of data out there. It’s our view that we did not lose share in the fourth quarter, specifically in Europe is what you’re talking about. As far as the investment in advertising, we spent considerable dollars both in the North American market and in Europe. And I think you can clearly see from the results today that we feel that was beneficial and we did get a good return on that investment. Okay. One last question. On the marine products, when do you expect the G2 cartography software to be available and did marine grow in this quarter year over year? The G2 charts are going to be available very soon in the March timeframe. The product’s already in production and we’re filling the channel now. Question on your expansion facility that you purchased. What sort of additional square footage does that give you? Can you give us a little bit of clarity on how much more capacity that gives you relative to Q4 where it looks like you’re pretty much running it full bore? I think overall the square footage is a little over 22,000 square feet which is nearly double. We had about 250,000 in our existing facility. As far as capacity, I think you pointed out with 1 million units in Q4 that would be an annual run rate of 4 million on an annual basis and the capacity if you look at square footage it appears to be close to double but as Min mentioned we’re going not only use that for manufacturing but also R&D capacity. So, I think you could fairly say that we’re at least double the unit capacity by having that additional facility there. So, annualized rate you’re now doing 4 million you think with the additional you could do as high as 8 million? And then as just sort of a housekeeping number, would you mind running through those margins again on aviation and consumer. I’m not on the webcast, the slide flipped before I could get to it. And one last thing. Obviously big bump in SG&A, is that a fourth quarter thing or is that I mean are we to expect kind of a similar run rate? I know you don’t want to give too detail a guidance, but just in terms of modeling? Well I think you know, as I mentioned, seasonality earlier, earlier question, definitely we’re going to continue to spend significant dollars in advertising and SG&A. But you shouldn’t expect on an absolute level that amount of $44 million in Q1 because of the seasonality of the business. Nice finish to the year. A few questions for you. You were running at full capacity it seems in Q4, was there some unmet demand? And, you know if so, could you quantify that possibly? In general, we talked about product availability and with as many products as we have, we’re looking at some unmet demand, but in general we felt like we were able to meet most of the customer demands during this period. Okay. And you mentioned new products for 2006, kind of a consistent, I guess slight up tick in the number of new products you expect to be launched, from an overall sku count, in 2006 will there be kind of a consistent number with what we saw in 2005? As a tick up, we will introduce new skus and I’d say in general what you saw last year is a little bit of an increase for the number of skus that I’d say, 50-60 new products this year are likely increase this year as well, but there will be a retirement or an end of live for a lot of the existing skus. Okay. And Kevin, you spoke to the gross margins, you saw some benefits from more favorable pricing and next can you elaborate on that a little bit more? I think going into the quarter you could speculate given competition there could have been more cranking pressure, but what we experienced is fairly stable pricing through the fourth quarter and holiday season and a lot of the aggressive pricing really hasn’t hit until we get into the 2006 timeframe. Product mix we saw some of our higher price products continue to sell well even as we brought in the I series and some of the value or lower priced Pods. And so the sweet spot in the P&D market still seems to be priced above where that I series is, is that fair? Okay. European business was very strong, can you provide any more detail on you know regions or areas of particular attraction? Okay. And my final question. I have been making a number of assumptions regarding the segments you’re about to report, are you prepared to give any clarity on the size of those segments for 2005 for comparison basis. No. We’re not prepared to talk about those until we get into the first quarter filing of ’06. We’ve stated in the past that auto mobile is clearly number one. You know that aviation is already publicly stated. Number two was our outdoor fitness in the consumer segment and number three is the marine in terms of size. Just a couple of questions. The I series, how does it do. Can you broadly speak about relative to the C series and some of the other products, how did it do? The C series has been the most popular product, however, the I series we have some strong sales in certain channels especially in certain countries in Europe and also it has entered into the channels in the US like Target, Amazon.com and also Wal-Mart. We appreciate the sales of the I series. Okay. Another question. I guess this is for Cliff. You’re developing I guess the G1000 for both the Phenom 100 and 300 for Embraer you guys are on the Mustang, are there other jets, I know you can’t be specific but are there other programs that are turbine powered that you can pitch the G1004 that you’re currently pitching it for not disclosing what they are? Are there any bigger aircraft? The V-Jet’s a single engine. I guess what I’m driving at, are you guys thinking about or you know pitching for other jets that might be bigger than what you’re currently, I know you can’t say manufacturers or anything like that, I’m just getting a sense of what’s going on? Right now our specialty for our equipment is really the R23, class 3 and class 4 aircraft and with the Phenom we’re bridging into some R25, but I think that’s kind of the range we’re targeting where there’s really the most volume. Okay. And then I just one last question, with the expansion in the fabrication facilities, does that imply is it safe to think that you guys won’t be doing any significantly more outsourcing in terms of chip fabrication or anything else? From a manufacturing level, we’re committed to for now we’re committed to doing our own manufacturing from the chip side. You know, we’ve already announced high sensitivity GPS surfs, so we’re going to continue to roll out new products with those features and functions in them, but no other business to report. Okay. And then, I guess one last question, back to Cliff. Back to my airplane question. I like those questions. The aircraft like the CJ1 I believe that’s part 23,right, and it’s bigger than a Mustang, is that the kind of thing that potentially we could see or (inaudible). Well again, Cessna is our partner and any announcements on any programs come from our partners first, certainly that class of aircraft is our target. Hi guys, this Jonathan Hill for Bill Benton. I have a couple of questions. Number one, in terms of your distribution, are you planning on pursuing more opportunities say in things like US dealers, similar to the channels you’ve done in Europe? I think perhaps we’re going after as many opportunities as we can get in the P&D market, but if you look at where most of the growth has been, it still continues to be through the retail channel in the North American market, although there are certain promotional opportunities which Cliff highlighted with many partnerships we have in Europe that we’ll continue to go after but I would say just in general, that’s not where – your question is not where we’re going to see most of the growth in 2006. Okay, but in terms of the pricing environment and the competitive environment, how are you guys seeing things in terms of the increase in the number of players that are coming into the markets and how are you looking at pricing for 2006 as a result of that? I think in Europe, we’ve seen more aggressive pricing so for one the European channel, the European market is becoming more competitive there. In the US market, we will continue to evaluate what happens there but generally we have a little bit higher pricing in the US that we’re able to secure, but at this point I don’t have any further details that we can talk about. Okay. Last question. In terms of the seasonality, have you guys seen continued momentum from the strong fourth quarter into the first quarter? I think again, I talked about seasonality earlier. Just in general, we wouldn’t be laying out the gross numbers we have today if we didn’t see a large degree of growth in the P&D market in general and the overall business specifically. Thank you, good morning. In your prepared remarks you mentioned that in the marine area that you expect to have several new products on the shelves I think in March. Do you expect them to have a meaningful impact in the March quarter from a revenue standpoint or is that mostly going to hit in the June quarter? Well it is a major product rollout for all of our mid-range and high-end chart plotters, so we would expect that the initial channel fill is going to be significant for the marine market. Great. It’s helpful. And I know you don’t want to give away any competitive info on future projects but is there anything you can say about the pipeline of P&D products in ’06 with respect to any kind of successor to the C series or variations of nuvi type products? Well we continue to innovate and create new products. We are working on new product introductions as we speak and we should have more news for you to be able to see and hear shortly. Okay. And with respect to the cogs of the P&Ds, clearly you have to make some assumptions about you know prices coming down but presumably there’s also the ability to reduce your cogs, I mean is there anything you can talk about with respect to any assumptions you’ve made about how the cost of materials and components in PNDs will decline in ’06 relative to ’05? From a component perspective we’ve not seen a lot of movement, definitely a flash and LCD in particular have declined with raw material costs, but we expect consistent cost reductions, cost takeout within our own, within aviation and consumer manufacturing processes will help overall keep costs in line with the overall market. That’s kind of what our goal is in 2006. Great. And is there any way to quantify the impact of the numerous auto dealership agreements you’ve landed over in Europe and you’ve got this Taiwan deal which I guess actually a question there too did the Taiwan Ford deal actually continue past the Chinese New Year or was that sort of one off? And how about, just if you can in anyway sort of quantify or even qualitatively talk about the contribution you expect from these dealer relationships in Europe? I don’t think we want to breakout anything specifically there in terms of how much that contributes, but in general, the dealerships, the promotional activity that we’ve seen in Europe is a little bit larger in Europe obviously than it is in the United States, so I’m not going to give you an exact number. Hey guys, just one question. Within the auto business, can you just give us some idea for mix between the products, whether that’s percentages or if you could just rank them in order of volume? Other than what Min said, is that the C series continues to be a sweet spot and it is still leading the way in terms of volume, the I series did come in, in the fourth quarter and sell well particularly in Europe in certain areas of North America and nuvi primarily just a European products in the fourth quarter and just kind of ramping up in 2006 now. That’s kind of how I’d lay it out in terms of size. Good morning and thanks for another great quarter. Could you give us a split on the aviation side between OEM and aftermarket? Normally, what we said in the past, I think and clearly with the success of the G1000, the OEM contribution has continued to increase. I think the number I would say is somewhere around 30% and growing with everything else being aftermarket. I think we’ve stated publicly in the past that with many of the deals we don’t want to make the specific deals known, but sitting around $40,000 per plane, with the autopilot obviously that increases. That’s roughly the number that we’re experiencing right now. Okay. And how much is that going to increase when you go to a turbine fit up with presumably with two sides, radar and all that? Okay. And could you discuss again what you see as your best use of cash going forward, you generate so much of it? I don’t think the story is going to change. We continue to continue to look for acquisition opportunities, we are committed to dividend. I mentioned the stock repurchase plan and you can see it from this morning that we are also committed to investing in our business with facility expansions in Taiwan and also in Europe and even in the US if we need to in the future. So those will continue to be the four major uses of cash. So no changes there. On the, you made a comment on your prepared remarks about the amount of the AR at the end of the quarter that you had already collected. Could you give me that again? Thank you. Just a quick follow-up. On the portable automotive category, just trying to get a feel for what are the sensitivity factors on margin there? You’ve got everything in that category from the $1,500 model 7200 that I see just became available down to the sub-$300 I series. I’m guessing it’s not necessarily ASP, you know lower ASP doesn’t necessarily low margin. Is it really volume that drives the ultimate margins here? It looks like pricing remains pretty stable throughout the holiday period. And if it’s some other attribute, if you can just touch on what typically drives the margins for the wide diversity of products you’ve got in the portable automotive category. Hey John. I think the key drivers are really the embodiment which includes the memory configuration, the display, those are some of the components that we have in those product lines. In general, should we assume that lower ASP doesn’t necessarily mean lower margins or is that not the case since it does appear that the higher ASP products have more display and more storage? On the lower end there’s probably always more price pressure to satisfy the market so I wouldn’t assume that the lower end are necessarily same margin as the higher end. I was just trying to get to the point you mentioned that you had favorable product mix and that accounted for the better than expected margins as well as stable pricing. We saw the stable pricing, I guess I’m just wondering from a favorable mix standpoint, did you not expect that the C series was going to be such a significant percentage of the overall mix in this category? I think (inaudible) was going to be, the I series has done well, so we’re not talking about a lot of variability there. And the other thing is the 2700 was another product that I think did better than expected. That’s at the high end of the price curve so those are two major factors that played out in the consumer margins. Okay, do you expect compared to the other reporting segments do you expect that we’re going to see the greatest variability of profit margins from quarter to quarter in this particular, this new segment. I had a couple of questions. One was can you be a little bit more specific about what you expect in terms of consumer ASP declines of P&D markets for 2006? We don’t have an exact number other than just to given the fact that the automotive and the mobile segment is definitely the highest and fastest growing, so we will just say that our ASP’s will likely continue to come down, but we’re not prepared to quantify how much that is, there’s just too much variability in that market right now. 114 is the exact number and we’ve quantified the fact that inventory dollars are going to continue to go up, but they should continue to come down although given the fact that product availability continues to be critical in a growing mass market that’s kind of how we’re managing that, how we’re managing our overall inventory, so I think we’re pleased with 114 till we see some reductions possibly but there is not a lot of significant amount of improvement that we’re going to be able to see in the future. Okay. You know Europe that we’ll see basically, can you talk about what your share is like there versus tom tom, do you think you were able to gain share versus down there? I think at this moment some of the retail (inaudible) that we rely upon (inaudible) have data from the previous quarter which I think you’ve seen and we don’t know if we’d change. Last question is, can you give us some idea I don’t can you give us some idea of what the ASP will buy segments to the American consumer? No, we don’t think that. We’ve not made that public. It will be available at the end of the first quarter though. Thanks. Follow up here as I’m playing with my model. So as I look out to your guidance kind of 20% year to year growth in revenue, and I wonder is there opportunity for leverage on the operating expenses or if you believe there is? You know at the levels we gave, comes with revenue and operating margins and then EPS. We were expecting the high 20’s, roughly 30% growth, we’re expecting that SD&A will roughly stay flat as a percentage of sales. R&D could be little bit of leverage there, but in general, putting aside both of those categories. Well we believe that R&D is critical to the future of the Company, so we’re, yet on a dollar basis, we’re committed to growing that and then given the increase from the T&D market in automotive we feel that we have to spend SD&A dollars to have more advertising and compete there as well. We’ll try again, can you guys hear me now? Let me ask you about retailers. Kevin when you were out here in San Francisco, you talked about the internet being much more (inaudible) than it has been in the past. Who are the top retailers in Q4 and what percentage of that was in the internet? Well I think it would typically layout the top. Specifically other than to say that for the internet has continued to be a strong part of the business. But still, the major retailers that we talked about in the past continue to be the major retailers, you know, (inaudible), Best Buy and Circuit City and they’re being the top, the big box retailers that we sell into. There’s been talk of Wal-Mart and you mentioned Wal-Mart earlier in the call. Have you been in any physical locations in Wal-Mart or just on the internet? Wal-Mart.com? You want to follow up with me later. Specifically, I can’t tell which one you’re looking at. Looking at the Other? Oh, great. Thanks for taking my question. I have a question regarding the competitive landscape in the US specifically. Have you noted any changes in the fourth quarter? Okay. Second question. Do you have any automotive products already in the market in Asia and if so, could you give your best guess of the approximate size of the Asian market in terms of units in ’05? We are seeing some data available in Taiwan, China is coming and we see very limited amount of data for Malaysia and Singapore and other countries like India (inaudible) behind. We don’t’ have any significant shortage of components, but the major challenge which we and all the manufacturers face is that many of the components start as LCD display and (inaudible),four months, so any time when you have the up start, it demands you respond by getting components. And the margins that you’ve indicated for the business units, are there any adjustments you have to make, or can we take them as they are? For the Q4 results. If there are any accounting changes that you can already anticipate for going forward. I do understand that you will split it up differently, but are there any things that you may be able to highlight already? Okay. And then, finally last question if I may? How are you going to manage the auto business going forward? Will you management for gross margin as tom tom indicated they’re doing, or how do you think about that, without giving any indication on the margin itself? I think the way we’re going to manage that is it’s the high growth business and we will we’ve often stated that you shouldn’t just be looking at gross margin dollar but you should be looking at overall gross margin contribution or operating margin contributions, so that’s how we’re going to continue to manage the business. And then finally, I did not understand the comment you made on manufacturing your own chips? Did I get that right? I think the question and maybe we injected the term chip set when it was referring to our factory facility and we don’t do any manufacturing of chip sets ourselves. We always rely on outside partners for that. The manufacturing we do is for assembled units. Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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_233932

Here’s the entire text of the prepared remarks from Gilead Sciences’ (ticker: GILD) 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. Ladies and gentlemen, thank you for standing by. Welcome to the Gilead Sciences third quarter -2005 Earnings Conference Call, at this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. At that time if you have a question, simply press *, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number two. As a remainder this conference call is being recorded Tuesday, October 18, 2005. Your speakers for the day are John Milligan, Executive Vice President and CFO. John Martin, President and Chief Executive Officer, and Kevin Young, Executive Vice President of Commercial Operations. I would now like to turn the call over to Dr. Milligan. Please go ahead, sir. Good afternoon, and welcome to Gilead's third-quarter 2005 conference call. We issued a press release this afternoon providing results for the third quarter ended September 30, 2005, and describing the company's quarterly highlights. The press release is also available on our web site. Also joining us on today's call are Norman Bishofberger Executive Vice President of Research and Development, Mark Perry, Senior business advisor, Mat Howe Vice President Finance, and Susan Hubbard, Senior Director of Investor Relations. I will begin the call by reviewing the third-quarter financial results and will provide updated financial guidance for the full year, 2005. Then, John Martin and Kevin Young will take us through the corporate and product-related highlights for the quarter. We'll keep our comments relatively brief so have time at the end of this call to answer your questions. First let me start with the standard safe harbor statement. I would like to remind you that we will be making forward-looking statements relating to financial results within the meaning of the private securities act of 1995. These statements are based on certain assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statement. I refer you to our latest press release and form 10-K, our quarterly report on form 10q for the first and second quarter of 2005, and other publicly filed SEC filed disclosures documents for detailed description of the risk factors affecting our business. In addition, during the call today we'll be providing you with information and data from clinical studies that have not yet been reviewed by the FDA nor included in our prescribing information. I want to remind you that our sales forces are permitted from our products only on FDA-approved prescribing information and we cannot guarantee the FDA will approve the inclusion of any of the clinical information or data discussed on this call in our prescribing information. Third quarter 2005 was another successful quarter for Gilead. Driven by the continued strong growth of our HIV franchise, we achieved a significant milestone in product sales in excess of $467.2 million, a 50% increase compared third quarter of 2004. This marked eight consecutive quarters of product revenue growth. HIV product sales surpassed the $1 billion mark for the first nine months of 2005, with successful product launches in more countries. Our third quarter of 2005 net income was $179.2 million, up 58% compared to the third quarter of 2004. Diluted earnings per share grew by 52%, and income from operations increased by 53%. The strong operating performance is a validation of the significant effort by the more than 1,700 Gilead employees around the world. And the strategies that we've implemented for growing revenues and cash flows will make a controlled investment in our research and development programs and sales and marketing infrastructure. Now turning to the specific results for the third quarter. Gilead had strong financial performances in the third quarter as product sales and earnings improved significantly in the third quarter, 2004. Total revenues are up 51% compared to the same quarter last year, driven primarily by higher sales of our HIV products and higher royalty revenue from collaborations with our corporate partners. Income before taxes grew substantially from $156.5 million for the third quarter of 2004 to $253.6 million for the third quarter of 2005. An increase of 58% driven by strong revenue growth coupled with continued controlled spending. Income before taxes decreased $24.6 million compared to the second quarter of 2005 primarily due to the $15 million payment to Emery University as part of our amendments for existing licensing and agreement for Cytarbine related to the ASPV indication as well as $8.4 million in severance and relocation costs related to our moving our European Headquarters from France to the United Kingdom. The company reported net income of $179.2 million or $0.38 per share on a fully diluted basis for the three months ended September 30, 2005. This compares to 25 cents per diluted share for the same period last year and $0.41 per diluted share for the second quarter of 2005. Our effective tax rate for the third quarter was 32%, unchanged from the effective tax rate for the third quarter of 2004. Now turning to revenue. Total revenues for the third quarter of 2005 were $493.5 million an increase of 51% from total revenue of $326.2 million in the third quarter 2004. Compared to the second quarter of 2005, total revenue is essentially remain flat quarter over quarter. Revenues from Gilead's product sales increased sequentially by 4% in the third quarter this year as the HIV and HPV product franchises continue to grow. This growth is offset by a decrease in royalty and contract income, which I'll describe in more detail later. Net product sales for the third quarter of 2005 were $467.2 million, a 50% increase over the same period last year and 4% higher than the second quarter of 2005. This growth was primarily driven by higher HIV and HPV product revenues as well as continued strong sales for AmBisome. HIV products sales grew to $366.5 million for the third quarter of 2005, up 59% compared to $228.1 million in the third quarter of 2004 and 6% sequentially from the previous quarter. This growth continues to be driven by the strong uptake of Truvada in the United States and European countries where the product has been launched and the strong sales of Viread in countries where Truvada has not yet been lunched. Truvada sales were $162.4 million for the third quarter 2005, up 32% sequentially. In the United States Truvada sales were up 25% sequentially primarily due to the use of Truvada in patient’s new therapy and secondarily from switches of patients on other regimens including those containing Viread in Truvada, for which U.S. sales decreased sequentially by 15% and 2% respectively. Truvada sales in United States were $140.0 million for the third quarter, nearly double of $74.9 million recorded by Viread for the same period. Worldwide Truvada sales account for almost 45% of the total HIV product revenue. Outside the United States, the HIV product sales grew to $143.8 million from $88.6 million in the same period last year and from $139.3 million recorded in the second quarter of 2005. Increase is driven both by the continued successful launches of Truvada in several European countries during the first three quarters of 2005 as well as strong sales of Viread. Truvada is now available in Germany, Ireland, Portugal, United Kingdom, Spain, and just recently in Italy. The third quarter of 2005 Truvada product volume outside the United States more than doubled sequentially compared to the second quarter of 2005. As I mentioned, Viread sales continued to hold strong despite the strong uptake of Truvada. Compared to the same period of last year, international sales if Viread is up 45%, driven by sales in the European union, Australia, Canada, and Latin America. Hepsera for the treatment of chronic hepatitis B has sales of $46.9 million in the third quarter of 2005. A 58% increase compared to the third quarter of 2004, and a 2% increase sequentially from the previous quarter. For the third quarter of 2005, US and international sales were up to $21.9 million $25 million respectively. Hepsera sales in the European union increased by 52% to $22.6 million when compared to the same quarter of 2004. Finally, sales of AmBisome were $54 million for the quarter, an increase of 10% over the same period in 2004 but a 3% decrease sequentially from the prior quarter's record sales level. Higher international sales volume of AmBisome was offset by lower pricing for some reason. The third quarter of 2005, we recognized royalties and contract revenues of $26.2 million compared to $15.5 million in the same quarter 2004 and $46.8 million for the second quarter of 2005. The increase compared to the third quarter 2004 primarily driven by higher royalties of $12.1 million received from Tamiflu sales by Roche compared to royalties of $1.7 million received from Roche in the third quarter of 2004. As a reminder we recognized royalties from sales on a one-quarter lag. Thus, the strong royalty revenue in the third quarter 2005 reflects stronger sales by Roche in the second quarter of 2005, as compared to Tamiflu sales in the same quarter of 2004. A higher Tamiflu sale during the second quarter of 2005 was mostly driven by pandemic planning purchases as Roche took several large government orders. Sequentially, royalty contract revenues decreased by 44%. This decrease was primarily the result of the higher royalty payment received from Roche in the second quarter, 2005. In the second quarter of 2005, Gilead received the royalty payment from Roche of $36.2 million from Tamiflu sales by Roche in the first quarter. The majority of which were from seasonal flu sales, particularly in Japan. Roche is scheduled to release their earnings tomorrow, and we will be monitoring their guidance on Tamiflu sales and evaluating any potential impact on Gilead's future financial performance. I'd like to take a few moments to discuss Tamiflu, the status of this with Roche, and the growing public attention to avian flu and the global pandemic planning. As you know, Gilead scientists invented Tamiflu. In 1996, we outlicensed rights for the worldwide commercialization to Roche. Gilead and Roche co-developed the drug with Gilead conducting three of four clinical trials that led to the product’s first approval for the treatments of influenza in the United States in 1999. On June 23 of this year, we delivered to Roche a notice of termination of our 1996 development and license agreement for Tamiflu for material breach of contract. The specific claims of breach are detailed in the notice of termination letter filed with the SEC as an 8-K and are privy to that documents for the details. Following the notice, Gilead and Roche were unable to resolve the outstanding dispute within the 90-day cure period. As a result the parties have now submitted the matter for confidential binding arbitration under the terms of the 1996 agreement. Until the matter is resolved, ongoing discussions between Roche and Gilead and the status of the arbitration are confidential. There are a wide variety of outcomes that could result from the arbitration process, none of which we can speculate on or comment on. Since delivery of the notice of termination we've been committed to ensuring that our dispute will not in any way interfere with discussions between Roche and any parties interested in pandemic purchasing and will not adversely affect product manufacturing and supply. We cannot comment on Roche's recent public statements regarding the array of alternatives available to them for increasing manufacturing capacity. But we do want to reiterate that as the inventor of the compound and the company that developed the manufacturing method that was transferred to Roche, we are well versed in the technology and with all aspects of the manufacturing process. We are confident that should it become necessary, Gilead and our third-party manufacturers will be capable of manufacturing Tamiflu in significant quantities. We apologize, that this is all we can say at this point. Now turning to gross margins. Product gross margins for the third quarter of 2005 are approximately 86% compared to product gross margins of approximately 87% for the same quarter of 2004. The slightly lower growth margin is primarily due to product mix change and switches continue Viread higher market product to Truvada. Turning to expenses. Research and development expenses were $78.8 million for the third quarter of 2005. An increase of 60% from $49.2 million in the same period last year, and an increase of 32% sequentially. Higher spending was primarily driven by the $15 million payment made to the Emery University in connection with the amendment of our license agreement with Emery, related to development of Cytarbine for hepatitis B drug as well as higher expenses related to increased headcount, purchases of clinical and product development materials, and increased costs and fees incurred by Gilead under our hepatitis-C collaboration. SG&A expenses in the third quarter of 2005 were $99.2 million, up 37% from the same quarter of 2004, and a 4% increase sequentially. The increase in spending and SG&A is principally due to $8.4 million of severance and relocation expenses that we recorded to date related to relocation of our European commercial, Medical administrative headquarters from France to the United Kingdom. In relation to our European headquarters location, we continue to expect that total costs for severance and relocation, and hiring to be within the range of $10 million to $13 million, which we previously disclosed. These cost included relocating employees for transferring from France to the United Kingdom, severance costs for employees who have declined relocation, as well as recruiting costs associated with higher placement employees in the London area. The impact of foreign exchange was favorable on an overall basis during the quarter, due primarily to a stronger European currency relative to the US dollars when compared to the same period last year. The total net impact of foreign exchange on our pretax earnings for the third quarter and first nine months of 2005 was $5.3 and $14.7 million respectively when compared to the same period in 2004. This includes the foreign exchange impact on revenues, actually spending, and the results of our hedging program. Finally, I'd like to turn to the cash flow statement and balance sheet to highlight our cash flow performance for the quarter. The balance sheet at September 30, 2005, shows cash, cash equivalents and marketable securities at $1.7 billion. This is a decrease of 7% when compared to the balance of approximately $1.8 billion at June 30, 2005. This decrease is primarily related to the Emery royalty buyout payment we made of $341.3 million, partially offset by operating cash of $179.2 million generated from net income during the quarter. We'll continue to evaluate strategic ways to use our cash and investments, including opportunities to in license, acquire companies, or potential products to complement our own internal efforts as well as methods to offset future dilution from employee stock option exercises including potential stock buy-back programs. Now I'd like to turn to our financial guidance for 2005. For our entire HIV franchise, which includes Viread, Emtriva and Truvada, relating our guidance for net product sales for the franchise from a range of $1.275 to $1.325 billion to a range of $1.365 to $1.385 billion for the entire year 2005. This guidance is the result of continued strong sales of Viread in all markets and rapid uptake of Truvada in the United States and European union. Turning to AmBisome, based on strong year-to-date results we are also slightly raising our previous revenue guidance of $205 million to $215 million to a raise of $210 million to $220 million for 2005. For Hepsera we are tightening our estimated net product sales of Hepsera for the full year 2005 from a range of $160 million to $180 million to a range of $170 million to $180 million. We reiterate our previous gross margin guidance for 2005 to a range of $85 to 86%. We're also tightening our R&D expense guidance for 2005 from $265 million to $285 million to a range of $270 million to $280 million. With regard to SG&A expenses we are tightening our guidance for 2005 from $365 million to $385 million to a range of $370 to $380 million. We're also lowering and tightening our capital expenditures guidance for 2005 from a range of $55 million to $65 million to a range of $45 million to $50 million. Finally, our tax rate guidance for 2005, we reiterate our previous 31% to 33% guidance for our effective tax rate. However, we are evaluating a potential repatriation of foreign earnings under the homeland investment act, which could result in a net one-time benefit to our effective to affect the tax rate in the fourth quarter of 2005. In summary, as Gilead looks ahead, we will continue to make the investments that we haven’t search to promote our product lines. Particularly our HIV franchise AmBisome and Hepsera and continue to evaluate opportunity to build a strong and independent global business. This concludes the earnings reporting section of this conference call. At this point I'd like to turn the call over to John Martin and Kevin Young, who will review our corporate and commercial highlights for the third quarter 2005 and provide an update on the milestones we will be striving to achieve for the remainder of the year. Thank you, John. Good afternoon, everyone, and thank you for joining us today. We're pleased to summarize for you Gilead's accomplishments during the third quarter of 2005. I'll begin by providing a brief corporate update and discussing our pipeline programs. Then Kevin young will review our commercial efforts and John Milligan will wrap up the call. On the corporate front we very pleased to announce in July that John Cogan has joined our board of directors Dr. Cogan is currently a senior fellow at the Hoover Institution and at the Stanford Institute for Economic Policy Research. As the scope of our business grows increasingly complex, we look forward to benefiting from his expertise and healthcare economic policy. On a global front, during the third quarter, we were able to make significant progress in our efforts to bring medication to HIV patients in developing world countries through our Gilead Access Program. We announced in August that we had reduced the no profit price of Viread and Truvada by 31% and 12% respectively. Our ability to continue to reduce prices of these medicines is the result of increased economies of scale, the manufacturer of active pharmaceutical way of both Viread and Truvada at a contract manufacturer in the Bahamas, and continued improvements in the manufacturing process. In an effort to deliver our HIV medication to those most in need, we also made progress on the registration front, submitting several filings to developing world countries over the course of the quarter bringing our total number of submissions to more than 35. And just last week, we finalized our nonexclusive licensing and distribution agreement with Aspen Pharma Care for Viread and Truvada in the developing world. Aspen will manufacture finished product for countries included in Gilead's access program and will distribute the products in every country in Africa. Finally I'm pleased to announce that Gilead's European team has moved into its new corporate headquarters in the United Kingdom. This office is located in Stock Way Park, a high technology business park only 10 minutes from Heathrow airport and about 35 minutes from Central London. This move builds an important foundation for the further development of the Gilead organization in Europe. Turning to research and development as you know, we continue our efforts in developing a fixed dose combination of Truvada and Sustiva. Despite the challenges we faced this remains an important area of focus for both Gilead and Bristol Myers. In August we announced that we had turned our efforts to the development of a bi-layer pill where Truvada and Sustiva are physically separated in two layers combined in one pill. We're evaluating three bi-layer pills in parallel ranging in size from 1,400 to 1,600 milligrams. Based on pre-clinical data we believe that this approach has a greater probability of achieving ____ than our prior two attempts. Should these efforts prove successful we will be on track to file NDA for the triple combination during the first half of 2006. Moving to another development program in HIV, we are very pleased with the progress to date with GS-9137, our novel integration inhibitor for which we initiated phase 1-2 study in late June. As you may recall we end licenses comes down March of this year from Japan Tobacco and were able to file the I & D in June with a strong pre-clinical toxicology package. Also prior to end licenses Japan Tobacco had completed a phase-one study in healthy human volunteers in Japan. The phase 1-2 study that we are conducting is a short dose-ranging model therapy study on HIV-infected individuals. We're evaluating GS-9137's potential to be a once or twice-a-day drug, and assessing the potency and short-term safety of this compound. We hope to present data from the study in early 2006. Integration inhibitors represent a promising new field in HIV research. Given our experience developing novel compounds in HIV and due to the unmet medical need for some late-stage patients, if the phase 1-2 study results are positive we believe GS-9137 could follow a rapid development path with phase-two studies beginning in 2006. Turning to our hepatitis development programs. In July, we initiated two phase-three clinical trials. Study 102 and study 103, comparing the efficacy and safety of Tanofavir versus Hepsera in patients chronically infected with hepatitis-B. We believe that the 300-milligram dose of Tanofavir, the same dose marketed as Vireead for HIV has the potential to be important treatment for hepatitis-B. There have been several scientific presentations highlighting significant hepatitis-B viral low decreases in HIV, HPV co-infective patients treated with Tanofavir. We look to confirm those results in our phase-three studies. We are making steady progress to enroll patients in the two trials and believe it will take approximately 12 months to complete enrollment of nearly 600 patients. Once enrollment is complete, the studies will run for 48 weeks. Based on these estimated timelines, the earliest we would be able to file a supplementary NDA would be in 2008. Hepatitis-C, we took our most advanced candidate, GS-9132, into the clinic in a phase-one study in August. We evaluate the pharamcokinetics, tolerability and safety of single escalating doses of GS-9132 in approximately 20 healthy volunteers. As you may recall, GS-9132 is the compound we are developing in partnership with the Kileon Pharmaceuticals. It is a small molecule inhibitor of hepatitis-C virus replication, which works through a novel mechanism involving HCV protease. Kileon will lead the development of GS-9132 through the proof of concept study at which time Gilead will assume responsible for the further development of the compound . We look forward to presenting data on this compound at a scientific conference at 2006. As we as we stated previously, we believe that the treatment paradigm for HCV will fall similar to that of HIV and are, therefore, committed to bringing forward several compounds in hepatitis-C. We continue to make progress in our other early-stage efforts, which include the Gene Lab's Nucleocyte program and our internal protease and _____ programs. I am proud of the recent R&D accomplishments we have made by advancing three compounds into clinical trials in the areas of HIV, hepatitis-B and hepatitis-C. We are committed to building both through internal research and end licensing and acquisitions efforts. A pipeline of products that will be helpful to the growth of the company in the years ahead and that will make a difference in the treatment of life-threatening diseases worldwide. I will now turn the call over to Kevin Young to review our commercial product efforts. Kevin… Thank you, John. Good afternoon, everyone. I will begin by highlighting the developments in our HIV franchise where we have continued to experience growth in all our commercial markets. Since the US launch of Truvada we've increased the combined new prescription market share of all of our HIV products to 37.8% from 26.9%. As of the week ended October 7, 2005, Truvada alone captured 20.2% of the new prescriptions and 18.7% of the total prescriptions in the anoxia I-class. At the same point in time, Viread continued to hold 16.2% of the new prescriptions and 17.6% of total prescriptions in the class. The third quarter also marked a change in regard so to speak for our HIV franchise. In August, one year after its launch, Truvada surpassed Glaxo’s Combivir in new prescription market share. Notably, in September, Truvada surpassed both Viread and Combivir in total prescription market share. Further, Truvada has achieved a 3 to 1 edge in both market share and prescription volume over GSK- Epzicom, the combination of abacavir and 3TC, which was approved on the same day as Truvada. The HIV market in the US has experienced demographic shifts, and we are recognizing significant potential for market expansion through education and awareness. In the United States, approximately 40,000 new patients started antiretroviral therapy last year, and the number of total patients receiving antiretroviral therapy is now approximately 430,000. Introduction of safer, more tolerable, and easier to take therapies like Truvada, improvements in diagnostic tests for HIV, and a trend among some physicians to start their patients on therapy earlier have all contributed to this increase in treated patients. As these trends continue to play out in the market over time, we believe that we are well positioned with Truvada to capture a large proportion of the greater than 500,000 patients who are infected, but are not currently on therapy in the United States. Out of the total pool of patients on antiretroviral therapy today, independent market research estimates that more than 95,000 patients are receiving Truvada therapy as we enter the third quarter, and importantly, Truvada is currently capturing nearly 60% of new patient starts, up from 50% in the previous quarter, as well as switches from other therapy. One of the factors contributing to the increasing overall Truvada use is the continued rollout of important scientific data, 48-week results of study 934, our head-to-head study of Truvada versus Combivir in patients were presented for the second time this summer at the International Aids conference. We have extended the study to 144 weeks and will continue to present the data in important and appropriate forums during the next several years. We expect the 48-week data to be added to the Viread and Truvada labels during the second half of next year, which will provide additional support to our US sales force. In addition, Viread and Emtriva, the components of Truvada, were used as the backbone in both arms of Abbott's study 418 evaluating Kaletra as a once-daily therapy. This data was added to the Kaletra label earlier this year and have provided us with the ability to promote Truvada as the NRTI backbone of choice when used with a third agent from either the NNRTI or PI class. Finally as many of you know, interim data from Gilead's comet study, which is a single-arm study evaluating switching from twice daily Combivir to once daily Truvada, in virologically suppressed of HIV patients were to be presented at the Inter Science Conference on antimicrobial agents and chemo therapy in September in New Orleans. Due to the catastrophic event of Hurricane Katrina, the conference was rescheduled to occur in December in Washington, D.C. Many of the patients in the comet study will have passed the 24-week end point by December, and data from those patients will be included in the presentation. And prior to that, interim data from comet will also be presented at the European AIDS Conference in Dublin, in Ireland, in November. Turning to our performance in the European union. Truvada has now launched in four of the five major European countries including the United Kingdom, Germany, Spain, and most recently Italy. We anticipate that the product will launch in France early next year. A significant milestone as France represents the largest HIV market in Europe with more than 50,000 patients on antiretroviral therapy. With the launch in France, all of the big-five European markets will have launched Truvada in less than one year from EMEA approval. We are very pleased that we have been successful not only at achieving a concentrated rollout among the major European countries, but that we have worked efficiently with European pricing authorities to achieve a consistent one-plus-one pricing pattern. Looking at Truvada's performance to date in Europe, in Germany despite the fact that Truvada launched three months after Glaxo’s Kivexa, which is known as Epzicom in the US. Truvada is outselling Kivexa three-prescriptions to one. In the UK even though Truvada launched four months after Kivexa, Truvada began outselling Kivexa three months after the launch, and in Spain after only two months on the market, Truvada is now in formulary in more than 25% of HIV-treating hospitals. Turning to Viread the European union , overall sales have remained strong since the launch of Truvada. We continue to see Viread grow largely as a result of its convenient once-daily dosing and its established position in second and third lines of therapy. According to third-party market research, Viread has now passed Combivir in NRTI market share with Viread at 19.7% and Combivir at 17.1%. This continued growth is in part attributable to our European sales force’s ability to promote the 24-week study 934 data, currently included in the Truvada European label. Overall, approximately 100,000 patients are receiving Viread and Emtriva or Truvada as individual agents as part of their HIV treatment regimen in the European union. The use of our HIV portfolio has grown mainly because of expanded use of Viread and patients starting on Truvada therapy balanced by conversions from Viread and Emtriva to Truvada. We believe that Truvada represents a significant opportunity to further penetrate earlier lines of treatment and secure its position as the once daily NRTI backbone of choice. Turning to Hepsera for chronic hepatitis B. In United States, Hepsera prescription volume grew 33% on an annual basis at the end of the third quarter 2005. In spite of increasing competition, Hepsera prescription volume has increased 6% since the launch of Entacavir by Bristol-Myers Squibb. As the antiviral market leader for the treatment of chronic hepatitis B, Hepsera has benefited from the growth of the market since the entrance of a new competitor. Hepsera continues to be supported by its long-term efficacy, proven safety, and a superior resistance profile. We'll present exciting five-year data from the Hepsera study 438 at the American Association for the study of the liver diseases annual meeting, San Francisco, in November. As detailed in the publicly available abstracts, data from the study in E-antigen negative patients, a difficult to treat of form of hepatitis B, indicate that the treatment with Hepsera up to five years reversed signs of liver damage. In total, there will be seven Hepsera presentations at the meeting. In the European union, much of the growth in Hepsera is occurring in France, Spain, Italy, and countries of the Mediterranean region. Most notably Turkey. During the third quarter, 2005, total unit volume of Hepsera increased by 55% compared to the same period in 2004. Finally, Hepsera was launched in China on August 25th by a commercial partner in Asia, Glaxo Smith Kline. To conclude my description about of our commercial products, AmBisome continues to perform well in our key market segments, namely fever of unknown origin, and confirmed invasive fungal infections. On a volume basis, unit sales of AmBisome in Europe where Gilead markets directly or through distributors increased by 11% during the third quarter of 2005 compared to the same period last year. AmBisome remains the gold standard for serious fungal infections and continues to maintain nearly 24% market share in the intravenous anti fungal market. As you'll recall, late last year we concluded the Ambilo trial, which evaluated higher loading doses of AmBisome versus the standard 3 mg /kg dose. Data from this study will be presented at the American society of Hematology in early December in Atlanta. We are very pleased with the continuing growth of all our franchises during the quarter. Finally, I would like to conclude by highlighting how proud I am of the employees at Gilead for their swift response to help and address the urgent needs of physicians and patients in the wake of Hurricane Katrina. We were able to communicate to the relevant state government and public health officials about our efforts to ensure ongoing access to Truvada, Viread, Emtriva, and Hepsera. One of these efforts included dispensing replacement products at no cost to the state AIDS Drug assistance programs in the Gulf states and to out-of-state displaced individuals. Helping to address medical needs essential to our mission at Gilead. At a time like this, I am pleased that we were able to contribute to the relief efforts. Now I will return the call back to John Milligan. Thank you, Kevin. Thanks to everyone for joining us on the call today. We're proud of the financial, commercial, and product development accomplishments Gilead achieved in the third quarter. We look forward to continued strong product revenue performance during the remainder of 2005, driven by our growing HIV franchise as well as Hepsera and AmBisome sales. We remain focused on investing wise in our pipeline and our marketing and sales programs for continuing to deliver earnings for our shareholders. I'd now turn the call back to the operator so that we can 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. 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_233933

Here’s the entire text of the Q&A from Google's (ticker: GOOG) 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 Gentleman to ask a question at this time simply press “*” “1” on your touch tone telephone. Once again that was “*” “1” for questions or comments that you may at this time. We will take the first question from Scott Kessler with SMP Equity. Thank very much. I was wondering if you could talk a little bit about your plans to provide free Wi-Fi access to the city of San Francisco. What is the underlying business rational, do you plan on trying to do similar things in other areas of the country? Thanks a lot. Yeah, thank you for the question, this is Larry. We are excited about expanding Internet access in general. We think it is really good for our business as people have better access to internet they do more searches and they use our services more and so the San Francisco Wi-Fi is an experiment to see how we can provide some new services and also software as you mentioned localized software and things like that, in an environment where people have really good accesses to the internet. But we have not announced plans to do anywhere else besides San Francisco yet. Hi guys. Congratulations on the quarter. I am not going to ask about the quarter, I will let it speak for itself for now. But, I want to talk about the big picture and discuss how you guys view alternate moneterization methods to the current pay-per-click model? Statistically what you think about pay-per-crawl, pay-per-action model and how they may work within Google’s framework and do you have a timeframe in mind where you might introduce early tests in these methods and also potentially related to that, could you comment on reports that you have been testing direct feed from some potential classified ads partners and thoughts you might have on the usefulness of Google potentially acting as a classified ad aggregator? Thanks. Hey Ben, I think that was a pretty extensive question I think I will defer to Omid on some of the pay-per-click and pay-per-crawl models because I haven’t been too much involved in that. I think the main way for us is really trying to focus on opportunities for increasing monetization probably the biggest opportunity there. I think you have seen us deal with the site targeting efforts and that‘s really grown substantially in this last quarter and basically what that does is, it lets advertisers choose ways to ad their ads and pay by CPM or impression based model. Omid Kordestani, why don’t you take the pay-per-click component. As Jonathan said we are trying to really understand how best advertisers want to work with us. So throughout this year we’ve done a lot of work with agencies and sales force to really understand how do we bring this accountability to media and we haven’t really announced any specific products in that area and just focused on finding the best way to bring the same kind of accountability we brought to CPC advertising, no current format but extended beyond that. Yeah, thanks. Question on the AdWord versus AdSense mix. Obviously the more of the AdWord mix improves _____ logic to spend more essentially on R&D and sales and marketing. I am just curious on the mix, to what extent does the mix that you are driving or it’s natural evolution etc., because that will give you some flexibility kind going forward and then secondly the buzz that there is lot about the paid click per search going up to the significantly and I am just wondering in terms of your optimizing and working for advertisers, what you are doing in that space to the extent of how the _____ make for, other stuff in that area? Yeah, this George, I will take over the mix question. We have been through a couple of cycles on mix, early on it was a Google.com driven business and then we began in 2002 and 2003 to really build up the partner network. And that of course drove TAC up and what we are seeing, now and it was rather perceptive this quarter is a very robust 20% growth in Google.com with relatively modest 7% growth in the partner network. So, we’ve been through cycles on this both rich Goggle.com cycle and somewhat lean Google.com cycles and it all depends at the rate, really the driver is the rate at which the partner network is growing. This is Jonathan, Just following up on our own monetization efforts. Basically the way to understand the dynamics support driving most of that is you really just look at both ends of the advertising spectrum. And I think what you will see is we are monetizing the business better at the global fortune 1,000 front, where we are coming up the lots of new product functionality that lets us reach customers again with site targeting and a lot of aggressive adds quality improving in work that we have been doing to make the add better targeted and more effective and increase that all the way. And the other end of the spectrum and this is probably a significant component too. If you look at the smaller advertisers in small business space, we are developing lots and lots of ways of making it much easier for them to come on to the network and advertise. So, the growth is coming in terms of the number of the advertisers and the fact that we are giving them both tool at either end to monetize more effectively. Great, thank you very much. Couple of questions, how do you think about kind of extending your abilities to take existing advertising products and other services and bundling them together such as, if potentially a PPC and CPM based product model or may be advertising and other areas that are ancillary to advertising and lead generation? And then secondly, you are half way there, with the performance-based model. How do you think about, eventually looking to shift your advertising product, to may be a percentage of sale basis which is kind of seems like the most efficient model in terms of helping generate transactions for your advertisers? Thank you. Hi this is Omid again, as we said earlier we’ve really looking at ways to bring this accountability and extend it to the directions you are talking about. And then one example I can give is, the ways that we try to simplify for advertisers to in a bid basically one price and that has to have different kind of pricing models for the network, be it the content sites or the search sites and then we introduced technology called smart pricing, which allows us to kind of value traffic from different sites in different ways and we do that by considering conversion information. So, built into the way the add system is working to the way the network is working today, we are continually looking for ways. Again to make it simple, but bring it as close as possible to our ROI metrics that everyone is interested in. Hi thank you. You started off by talking about some success and I think may be recently with the fortune 500, could you say how you could quantify that, earlier in the year you had a number of your penetration almost the fortune 1,000 was that something particular that happened, I guess some new products but did they really accelerate the penetration and any update on what that level of penetration is? Thanks. The biggest change that was done in the sales force had to do with verticalization, we actually organized our sales force into a set of vertical teams they call one or two levels higher than they were before. Omid do you want to describe that a little bit? Sure, one of the major initiatives that I am very proud of our organizations really executing out this year was across the board trying to leverage the best channel to serve our customers, so internally we call it, we like to work with our customers the way they like to work with us, so be it a third party agency or coming to us directly online or working with our direct sales force so. What we’ve done is really made it very smooth for our customers and transition as many accounts to the best channels that our best setup serve them. So, throughout the year as Eric mentioned, we have taken our field organizations and pushed them into an industry focus and have them both call and service accounts with attention to the industry, the metrics in that industry and again leverage all of our channels both within Google and our partners to service our customers the best way possible. This is Jonathan just following up. I think the really biggest component there is having along with the sales force changes moving into the brand budgets with the big fortune 500 customers and I think this is a big secular trend that’s benefiting Google and other online properties. So, in addition to the new products that we have been launching, we are just seeing consumers spending more time online and there are many examples of, if you look at Paramount Pictures and others who are using multiple Google products with the launch of new movies like Hustle & Flow to spend more online across inventory that they want previously given access to. Thanks, on two quick questions. First of all I was wonder if the smart pricing referred to would benefit Google’s network more than its partners, just trying to understand why you are growing so much faster then your partners. Did the partner’s site have as many as the new _____ links and secondly can you talk about some of the efforts you are making in the enterprise area? Thank you Sure this is Omid. We believe actually as we look across the network, there are different characters as you are seeing, there are some site have a very commerce focus that do perform better than our own inventories. So, Smart Pricing really is designed to for the most part to take and really put a discount in the areas where we see traffic that is just not converting as well as we expect. And again this is an area where we are focused on improving with additional science and focus on ROI metrics. In terms of the growth and the kind of mix in the quarter it really had to do with the fact that Google is continuing globally to gain shares in search, but a lot of our partners are doing as well. So, it’s as George mentioned the metrics, the shift was more to their own properties, but in general I think across the board both our partner network contributed well and the performance of our products really enhanced the monitorization capability this last quarter. In terms of the enterprise business, we are really again focused on similar to the other parts of our business, serve the customers the way they want to work with us. We had a lot a focus on the government sales with our high end systems and search clusters, but the mini product itself is doing extremely well and a we have a lot of new customers both in the SMB market as well as in the kind of the larger deployments with government and major fortune companies. Yes hi, its Imran Khan. One question, can you talk a little bit about what is your motivation for adding a third link and how did that if impacted _____ rate or overall yield in terms of volume or monetization of this quarter? Thanks. This is Larry. I think that’s a very good question. You think sort of when, we add more advertiser links, we are sort of increasing revenue with the existing qualities or something like that. What we really do though is we actually do more complex things. So, we decide when to show the ads or not, and we can actually increase the quality and revenue. So typically the changes we make we think are going to do that usually craft about our prediction. But, I think you will see us make very many changes like that, we certainly would like to make very many changes like that in the future and we should typically have a pretty long list. It’s hard for me to go on with the specifics without that, but you know generally we try to increase both quality and monetization, we make changes like that. This is for Brian for Mary. On Yahoo’s call the other day, they mentioned picking up former Google advertiser such as iVillage, can you talk through, what you guys are doing on the AdSense front to aggressively pursue and retain your publishers and separately would you give us any insite into the drivers of revenue per search this quarter or how those factors are trending? Thanks for your question this is a Sergey. I think that you hit the nail on the head with your former question. You have a lot of question but to answer the former, the primary thing we work very hard for AdSense publishers, is just to make sure they have good monetization as well as good user experience. And I think we are executing very well on that by virtue of developing the ad technologies which are in many ways similar to search technologies. They increase both end user quality in relevance as well as monetization. Now there have been a handful of losses over accounts relatively small ones and I haven’t seen any particular pattern from what I know that iVillage had some specialized functionality they were very interested in sort of and they weren’t looking so much of the core monetization which is what most publishers are interested in. It’s Bob Tank here. My question relates to AOL. I know you can’t comments on any rumors speculation in the market. But I was wondering if you could elaborate a little bit further about some of the other synergies right now you have with your partner, beside from just being partner, whether be engineers working closely together whether it would be IM or VOIP integration and while you touching on that topic you could talk a little bit longer term on what you see as far as what Yahoo and Microsoft are doing with their IM integration and where VOIP and IM ultimately could go as far as cross platform integration? This is Eric, I feel like you have answered your question in the question. Of course we can’t comment on any rumors. I would tell you that AOL has been our longest and in many way tightest partner for many, many years. We have teams that are covered on a wide variety of activities, they have expanded their base, we set the advertisers together, there are number of areas of technology involving advertising and video and so forth that had been collaborative in nature. And that work continues and we hope it will continue for many, many years. So they are very, very valued partner and we hope it will be forever. With respect to VOIP and Instant Messaging integration it would really require me to speculate on some products that we are building and the structure of the industry and because we don’t do that. It is obvious that Instant Messaging and Voice over IP are going to become very, very significant components of people’s online experience. Google as you know has a product in that area called Google Talk, which we introduced over the quarter, it looks like it’s doing extremely well. It may be helpful to say right at the top, that we don’t do the same thing as everyone else does. And so if you try to predict our product strategy by simply saying, so and so has this and Google will do the same thing. It’s almost always the wrong answer. We look at markets as they exist and we assume that they are pretty well served by the existing players. We try to see new problems in new markets using the technologies others use and then we build. Next question. First I was wondering if as you looked at free Wi-fi mobile services, is it your vision that in three years from now you still be monetizing all of that primarily through advertising or do you see yourself incorporating another revenue line? And in the second question will be just a comment on your views on Thin Client computing, obviously you started on a relationship with Sun, you have a history with Sun, I am just wondering should we see cheap devices out there at some point, and just your thoughts on that? Thanks. Well there are so many products that we have today that we monetize in ways other than advertising and _____ Google the enterprise product. But, right now it is the engine that is really driving our current economic prosperity, is this big sea change that we’ve seen from transitioning offline dollars to online. And if you look at the relative opportunity there, I think what you are going to see is that there is going to be significant more money transitioning into the be pay-per-click model that we’ve evolved and you are going to see other types of efforts along with the brand advertising increasingly growing. I also think you are going to see other platforms that would be able to apply the add network to and we’ve have been doing some experimenting in some of those areas with print and magazines and I think you‘ll see some continued growth there. But, the main focus is absolutely going to be this sea change in advertising. So the second part of the question was really about Thin Client models and again when you are using a term that means a lot of things to different people, we prefer to think about it in terms of what does the end user actually want? The end user basically wants to see the same kind of information on any device anywhere all the time. So, if you call that Thin Client and that’s what we mean, and if you mean something else by Thin Client then that’s not what we mean. And the technology has moved to the point where it’s possible to have a unified online experience that spans your mobile phone, your personal computer, all the new devices that are coming out of the next few years and Google intends to be the primary mechanism for access and search of all that information. As we highlighted earlier we have done a large number of interesting deals with mobile operators already as a part of that initial thrust. With respect to Sun, Sun has turned out to be a very valuable partner with respect to toolbar distribution and potential distribution of our other open source technologies and that’s an important component of brining in user services to all these new devices, and to really give choices to which platform they want to use. Thank You very much you. Eric, you guys have done a excellent job with leveraging the search productivity, recycle elements and taking this information driving better click to use coverage and PPC as well as leveraging site targeted at advertising and I was wondering if you could comment on how those factors compare in the United States versus international on a relative basis. Is international 30% of what are doing in United States is at parity, then someone mentioned, going after other platforms, I was wondering can site targeting be done in IPTV with branded advertising to the television platform? Thank you. Hi Anthony, this is Omid. In terms of internationally again we don’t break down specific numbers but, what I can say is that, one as Eric noted last quarter we have been extremely busy building our capabilities and what we are seeing is that this model is truly working. Very similarly across the globe, the transition to media is happening, the interest in one of the spectrum of advertiser from local advertisers to a large advertisement company is happening. In China for example we have recently signed four resellers doing a great job of, bringing us new customers. And frankly in areas where people probably some of these customers don’t even have PC’s these advertisers are being setup by these resellers to purchase packages of clicks in effect. So I think the metrics really will have to do with the maturity of the market, so UK is obviously our strongest market, overseas for us, we are doing really well in Japan but in terms of specific update, we are not breaking those down at this point. And second question I think, I would like Eric to address it. The main thing that you really want to look at, we tend to have a cycle as you look at the each of these countries and obviously this was led primarily in the US and you see in particular some on the Western European Countries are little bit behind in terms of just maturity of the online market. If you look internationally across the world, I think the main issue in terms of predicting the dynamics in the countries broadly is the scope of commerce. And so you see some countries where there isn’t as much user behavior and interest in engaging in commerce online or they don’t have the shipping infrastructure to allow the transaction for goods and services to be consummated online. And so I think there are some areas there where some of the international areas in kind of much more nascent stages of online commerce where you don’t see the monetization. Good afternoon and congratulations on another awesome quarter. I want to dig in a little bit I know you answered this question but some of the questions that were asked but, I would like to know if I could dig into the discrepancy which I believe is the biggest you’ve had so far in the growth of Google network as compared to your partners, I think Omid was talking about of maybe eluding to potentially a market share gain that might have helped, could you talk a little bit about more about is this stage of product introduction that you tested on Google network that we could see some of this in the coming quarters, come up within your partners, is there a more permanent shift of traffic or other things at play here? Hi Safa this is Omid. Let others add any comments that they seem fit here. I think we are actually observing the search very very closely and what we are finding is the major partnership in this space are long term contracts that we have already established and so there is not kind of significant big partnerships that we could establish in the near term and so the search network is pretty stable for us. We still see that there is tremendous opportunity in the content network and we are busy servicing that both with our field organizations and our online services. I think it’s just a nature of how the traffics are evolving, partners are spending, on ways to marketing to bring traffic to the sites and in certain quarters we see that having an effect on the traffic of the network, we see them changing the formats of ads versus the amount of ad they show, the amount of search they show. So, again. I think the trends are continuing and we are doing really very well with our search properties and growing the share and the partners are stable with us with a long term contracts and we are focusing in the new areas like content targeting and site targeting to hopefully expand opportunities for everyone. Yeah Hi Safar thank you, a good question. On the market share front we do a lot internal studies and I know some of you guys do as well and basically from what we can tell, looks like we are holding or gaining market share really in virtually all markets. So, I think the general trends that read about in the external studies that you’ve seen are accurate. Great. I was wondering if you could talk just a little bit about gmail, as we continue to go through the Beta period here, can you just talk about some of the trends that you are seeing whether it’s in signup’s, whether its in click-through and monetization there. How does monetization with gmail compare to what you see with your broader search business and how would you have us think about the opportunity within mail for Google down the road? We are very excited about gmail, but at this stage we are looking at it as still a platform off of which to built rather than a sort of big revenue driver in itself. The kinds of services that we are able to launch off of that is for example Google Talk that was mentioned earlier but, also many others that we are testing, we think that it’s a very interesting area, at the end we think that there is a lot of new innovation to be had, just with email. But, also with the related communications area, I am just dealing with people’s important information, which I feel in most of our cases we have just a huge amount of information that’s important to us that’s in our email. So, we still view this as a platform for us to build off of and to experiment off of. Ladies and gentleman, due to the time constraints we will take a final question from Paul Keung at CIBC World Market. Very impressive revenue growth, I was wondering how much of the growth this quarter came from new products site, like Google SMS, or SSAD or some new initiatives like site targeting when you compare with more traditional monetization products. Would it be fair to say that your expected accelerated sequential growth, which is nearly did not expect to be entirely due to these product initiatives? When we look at the quarter, we see improvements in monetization across the board. The growth occurs by virtue of the focus on quality, building up a network, extending our partners, adding more advertisers, it really expands all of the categories that you described. So, it is not a single product that we introduced that somehow causes it to happen. It is a discipline around new product invasion that really touches across the entire portfolio of the company. So, with that it looks like we are out of time and I want to end by saying I really appreciate people taking the time to be on the call, to listen and to study what we are doing, things are obviously going very well here. What you are seeing is you are seeing I think the consequence the systematization of a business, which really is about results and advertisers results, results are around information, metrics driven model for end users and for advertisers that has really scaled. What is great about this business is that it can be extended very, very broadly. The underlying principles that we’ve talked about, the principles of innovation, of how we manage our engineering teams and the focus around technology, creativity, the culture that has been built, in my opinion will deliver these kinds of results, this kind of opportunity for many years to come. This is a very, very, very big space that we are in and that’s why it’s exciting to be part of Google. Thank you all, so very much for spending time with us. 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_233934

Good afternoon. My name is Natasha, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the United Online Third Quarter 2005 Earnings 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. Hello, and welcome to United Online's conference call to discuss the results of our third quarter ended September 30, 2005. With me today is Mark Goldston, our Chairman, CEO, and President; and Charles Hilliard, EVP and Chief Financial Officer. In today's press release, the Company refers to adjusted operating income before depreciation and amortization, or OIBDA, adjusted net income and free cash flow, all of which management believes are useful in evaluating the Company's operating performance. These numbers are not determined in accordance with generally accepted accounting principles, or GAAP, and should not be considered as an alternative to or superior to historical financial results presented in accordance with GAAP. Definitions of these numbers are provided in the press release, along with reconciliations to the most comparable GAAP financial measures. Before we get started, I need to point out that the Company does apply the Safe Harbor Provisions as outlined in the press release to any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, our financial condition, our performance, our pay account growth, future products, and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. More information about potential risk factors that could affect the Company's business and its financial results is included in today's press release under the caption "Cautionary Information Regarding Forward-Looking Statements" and in United Online's most recent filings with the Securities and Exchange Commission. Projections provided by management in the press release and in today's call are based on information available to us at this time, and management's expected internal projections and expectations may change over time. However, the Company does not intend to update these projections. Any persons replaying this broadcast after November 2, 2005 should recognize that any non-historical information discussed in the call might not be current or valid after that date because of the circumstances and assumptions underlying such information may have changed. And, with that, we're going to start out with a few comments from Mark and Charles, and then we're going to open it up for questions. So now I'll give the floor to our Chairman, CEO and President Mark Goldston. I'm going to take you through some highlights of the quarter and discuss some of the important initiatives within the Company, and then Charles will take you through a detailed look at the financials. The September 2005 quarter was another record quarter for the Company in a number of key financial areas, including revenues, operating income, adjusted OIBDA, and cash flows from operations. In the face of continued challenges in the access business, we had another strong financial quarter, and, in fact, recorded our 17th consecutive quarter of record revenues dating back to the September 2001 quarter, a milestone accomplishment that we're very proud of. Our non-access businesses accounted for 100% of our sequential quarterly revenue growth, similar to what occurred in the June 2005 quarter, which further demonstrates that the United Online diversification strategy is being executed with a high degree of success, and the core of our non-access business is our Classmate subsidiary, which we purchased almost one year ago and I am very pleased with the way that business is performing. I'll elaborate on Classmates a little bit more in a few minutes. I'm also glad to announce that the largest, most comprehensive technology initiative in the history of United Online, our entry into the VoIP, our Voice over Internet Protocol business, officially launched last Wednesday. The soft launch of the VoIP service, called NetZero Voice, represents an exciting new opportunity in what is predicted to be a very large global market. In contrast to past earnings calls where I wouldn't talk about VoIP, today I will describe the VoIP product line in detail for you, and I think you'll see why we believe that our approach to the market is unique and compelling. So as we sit here today, United Online has two key business opportunities beyond Internet access. One is web services, which include cell phone networking, and the second is VoIP. Our goal is to diversify as much as possible away from pure Internet access and to leverage our tens of millions of users across all of our businesses to be able to officially penetrate these other markets that we've described. Let's talk about the access business. The access business as a category is a very competitive place right now and has been especially focused on aggressive pricing for the past six months. The broadband providers, DSL in particular, have resorted to deeply discounted pricing on their core DSL products while attempting to facilitate a land grab during the back half of 2005. With VoIP on the horizon as a huge potential industry that can cause major headaches for the RBOCs as they attempt to protect their highly profitable local and long distance phone plan, certain of the RBOCs seem to be using DSL as a loss leader in an attempt to lock in consumers across a suite or bundle of services. In response to these aggressive consumer DSL deals, many cable Operators have also become more aggressive in their pricing and promotions to try to hold their ground against the $14.95 to $19.95 DSL offering. Many dial-up providers have responded by aggressively pricing for running their services as well, and these activities continue to intensify. This trend, along with broadband's promotional pricing at the current point, and some quality issues that we had with our CRM vendor, as well as the impact of having a customer care call center in Mississippi contributed to an increase in our churn rate and let to a further decline in the core access business. While we continue to test different promotional plans on our brand, we're not currently contemplating engaging in a permanent all-out price war to combat what appears to be unsustainable price cutting in the broadband market, as highlighted in the fact that SBC this week moved to raise pricing on their $14.95-a-month product for one year. They put it up to $16.99 a month with a 6-month commitment, and then it jumps all the way up to $29.99 a month thereafter. Our goal at United Online is to continue to find ways to mange the dial-up business through innovation and through the introduction of compelling new features and services to enhance the value proposition of our NetZero and Juno services while maintaining our hallmark financial discipline and our focus on managing cash flow in that business. We believe strongly that dial-up will be around for a long time to come, particularly in areas where broadband is not available and for consumers that either can't afford higher priced broadband or who don't need a broadband connection to meet their needs. We're fortunate to have a top value brand in NetZero, and our job will be to convince the many people that remain on dial-up that NetZero and Juno provide the best quality and value in the dial-up market. As we continue to demonstrate success at diversifying United Online's overall revenue base with growth in our social networking business, other non-access services, and the exciting new NetZero Voice product line, we believe that as a corporation we will be less vulnerable to lose by competitors within the access arena. I've said on previous earnings calls to all of you that our goal was to have a substantial portion of our revenues in the future come from non-access businesses, and we are well on our way towards achieving that goal. Let's take a look at the non-access business of United Online and the exciting growth that's occurring at Classmates. When we purchased Classmates last November, basically one year ago, what appealed to us was the sheer size of the user base at almost 40 million members; the uniquely [protectable] positioning of the business as one of the largest social networks in America, connecting people to their past affiliations; and the opportunity to enhance the features available on Classmates to make the site more compelling and encourage people to spend more time on the site and more money in the form of subscriptions, transactions, and so on. I'm proud to say that the Classmates business has grown consistently since we have owned it and we've instituted numerous new programs which has stimulated the business and made the site much more relevant to the large user audience. Perhaps the most compelling new idea on Classmates was just launched last week, and that has to do with photos. Think about when you were in high school or college and how many people were in your graduating class. Many of us had a few friends and the rest of the people were either acquaintances or people we really didn't have a lot to do with and have little contact with later in our lives. That being the case, why do so many people go back to reunions? In fact, a large percentage of Classmates' members are faced with a milestone reunion each year. Why go back to see the same people from high school or college that we didn't keep in touch with over the years? The reason is really quite simple-- because we're all curious to see how people look and what they turned out to be. We realized that what was missing from Classmates was the ability to have 40 million people be able to use an easy photo application to actually see each other and see how they've changed, just like the experience they would have if they went back to their reunion, which many of them do. Our new photo application, unlike our previous photo application, is very easy to use and should encourage a large number of Classmates' users to post photos to their profile and significantly increase the user-generated content on our site. In fact, I'll let you in on a little bit of the data here. In the first few days that the new photo application was launched last week on the Classmates' website, the number of photos posted to Classmates increased 10 times to roughly 20,000 per day, up from 2,000 per day with the previous photo application. What's interesting is that the average user posting photos with the new feature is posting approximately four photos per member, which is very high. Before the launch of the new photo application, we would get 1,000 members every day posting their first Classmates photo using our old application, as I said. Since the launch of our new application, we went from 1,000 members every day to 4,000 members every day posting photos, and our major email and marketing communication programs haven't even begun yet on this product. So, as you can see, in the 12 months we've owned Classmates, we've really begun to transform this company. Our overall strategy for Classmates is what we call "Find-me, See-me, and Talk-to-me." The see-me portion was previously sorely neglected in that equation, so we pooled the collective intellectual resources within our United Online web services unit, which is Classmates' photo site in the web hosting business, and under the new technology leadership of that unit, last week we did introduce this vastly improved, easy-to-use photo feature to every Classmates user. If we can successfully convince 40 million Classmates members to transfer photos from their hard drives, digital cameras, and so on to their Classmates profile, we believe that people will be more likely to increase their visit frequency and page use and even pay to see pictures. In fact, we believe that the likelihood of someone wanting to communicate with a classmate is greatly enhanced by being able to see what the classmate looks like before they determine if they want to talk to them. This is just the tip of iceberg on Classmates, folks, and our new plans for the personal web hosting and photo businesses within United Online's web services unit we think are exciting as well. With the recent developments in the social networking category and the heightened interest in that category, we feel that with our critical mass and unique positioning, we're very well positioned in this area, and we're really excited about the prospects of this business. Our Classmates' employees up in Renton, Washington at our headquarters there are doing an outstanding job, and we're thrilled with the results that they've achieved and we're putting a lot of time and effort into this asset that's starting to really pay off. Now I want to turn our attention to the introduction of the new VoIP product called "NetZero Voice." NetZero Voice represents the largest collaborative technology effort in the history of United Online. Over 150 of our employees worked tirelessly over the past year to create this exciting new business for our Company. The VoIP category is just getting off the ground in the U.S.A. It has been gaining strength internationally for the last two years. You may have noticed that the worldwide leader in VoIP, a company called Skype, based in Luxembourg, was just sold to eBay for $2.5 billion and a deal that could be worth as much as $4.2 billion. Clearly, there is a lot of buzz and excitement around the VoIP category. There are two distinct models in the VoIP industry. The first involves the use of a terminal adaptor, or TA box, that is very much like a DSL adaptor, in that it contains a connection from the wall to the adaptor to your broadband line and from the adaptor to your telephone. The TA box model is commonly referred to as the "home phone replacement model," and from a revenue standpoint, it is the dominant form of VoIP in the U.S.A. today. The second major business model in the VoIP industry does not involve the use of terminal adaptor boxes. Instead, it uses a proprietary software client downloaded onto your computer to connect your phone calls primarily over a broadband connection. This is the model that Skype has used very effectively to sign up millions of users worldwide. Within the United States at this time, many of the major VoIP players, albeit in what's currently a very small market at roughly 3 million users, those players utilize the TA box approach. You've heard of brands such as Vonage and AT&T CallVantage, Packet8, Lingo. They're all promoting the "Throw out your home phone and switch to VoIP" strategy. Their model is based upon a consumer buying the necessary equipment and installing it to enable the service. While we believe that there is a future in that business, and ultimately United Online may enter that segment as well, it's our opinion that the home phone replacement services may initially be a bit radical for many Americans. We believe that the software client download model in the convenience of your home, your office, your dorm room, like the one we used in the ISP business for the past seven years is an easier, more user-friendly, less costly way for the masses to experience the ease and benefit of calling someone over the Internet. Certainly, Skype proved the validity of that thesis. NetZero Voice soft launched last Wednesday on the front door of www.netzerovoice.com, and represents an opportunity for everyone in America, if not the world, with a broadband or dial-up Internet connection to experience Internet phone calling. I said "broadband or dial-up." In previous calls, many have said, "Mark, it's not possible that you would be doing VoIP over dial-up, so what will you be doing?" and I couldn't answer the question. Now you can see why. We are doing VoIP over both broadband and dial-up. Most of the major brands are designed to work primarily over broadband, and, to our knowledge, they have not focused their technical or marketing resources on the estimated 45 million U.S. dial-up users and the hundreds of millions of dial-up users around the globe who may find Internet phone calling an attractive idea. NetZero Voice is designed to be access agnostic and to work over both dial-up and broadband, so the spectrum of appeal for this product is as broad as it can possibly be. What's also important here is that NetZero Voice works exceptionally well over broadband connection, so users can now experience high-quality VoIP connection even while they're downloading large files or applications. A lot of the current VoIP providers experience a high degree of call quality degradation during periods of heavy downloading. That is not the case with NetZero Voice and our unique software codes. NetZero Voice can be used to call anyone, anywhere, any time, absolutely free, from one computer to another using the NetZero free VoIP software. It's important to note that in order to enjoy free calling PC-to-PC that users must each have the NetZero software downloaded onto their computer. While it will take some time to gain traction in critical mass, this is a very compelling proposition and promises to take the computer, which previously was only used for viewing images and typing, into a mode where the computer will now be able to talk. For those who'd like the opportunity to call someone on a landline or a cell phone from their computer or to receive calls on their computer from a landline or a cell phone, NetZero Voice will enable that in true NetZero form through our various extremely low-priced pay plans. Specifically, we have a pay-as-you-go plan, which is like a preloaded calling card. It lets the user load their account for long-distance calling anywhere in the world. And we've got three pay plans-- a $3.95 a month, $9.95 a month, and $14.95 a month that are among the most aggressively priced VoIP plans available anywhere today. To sign up for a NetZero Voice pay plan, all you need is a United States billing address. We're currently reviewing the possibility of adding pay plans internationally and expanding our focus beyond the domestic market. NetZero Voice provides all users with free voice mail and free email, and we provide a message center that will contain their email and voice mail in a single location. We also give you a personalized phone number with all of our pay plans that lets you choose the area code and the number of your choice, and you use that number as your primary means of communication through something we call our "find-me/follow-me" feature. Find-me/follow-me lets the user program up to five separate phone numbers-- your home, your car, your office, your cell phone, whatever, so that when the number that we gave you is dialed, each number will ring in succession until you answer it. In effect, it will follow you and it will find you to make the connection if you so desire. If not, you'll go into voice mail, which on NetZero Voice is absolutely free. Another major advantage of NetZero Voice is that even dial-up users can enjoy the incredible call quality while they're surfing the Internet. There's no longer a need for a second phone line. Now users can make and receive calls over the same dial-up line that they're surfing the Internet with, which can save consumers between $20 and $40 a month on that second line being dropped. Think of all the dial-up users in the United States or think of all the dial-up users around the world. Now they don't have to switch to the NetZero ISP, although we would love them to do so, but they don't have to switch to NetZero ISP for Internet access. If they want to stay with their current dial-up ISP, they can download NetZero Voice software in a couple of minutes and begin talking to each other for free using the PC-to-PC feature or call conventional phones using one of our attractive pay plans. We've got a product that all dial-up users can use without changing their ISP. That is a big potential market. Our marketing for the NetZero Voice product will include a focused email program through our user base, key links on our site, a three-month free offer on all the NetZero Voice pay plans. So just in time for the holiday season consumers can start calling people immediately from their PC's to a landline or a cell phone without waiting for their friends or family or business colleague to download the NetZero software to take advantage of the free PC-to-PC calling. In terms of TV advertising, beginning in early 2006, we'll be using some clever new creative designed to highlight the new NetZero Voice product. The growth of our VoIP business is going to take time. This is a new application for the consumer and it's going to take some education. However, we think that this category is going to be huge. Some estimates have it between 18 and 24 million over the next four years. All we know is that VoIP is going to get bigger and bigger, and we think there's an opportunity to have a substantial domestic and international business at some point in the future. Our employees in Woodland Hills, California, New York City and Hyderabad, India worked collaboratively and have done a wonderful job of creating the VoIP business completely from scratch in a little over six months' time. That's remarkable. We've got a world class product in the market today, and I'm extremely proud of the effort put forth by our world class technology and business unit teams. They did an outstanding job. Our diversification strategy is progressing very well as we move beyond pure access and continue to focus our efforts on growing the social networking and VoIP businesses. Financially, we're in an extremely strong position, and our Board of Directors has just approved a $0.20 per share dividend for the quarter to be paid on November 30, 2005 to shareholders as of November 11, 2005, our third consecutive quarterly dividend. With that, I'm now going to turn the mike over to Charles for a detailed review of the financials of the September quarter. Charles? Second, we had another strong billable services margin. We were up 180 basis points versus the year-ago quarter to 79.3%. Sequentially, the billable services margin was down 10 basis points due to ramp-up costs associated with our VoIP launch. Third, free cash flow, which is very important to us, remained very strong at $33.9 million in Q3, up 23% year-over-year. Third quarter free cash flow has benefited from changes in non-cash working capital, reflecting record quarterly investment of capital expenditures of $8 million. And, fourth, we produced record adjusted OIBDA, up 18% year-over-year to $34.4 million or 25.9% of revenues versus $29.2 million or 26.4% of revenues a year ago. Let's go to pay accounts and subscriptions. Pay accounts increased by a net 7,000 during the quarter. As we discussed in the press release, we made an update to our billing reporting [stock plan] in the quarter, which resulted in a positive adjustment of 12,000 pay accounts and 15,000 subscriptions. While pay access accounts declined by a net 98,000, non-access pay accounts grew by 105,000. At September 30, 2005, non-access represented 41% of our pay account base, and that's up from 4% a year ago. Also, during the September quarter, our non-access pay accounts crossed the 2 million milestone for the first time. Subscriptions grew by a net 33,000. Non-access subscription growth was 122,000, which took our non-access subscription base to nearly 2.2 million. We continue to be very pleased with our progress in growing the non-access portion of our business and the early success with growing the United Online Advertising Network. All right, let's get into some more detail here. Billable services revenues were $117.7 million, up 15% year-over-year. Average monthly revenue for pay account, or RPU, was $7.79, down from $10.60 for the year-ago quarter and from $7.85 sequentially. The decline in RPU was due to an increasing percentage of our pay accounts attributable to non-access. In Q3, our non-access RPU remained in the low $3 range, with access in the mid to high $10 range. Advertising and commerce revenues were definitely a highlight this quarter. They were up 76% year-over-year and [80%] sequentially to $15.1 million. The year-over-year growth reflects primarily the contribution from our Classmates acquisition. The sequential growth reflects the stronger sales by the United Online Ad Network. Ad and commerce revenues represented 11% of revenues this quarter versus 8% a year ago. Importantly, approximately 20%, two-zero percent, of the United Online total revenues in Q3 were derived from our non-access businesses. That is up from 2% in the year-ago quarter and 18% in Q2. Sequentially, total non-access revenues grew 12%. Today, we view non-access revenues as billable service and ad revenues associated with pay and free non-access services, although a small portion of these accounts are to some extent derived from or dependent on our access business. Our cost of billable services were $24.3 million this quarter, up 6% year-over-year. The increase is due to the Classmates acquisition and a 1% year-over-year increase in average-- pardon me-- in hourly telecom costs of just over $0.06, offset somewhat by a 3% decline year-over-year in average hourly usage for pay access. Sequentially, our hourly telecom costs decreased 2%. For Q3, we anticipate relatively stable telecom pricing per hour. Cost of free services was $2.9 million this quarter, up 78% year-over-year. The increase was driven by the Classmates acquisition, offset partially by declining [telecom] costs for free access accounts. Sales and marketing was $52.5 million in Q3, or 39.5% of revenue, versus 39% in the year-ago quarter and 40.7% in Q2. Which takes us to customer acquisition costs. For the September quarter, we estimate our gross pay account acquisition costs at about $52, five-two, down from $79 in the year-ago quarter and down from $57 in the March quarter. The decrease year-over-year and sequentially reflects primarily the lower relative costs of acquiring non-access pay accounts. Consistent with prior periods, we calculate gross pay account acquisition costs to include total sales and marketing expenses, with costs of free services, less ad and commerce revenues. This total was $40.2 million in the September quarter. Product development expenses were up 38% year-over-year, primarily due to our budgeted headcount growth in the Classmates acquisition. Currently, we anticipate product development expenses to grow between 40 and 45% year-over-year in absolute dollars for 2005. General and administrative expenses were up 23% year-over-year due to the impact of Classmates and increased overhead costs, offset partially by the incurrence of facility exit costs in the September 2004 quarter. Excluding these facility exit costs, G&A was up 47% year-over-year. Total cash balances were approximately $241 million at September 30th, up $17.2 million during the quarter. We used approximately $5 million to pay down our term loan of $58.3 million and $12.7 million for dividends. This takes us to business outlook. We're providing guidance for Q4 revenues of approximately $131 million to approximately $133 million and adjusted OIBDA for Q4 of between $32.8 to $35.8 million. For all of 2005 we are raising slightly our adjusted OIBDA guidance to between $132 to $135 million, up from our previous range of $131 to $134. At the midpoint, our calendar 2005 guidance implies year-over-year adjusted OIBDA growth of about 18%. Pay account guidance for Q4 of slightly up to slightly down reflects our anticipation of continued trends with declines in access and growth in non-access pay accounts, which beginning in Q4 will include our Voice over IP product. Also reflected in Q4 guidance are very two important forecasting issues with respect to our VoIP launch. First, we plan to allocate a substantial amount of resources, from technology to product management, to customer support to marketing, which will include advertising dollars, to support this launch. Most of these resources are being redirected from existing businesses with which we have significant forecasting experience, particularly Internet access. We expect, number two, that there will be a learning curve, particularly with an entirely new line of business. As such, our Q4 business outlook includes a broader adjusted OIBDA range than in past quarters and implies that we have marginally less near-term visibility on revenues in pay accounts surrounding this launch. Excluding potential acquisitions, we are tightening our estimate for 2005 capital expenditures to be within the range of $22 to $25 million versus previous guidance of between $20 and $25 million. As we've discussed during the past, we anticipate an increase in cash taxes in Q4 due to limitations associated with our utilization of tax net operating loss carryovers, which at September 30th were approximately $192 million. Our cash taxes estimate for Q4 is approximately $10 million, which is at the low end of our previous guidance of between $10 and $15 million. Cash taxes in Q3 for record purposes were $1.5 million. Thanks Charles. Operator, what I'd like to do now is please get people into the q-and-a queue so Charles and I can answer their questions. Thank you very much. Good afternoon everybody. This is Youssef Squali. A couple questions. First, I was wondering if you could talk a little bit about the growth, the year-on-year growth we're seeing in Classmates. By our math, it's somewhere around 20%. So if you keep RPU relatively flat and you just look at the growth in the [parts discovered] where it's about 20%, is that the right number? And, second, is that the type of growth you expect potentially for next year? And, second, on the access business, is it fair to basically assume that the access business going forward should decline by somewhere around 90,000 to 100,000 subs a quarter? Thanks. Okay, Youssef, it's Charles. I'll take this. First of all, we've not owned Classmates for a year. That one-year anniversary will come up on November 17th, so it would not be fair to use the year-over-year comparisons. What I would say is if you look at the trend in non-access pay accounts, both in terms of RPU and in terms of the growth rate there, then Classmates is running roughly in line with that. So that trend is very similar. And in terms of any next year guidance, we'll consider when we announce Q4 results introducing guidance for 2006, but we're certainly not ready to do that right now. And, second, on the access business front, trying to quantify that going forward, I would say we're managing it to cash flow, and the amount we invest in it is somewhat determined by the attractiveness of opportunities in non-access businesses, including Classmates, and we're not ready to give specific guidance on the access business going forward. Okay. And then if you look at the year offering on Voice over IP, Mark, how will you be monetizing the PC-to PC VoIP model? I understand how you'll be monetizing the other one, but PC-to-PC, are you going to monetize it at all or is it just going to be a subscription acquisition channel? No. We're going to monetize it. We actually have advertising. We have a unique "soft phone client" is what it's called, that goes on the screen, and on the free version at the bottom there is advertising that we can display. We're also looking at potential partnerships with people that we can tie into who want to reach this audience on things that are thematically consistent with the features that we've got on the free product. So we're looking at a bunch of different ways to tie in people. We absolutely plan, like we do with free access, to monetize these folks. And understand, Youssef, that like Skype, the free product, which is really compelling, is-- it's like having a single walkie-talkie. In other words, somebody else has to have the walkie-talkie for you to talk to them. And so, it requires people to download the software, just like it does with Skype, and then if you want to talk to somebody right away-- so you see our commercial, you say, "Wow, this sounds like a great thing. I want to go sign up for it." We're giving people three months free on all of the pay plans, so that the minute you download the software, you can start calling people on their cell phone, on their landline phone. They don't have to have the software. So we're trying to get people into the game right away. So the free will monetize and the pay speaks for itself. Yes. This is Matt Shindler asking a question for Safa Rashtchy. Quickly, just trying to understand, what do the users get for the different pricing plans on the VoIP plan, those $3.95 versus the $9.95 per month plan? The $3.95 plan that you basically get is 100 minutes that you can use for incoming and outgoing calls to and from cell phones, landlines, anything you'd like. And then you get, obviously, unlimited PC-to-PC. If you have the other plan, which is the NetZero Voice 250 Plan, that's the $9.95 a month. That gives you 250 outgoing computer to telephone minutes, but it gives you unlimited incoming minutes. So anyone can call your phone number unlimited, and then, obviously, unlimited computer to computer. And with each of these, obviously, you get your own personal phone number, you get voice mail, you get caller ID, you get call waiting, a very long list of features. And then the $14.95 a month product is unlimited all the way around-- unlimited outbound calls, unlimited inbound calls, unlimited PC-to-PC, personal phone number, etcetera, etcetera, instant messaging. All of these things give you instant messaging as well. So you can be typing IM's, you can conference chat with 5, 6, 7, 8 people on the phone and have one-to-one or one-to-many conversations on IM, all very packaged into this, very easy to use, and it's a very compelling product suite. Unlike some of our major competitors, I think including Skype, on these products, including the free product, we give you free voice mail. You don't have to pay for it. So we've got a very compelling suite of features here. And, obviously, what really makes it unique is in addition to being phenomenal over broadband, we can give everybody in the world or most people in the world who are on a dial-up a connection the ability to use VoIP, which is a real neat idea. Okay. Two quick follow-ups then. How do those pricing plans compare to current Skype out-pricing, because that doesn't tend to be on a prepackaged monthly basis? So I can't-- I haven't made the conversions yet. I'm wondering if you had. And, additionally, concerning the number of free products available from Google Talk to the new MSN Messenger system to Yahoo's system, and as well as Skype, do you believe--? It sounds like you're going to have a fairly heavily ad monetized system. On the pure PC-to-PC system, will that be a deterrent to users? Those are good questions. One, I don't have the Skype numbers in front of me, so I don't have their pricing plan. I'm not online right now. If I were, I would pull up their website and give it to you. But I believe if you look at it, you will see that our pricing plan is, if not as, more competitive than what you would see there, number one. Number two, in terms of the free product that's available, as a category what we think is going to happen is if you have people in this network, you will use the free product. But you have to remember, even though we have let's say 40 million people in the Classmates, let's assume that every single one of them downloaded the software, all 40 million of those people don't know each other. And so, you have to know who it is you're going to be talking to, for us or Skype or anyone else, to use the free product. So over time, I think it's a big idea. Like, for example, if you wanted to use it, you would have to tell 5, 10, 15, 20 of your friends, "Download this software so that we can talk PC-to-PC." Now that's not onerous, but that requires word-of-mouth, etcetera. Well, right out of the gate, a $3.95, $9.95, $14.95 program, but we also have something called "pay-as-you-go," which is like loading a calling card, you can immediately start calling anybody you want at price points that are not only a fraction of conventional long-distance that you would buy, but even if you look at somebody like Vonage, who I think has a million subscribers in the U.S., I mean their unlimited package is $24.99. And so, it's a huge savings versus that. AT&T Call Vantage, which is another major player in the category, is $29.99. So the price points here are very attractive. It couldn't be easier to use. You don't need any equipment. You download this thing in a matter of minutes. You either use the speakers or the mikes on your computer or you plug in a headset, either/or. It's very easy. And the advertising that will be on the free product, to your question, is unobtrusive but in a place that will be effective. It is not big banner ads flashing all over your screen, but it is something that's integrated so that it will be meaningful and relevant to the consumer. One just final follow-up. Sorry. If--? Is your product standard spaced, because it seems that the likelihood, and at least with the IM products it looks like it's going that way already, does the true--? The PC-to-PC systems are likely to go to complete interoperability sometime in the future. Are you using [Jabber] or some other? Interoperability is what people are planning could ultimately happen to the category. I actually believe that ultimately that probably [won't] happen in the category. So the PC-to-PC calling, I think over the next couple years there's probably a good chance that it will be interoperable. But having said that, and while I do think that's absolutely a compelling product and certainly Skype has proven that a lot of people will do that, that product from us or anyone else is only as good as both people being at their computers. Given that people move around a lot all day and in the evening and are constantly getting calls either at their office, their car, their cell phone, whatever the case may be, the free product demands that both people be at the destination; whereas, our paid product, one, doesn't because you can call any phone, and, two, because of our find-me/follow-me feature, it really doesn't matter where you are because you can program in a series of numbers and the phone call will find you. So, while I think interoperability, free PC-to-free PC is a good idea, and I think may be coming in the future, I don't think it's the pure panacea for people who are looking at this as a viable phone service. It absolutely is a panacea to people who say it's boring just to sit in front of my computer and only be able to type and see images and now I can actually talk. I mean it's almost like voice instant messaging. From that standpoint, we think it's very attractive. But for people who want to make phone calls and are going to use this as a way to save them a lot of money, the free PC-to-PC, from us, Skype or anyone else, I don't think is going to be the most compelling solution for them. Hi. It's Dave Geisler calling in for Jim Friedland. Last quarter you gave some color on the allocation of your marketing dollars. I was wondering kind of given the competitive activity on the access side of the business if you could kind of update us as to how you're allocating your marketing dollars between access, VoIP now that it's launched, and as well as web services. Sure. The vast majority of the television dollars, 90-some-odd percent, obviously, has been on access. We do not intend on VoIP to go on the air-- it will either be late December or it may actually be into January in terms of going on to broadcast media for that. We spend a modest amount of money, and I mean very modest, on Classmates on a quarterly basis on television. As you know, we are with Classmates one of the largest, if not the largest, online advertiser in America. So, and that's been consistent and those numbers haven't really changed dramatically quarter-over-quarter. So, from a mixed standpoint, through September 30th at least, nothing really different from what you've been used to in the past. And I would say even in the fourth quarter, because we don't intend to spend a lot of money on the VoIP launch until late in the quarter when we want to make sure this thing is out and doing all the things it needs to do, I don't think you'll see a big shift on that. Now, going into 2006, we'll have to see what the traction is, but the VoIP business may end up getting a lot more of our expenditures. It depends on how it goes, but we are committed however long it takes to building that business and marketing it through NetZero fashion. So don't know yet what the mix is going to be yet for 2006, and we also have a lot of new initiatives coming on in Classmates, which will probably demand that we spend some marketing dollars [in there]. But, just like we have in the past, we're going to allocate the dollars to wherever we think we're going to get the highest and best use while keeping an eye towards maximizing cash flow, really no different than what we've been doing for the last several years. Okay. Great. Just another question on the voice business. Do you have a sense--? I know you just launched recently, but what's your sense on getting the break even in terms of number of subscribers? Well, I'm not going to give any projections on that. I mean, first of all, the product's been out for six days, so-- You know it's really going to depend on when we decide to turn on the jets from a marketing standpoint and which products within the VoIP seem to get the most traction. If we find out that the pay products are getting a lot of traction early on that might change the model somewhat from when if we use the plan of getting a lot of free people early on and then, obviously, getting them to migrate like we do in access over to the pay product. So, it will really depend and we've got three different plans that we've developed right now. One of them is modest, one of them is sort of middle-of-the-road, the other one is really aggressive, and we've got to give this thing a couple, six to eight weeks, and see what kind of [tape rate] we get, what kind of usage we get, and what's going on in the market before we unveil the big marketing blast. It wouldn't make sense to launch a product immediately, then turn on the TV and blast it away. It's just not how we've launched virtually anything in the Company, including accelerated dial-up when we launched it. Okay. And then, quick, just a last question on the capital spend in the quarter, it was record levels, as you mentioned Charles. Is that primarily due to equipment spent for the Voice over IP launch or what else in that-- the increase in that number? Quite a bit of it is associated with VoIP. I would say a little over half of it, and then between Classmates and replacing some older equipment on the access business is in the remainder. Thank you. Just a couple of clarifications on a question. The 7,000 net sub ads, does that include the 12,000 that were found in the new billing software upgrade? Okay. And then did you--? Did you say what churn was in the quarter and what you expect it will be next quarter? We've got churn in the quarter was at 5%, which is within about 10 basis points of where we were in Q1, but it was up from Q2. Okay. And then on-- your business is rapidly transforming from one of access into one of social networking and other things. The social networking website that's getting a lot of press these days is myspace.com, and they're growing at something like 8 to 10 million users a quarter, and they've quadrupled this year for example. Can you just say how you compete with them and if it's a different demographic or different service, or is there any overlap? Yes. This is Mark, Mike. That's a good question. The last numbers we saw on My Space as part of the acquisition was I think 18 million, if I'm not mistaken. Our Classmates business has got about 40 million members, four-0, just to compare the two companies because there are a lot of differences, but I mean the revenues are [orders of magnitude higher]. Classmates is a company, as you know, that's been profitable since 2001. The Classmates business, by and large, gets people in starting at about 28 years old. The reason is that's usually when they're coming upon their tenth class reunion. I don't think a lot of people must not go to their fifth, but by their tenth reunion that's when people are signing up. So it's very much at age 28 to age-- and literally we have people in their 80's on Classmates, but the vast majority, probably between the ages of 28 and 70. The business of My Space, a lot of people on My Space are unidentified. They're on-- they're on different names. A lot of them, a 14, 15-year-old guys will say, "I'm 19 years old." A lot of the content that you view on there can be somewhat fallacious. It originally started out as a place where people would sort of post their interests. A lot of it was music related, etcetera. There wasn't a lot of monetization and I think that's why that company does not or did not have a lot of revenue, but they were very good at aggregating a lot of people. Whether or not those people were identified as being exactly who they said they were, they nonetheless could do that. Classmates is a very different model in that Classmates is a registry that defines who you are by where you went to school or where your worked or what military you were in and what years you did it and who your peer group is. So it's a very efficient model in that it is unidentified registry versus an unidentified registry, which is very valuable to marketers because we know who these people are, we know what age they are, we know where they're from, etcetera. And as we move forward, and now that we've launched this new photo option and some of the other new features that we have planned for Classmates, we are going to turn it into more of a personal portal type of business, but it will be a relevant personal portal. The personal portal will be related to why that person is there in the first place and what they want to post about themselves versus some of the more let's say content that's really out there that isn't related to what 28- to 70-year-old people are going to do. We are looking at the younger market. We've got some ideas around that. Our International Division tends to be relatively effective at getting the younger people in, so we have some things that we're looking at. The Classmate stuff that we've got coming out in '06 I think could be appealing in that regard. But the business model for Classmates I think is much more defined. It's a much larger business. It's got a lot more traction and I think there's a lot more tentacles that you can put on it than some of the other narrower focused social networking businesses. Although they've done a good job, so hats off to them. Yes, I mean Yahoo 360, again, is their attempt at sort of the personal content, personal portal, social networking space. I mean this is the hot space right now on the Internet. I mean people are realizing that the next wave of user-generated content is going to be people generating content largely about themselves and their interests. And it's one of the reasons why we bought PhotoSite. It's why we bought Classmates. It's also why we bought our About.com web services unit which does personal websites. I mean we sort of saw this coming 24 months ago, and now everybody else is starting to see it as well. It's going to be the law of large numbers, I believe, that prevail, and there are very few people who have the critical mass that we've got here at United Online. You know, our overall strategy of being able to find people, see people, and talk to people, all of which have revenue attached to it-- pay to find, pay to see, pay to talk. We like where we stand. And Yahoo, I'm sure in true Yahoo form will do a good job at whatever they do because that's what they do, but it's a big category and there is plenty of room for a lot of people. Okay, and then one more for Charles. You know we're seeing a huge transformation in your Company and the financials have held in really well. You're in essence replacing a higher RPU customer with a lower RPU customer, and I'm just wondering at what point will you give us a longer term financial model, what to expect as this transition unfolds? Michael, we try to provide people quarterly guidance on a quarterly basis, and we consider at the end of each year providing guidance for the year going forward, and, generally, we do that just on an EBITDA basis or an adjusted OIBDA basis, because managing the bottom line going through this transformation and given the dynamics for the subscription and ad supported business, we have more control over managing that bottom line. Beyond that, I would give you the comment that the existing guidance is the existing guidance and that's as much as we're providing today. We're not saying that today. We will provide you that update in about 90 days. I would tell you we've done that each of the past few years, but we review that every quarter. Thank you, Michael. I mean we're about to run out of time on this, so I want to thank everybody. If you have additional questions, you should really direct them in through Charles Hilliard's office. I would say though just as a follow-on and in summary, we really have made a lot of progress in transforming the business against the stated objective of 18 months ago to try to diversify a way into more non-access businesses. And as we sit here today, I am really proud of the fact that through three quarters of 2005, 41% of that pay account base was in non-access and 20% of our total revenues were from that, and I think that is something we're very proud of. And I look forward to coming back next quarter, giving you an update on how VoIP is doing, and Classmates and access, and any of these other new initiatives that we've got coming out. So thank you everybody for attending and we look forward to talking to you guys next quarter.

EarningCall_233935

Here’s the entire text of the Q&A from Dow Jones’ (ticker: DJ) 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 sir. Ladies and Gentlemen at this time we’re going to be conducting a Question and Answer session. If you would like to ask a question please press “*” “1” on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press “*” “2” if you would like to remove yourself from the queue. For those whom may be using speaker equipment, it may be necessary for you to pick up our handset before pressing the “*” key. We will pause for a brief moment while we pose the questions. I’ve a couple of questions. One based on your commentary on MarketWatch, is there anyway to assess whether year-to-date that’s been accretive breakeven months for diluted. And then you were kind enough to give the cost excluding weekend edition of MarketWatch, could you maybe give revenue from the same basis after the third quarter. And then, a small question just any guidance you’ve been gave us on the tax rate for fourth quarter? [Peter Kaan] MarketWatch is one, because I guess somewhat scrambled, we’re a bit reluctant to give the guidance that you’re asking for but what we could say is using conservative estimates for the year-to-date MarketWatch has probably been somewhere in the $0.02 to $0.03 per share diluted range. We believe it’s accretive in the third and fourth quarters and will be thereafter. But again, that’s choosing our best estimates of allocating now fully integrated ad revenue and fully integrated cost between MarketWatch and CEP, but those are estimates. And could you, Chris will take care of the third part of the question but they’ll ask you to repeat the middle-layer question. On tax rate Lauren, good estimate for the fourth quarter to be 40%. Our tax rate in the third quarter was 36.6% we had the impact of lower taxes as a result of the not having sushi in the domestic production deduction, but we are also impacted in the third quarter by just a low absolute dollar amount of income, the third quarter being our lowest ad volume month and therefore profit month. So, we’ll go with 40% for the fourth quarter. [Lauren Fine] And then, my other question was on the cost side, you were willing to give a support cost increase, but then you gave us your sense of what the cost increase was excluding the MarketWatch and excluding the cost of the weekend edition. But I’m trying to understand that if could give us revenues on the same basis excluding those two items so that we can see what the comparable revenue base was? And then while that core here, I guess I’m just talking to you and your lineage guidance for the fourth quarter as you went through the different categories, I’m not sure it’s really clear what some getting worse in the fourth quarter relative to the third quarter? Right. On the lineage guidance, we’re expecting financial to slide back slightly negative comps in the fourth quarter, we’re expecting pretty strong technology comps, we’re expecting pretty strong classified comps, we’re expecting pretty good general B2B comps and we are expecting declining general consumer comps as a result of discontinued up sliding in with auto, travel and pharma in particular. But your remarks made it sound like some of that is because it’s shifting to Saturday I’m not sure I understood that or not? Well, on the Monday to Saturday basis I guess we’re going to have to all get used to this together, but on a Monday to Saturday basis we are looking at a mid-single digit increase overall in lineage, and just that’s the color I just gave you basically blends to that mid-single digit increase, you blend that altogether. What I was saying was some have asked us to keep giving Monday to Friday guidance so that, they can try to get an apple-to-apple comparison year-over-year. The difficulty in doing that is when we’re providing that lineage guidance, we’re giving you, the actual lineage that we expect to run physically in the Monday to Friday paper. And then, we look at what’s going to physically run on Saturday. We know that some of what’s running in Saturday has cannibalized Monday to Friday it has shifted from Monday to Friday. So, if we were splitting out what we felt was incremental to Saturday and pushing the rest of the back on Monday to Friday then Monday to Friday comp will look higher, but then the page counters wouldn’t be able to give an accurate reflection of Monday to Friday because they wouldn’t know what is incremental, what wasn’t incremental from Saturday that’s probably clear as mud but--. They’ll still be up slightly over last year as Rich said earlier, we’re going to focus in the future on really reporting CEP revenues together, but when using rough estimates it will be up in a 1%, 2% sort of --. Lauren, we have the same issue answering that question, which is MarketWatch and CEP, Legacy CEP has been totally combined on the ad sales front, and we’re selling that advertising to many, many accounts as a package so then if we have to get involved with allocating right percentage of that revenue back to MarketWatch and to WSJ for example, and that involves estimates and it’s difficult to make those estimates and in this environment we would rather not be publicly reporting on estimates where we’re not a 100% convinced of the accuracy. [Lauren Fine] I understand, you’d were able to do it on the cost side but thought it might be helpful and relevant to do it on the revenue side, but I appreciate that thank you [Operator] Thank you. Sticking with MarketWatch, you talked about the integration, is there a way to talk about ad-rate increases that you’re going to able to accomplish at MarketWatch since you bought it? Secondly, you mentioned focus groups on the weekend edition, have you done focus groups really on the regular Monday to Friday, I guess the whole Monday through Saturday edition in terms of the size. Frankly, it’s drop hole around here suggests that it might be diluting the quality of the paper by having a size that is not original, and different than everybody else that’s out there in the marketplace. Any comments? [Chris Reid] On the second one Steve, we have done a fair amount of research on all aspects so, what people like and unlike less about the journal, what changes they would like to see in the future, and the reduced page size shows no significant negative, but it actually showed some positive in terms of reader convenience. So, based on that and it’s frankly based on the experience of multiple other newspapers that had moved in that direction. We feel we can do so with full confident. And I just add one thing because I had to. Our research shows that it’s not only our readers who would find that acceptable and pleasing, but it’s people of the same demographic who are not currently subscribers so, what we would called prospects have the same view. Steve, to your question on the advertising rates of MarketWatch as Rich said, sales approach for Dow Jones online which represents MarketWatch, The Wall Street Journal Online are three websites, big charts all of our websites is to sell across that audience and more than 8 million unique visitors. So, we’re very focused on yield per page view which is the aversion of rate. That does continue to increase, as we’re able to sell targeted advertising across our network to increasingly high percentage of a page views. So, for example interest based targeting is much more effective across 8 million unique visitors than our previous 3 million pre-market launch. And maybe another way of looking at that question is that a number of advertisers who have become significant advertisers to either the MarketWatch or the online journal, now that they are both represented by the same sales group. So, MarketWatch is now carrying ads from Oracle and Sun and UCC companies that do not have previously likewise the online journals now carrying ads from Schwab/Fidelity and E-trade, that do not have previously. So, we’re absolutely delighted with acquisition of MarketWatch, what it has done to DowJones online, as a one-stop shop for many advertisers trying to reach our demographic audience. No you can unbundle of course, we do sell a significant percentage of our advertising across the network, as we have infact, before the acquisition of MarketWatch where we sell the advertising across the subscription site, Wall Street Journal site, and our vertical sites CareerJournal, RealEstateJournal, StartupJournal, OpinionJournal etc. And Steve, just back to your first question to elaborate a little bit. We are obviously intended on keeping the journal, a very distinctive, unique publication and it will be recognizably unique in whatever design changes we make. But, what distinguishes the journal actually is less the physical page size and much more of the focus of our contents the uniqueness of the business content focus, the interpretive analytic natures of coverage the reliability and trust that’s associated with, those are the things that distinguishes not a couple of inches on a page. Hi, Not up on the MarketWatch anymore, but I was wondering if there is anyway to feed it even determine if I guess would you characterize the growth that both Journal and MarketWatch is similar, I know you have 23% this year, but I was just wondering if sort of waited toward one or the other? And then, when were you get comfortable shares that is based on the Weekend Edition to see if, indeed you are gaining market share relative to the time, say for example? And then finally, if you could just give us your circle volumes will be in the ABC reports? Thanks. Sure, on the MarketWatch issue with all the caveats that Richard which will gave as the difficulty you’re pursuing out which part in the scramble that came from where. So online advertising increased for the quarter as we said it was 23% for Dow Jones Online. That’s really true across those both the Online Journal and MarketWatch in that range. If you look at CMR data year-to-dates through August, we have grown our share of consumer advertising and that’s obviously good news for us and we expect Weekend Edition to help continue that trend, on circulation we will report we have turned in their ABC that doesn’t come public, until I think first week of November, but our print circulation will be on a par with the March ABC, and total circulation will be up slightly due to increases in the Electronic Journal close that can be accounted because it’s separate subscribers from those who are taking the print journal. That will be over $2 million of the total circulation. [Christa Quarles]: And one quick, you cut off online growth and if the Ottaway running and if you could just give us percentage of that total what internet is? Yes it’s in the low- to mid-single digit of the total range at Ottaway both Internet revenue as a percentage of total Ottaway’s revenue. [Mark Donohue] And then, just to add what Karen said on the market share question, we obviously look at this very closely and monthly using CMR data, and we have headcounts that taken share in 2005 from our Traditional Print Group both on the B2B side as well as on the consumer side, and we expect Weekend Edition to enable us to take even more share because it will be adding a sixth day and we’re projecting lineage and revenues to be up nicely Monday to Saturday in the fourth quarter and that’s contrary to what we believe many of our competitors are seeing, we are probably seeing flat to maybe even down revenue in the fourth quarter. So I think, we will be taking even more share in the fourth quarter as a result of Weekend Edition on both B2B and B2C from our traditional peer group. We focus much beyond our traditional peer group of course, because advertising is not just going to those traditional print competitors, but the internet cable TV and outdoor etc. Yes good morning, thanks. Couple of Mid Cap questions, CapEx for 2006, first question also, can you mentioned MarketWatch cost savings is significantly higher than you originally talked about say, I believe your original guidance is 12 million cost savings MarketWatch, what did actually shake down 16 to 17 million from I feel that it’s a benchmark for you? And then also, your 2006 journal wage rate is 3 to 4 percentage (4109) the US as well as Asian Europe and I wonder if that all affect? Craig, as you know we have spent roughly in the kind of, $65 to $75 million range in the last couple of years with $36 million of capital next year for the web-width reduction project. We’re targeting a capital budget of around a $100 million we will be putting final touches on that over the next couple of months and we’ll update you later this year. But, it will be in that range. And Craig, on the cost savings side at MarketWatch, originally forecast for $12 million in cost savings. We now think that numbers will be about 50% higher by the time we get down and it’s almost nearly all done at this point. And that reflects integration across every department of MarketWatch and CEP. And that also includes reduction in CEP as well as MarketWatch. Well, all that reduction didn’t just come from MarketWatch. The way think about it just to be clear is savings if we were able to execute by having double the size of our internet business and some of those savings came from traditional MarketWatch and some from Traditional Online Journal. Okay. And then my other more theoretical radical question, it’s sort of it really amazes me that an average newspaper gets about 20% of its ad revenue from detailed inserts from a newspaper. Obviously, Wall Street Journal has never had the capability to have a retail sources the big push, companies make it into more consumer brand advertising, it is there something that investors to look forward to over the next two to three years, if the Weekend Edition does well that you guys would retro fit your 17 plans in the US. So, do you actually do retail interest in US Wall Street Journal? [Mark Donohue]: It would be a major project to do that and an expensive one process of whole plant network. And we are not primarily a retail vehicle, we are well a national vehicle though retail was not a significant part of our ad base, and I doubted it would be even if we have some inserting capability. So, we don’t mean to be totally negative on that’s we have look that at occasionally in the past and we will continue to look at it. But I think there is still a lot of capacity in the paper itself including a lot of upside color capacity. But I think we’re more focused at this point selling those pages and we are on introducing inserts, which probably by-and-large aren’t very consistent with the kind of advertising. That is most appropriate for the journal. [Craig Huber]: Okay thank you. Hi good morning. You’ve been very focused on cost cutting given the environment. With the ongoing ad declines at Barron’s, are there any scenarios where you had actually followed that paper it’s the weekend journal? No. We think that third quarter was a bit of an anomaly with Barron’s is being down 20% if the trend will be much improved in the fourth quarter. We just got hit on multiple fronts. Barron’s has done a good job of expanding its advertising base from kind of, traditional financial advertisers to getting more corporate advertising, more tech advertising, more auto advertising in the third quarter, which is the confluence of events we got hit on all of those dimensions, financial advertising was down about 10% and then it really got hit on its, on those other three categories on Auto Tech Inc. We expect that we rebound a bit in the fourth quarter. Barron’s wows off lot of benefit and profit to Dow Jones there’s of course the Barron’s print product which, suffering through some of the same issues as all print products are these days. So when you add in to the Barron’s P&L, the value of reprints of Barron’s articles and the value of Barron’s Online to our online portfolio, and this year would be addition of conferences Barron’s conferences. The Barron’s franchise is very valuable and it was a lot on a standalone basis, and on that basis we never folded in, I shouldn’t say never but, we have never thought about nor is that on anybody’s rate or it’s just folded into the Weekend Edition. It’s also very different reader, different consents, different leadership on the management side. Okay, and just on the Weekend side, it looks like some of the new advertisers you mentioned how up with some smaller size ad pages or maybe less. Should we expect the size of those to increase overtime or as against traction? That would be our hope. Obviously, that if people come into the Weekend Edition and find out how well it’s work for them, I mean we have one advertiser in particular who came up to us with an event in Los Angeles to talk about how about how please he was at the results of that he was the first time advertiser. So, we obviously expect people like that to, based on the success to come back again and to come back larger that’s our goal. So, more frequency and more strive. Karen, are you going in that more aggressively after that the movie category for the weekend, I would have expected to see more ads in the that category so far? We are working on that. But I don’t think it’s the most logical category for us beyond you know because the lot of the advertising that say the New York Times gets is about driving you into a particular theater. We can expect to get out and promote a studio or a movie, but not necessarily the ads they’re intended to put one bottoms in place. [Douglas Arthur]: Yes, two questions for Rich. The investments spending in Ottaway which is an internet platform, when do you use to see that are cycling through and I’m wondering if you could just elaborate little bit on the technology forecast and headlines for the journal in first quarter and what is the risk to that or how confident are you that’s going to actually come fast? [Richard Zannino] Sure. In terms of cycling through the investments at Ottaway that will happen early next year, where we will be anniversaring that cost. So, the program will continue next year because of the two-year rollout across all the Ottaway sites. But, we won’t be incurring incremental expense in the ’06 over ‘05. And on the tech forecast, as I mentioned in my remarks a number of large advertisers with large programs you see some of them in the paper today in fact, and in resent days so it’s running, there’s always the risk that as you know that people gets skittish about there fourth quarter earnings estimates and try to reduce expenses and short-cycle advertising is an expense that they reduce, and we get hit by it. But right now, we’re counting on it. And in terms of have Microsoft has a fully major product release, tell me are you pretty, do you see that being a significant portion of tech ads in ’06? [Karen Elliot House] We are expecting and are working on getting a large share a lot more in reduction and the things sales as. [Douglas Arthur] Thanks, good morning. Just wondering acknowledging that different products but I am just wondering how much of Barron’s decline do you believe was attributable for the Saturday Edition if any at all. Wondering if you’ve seen any impact on Barron’s circulation either? Thanks. The impact on Barron’s advertising in the third quarter was, I think it was one ad, one small ad. So it’s miniscule and there are only two Saturday editions of the journal, which occurred in the third quarter so that, it really did not have any thing to do with Barron’s issues in the quarter. Going forward we have not, we know one advertiser that we have issue with, debating rather than Barron and going into the weekend edition. So, we’re very pleased on that front but there hasn’t on anyway near the cannibalization that we had thought there would be there. On the circulation side, it’s too early to tell we haven’t really seen a negative impact on newsprint. But, it’s too early to tell on the circulation side because Weekend Edition haven’t been at people’s mailbox as long enough to have any impact. All right, thank you. Just going back, can you help me with the math, I don’t think we can do it, if the ad revenues that were cannibalized by the Weekend Edition were thrown back in Monday to Friday but lineage have been more or less flat. Is that a correct assumption roughly in the ballpark? And then, secondly if you could give us an update on free cash flow where you think you end up in ‘05 and looking at ‘06 what are you thinking in terms of share buyback, that pay down or acquisitions in terms of privatization? And finally, suggestion / question maybe somewhat rhetorically being an avid Barron’s reader over the years, you took some of the statistics out and moved to the internet on the journal, I think on the news, there’s got to be a pretty big opportunity to do that at Barron’s. So are you thinking about that what do you think the cost savings would be? Barrons has actually done some of that and overtime they probably will do more. But I think the step package is relatively more important to Barron and the step package is to the journal, given the breadth of the other journal’s coverage. Chris, do you want answer other questions? Well, let me, I can quickly add into the math question. Fred if you assume that roughly half of what is running in Saturday comes from Monday to Friday and we push that lineage back to Monday to Friday. Monday to Friday comps would be up slightly in the fourth quarter. [Richard Zannino] Yes, I think that number got people kind of scared when they saw lineage down Monday through Friday mid-single digits and if you do that it doesn’t sound too bad. Increasingly everyone wants to view the service, it’s one new paper that comes out six days a week and that’s really the way we have to look at it. Fred on cash flow this year after CapEx dividends and investments will be in the neighborhood of about $70 million which would, I mean another $35 million round about some fourth quarter for 2006. You know it’s too early to make that call right now. We’re working on putting our plans together and we will be out later this year and certainly and no later than January on how those things come together. Well, I’m not asking for actual estimates for 2006. I think looking out to ‘06 I mean, strategically if we step back you know you can harvest the business in kind of return cash flow or you can go out and continue to buy the MarketWatch of the world or of course, invest organically, you have been favoring that paydown, you’ve said going forward after the MarketWatch acquisition, but you know could you get really aggressive with your balance sheet and think about you know, either substantially picking up share buyback or you’ve got a pretty flat dividend what are your thoughts been? Right now, we anticipate our dividend will remain constant where it is. And as far as share repurchase, we’d love to be out there buying shares right now, and as we’ve said in the past, we use share repurchase when conditions were right. Those conditions including share price or debt capacity authorization from our Board not having alternative uses of the cash to invest that had better returns. We’re going to be spending $43 million on the web-width reduction project over the next year-and-a-half that’s got handsome return of 26% in the payback period less than 3 years and our debt levels now are still pretty high for us at 511 million at the end of this last quarter shortly is through the next couple of quarters we’re going to be focusing on continuing to pay those down. [Peter Kaan] You know let’s say Fred, as solid investment opportunities come along like the web-width reduction will be investing. So, as Chris told, first priority is paying down debt. First priority is actually things like web-width reduction where we can invest money for those types of return second priority is paying down debt and third would be share repurchase. Thank you. Just two questions first I just going to continuing on this team with the last couple of questions. I know it’s way too early for you to give any projections on 2006 guidance, and then, I guess will do that probably in January again, but I guess the question is what happened to this consumer slowdown you’re seeing. What consumer advertising related slowdown that you’re seeing in the fourth quarter 4% or 5% decline in lineage does not abate into 2006. Is there anyway that you guys can grow earnings next year if you are faced with the continuation of those trends that’s obviously the comps that gotten easier, here in the second half and there is easiest say, have been in the last couple of years and it’s just really tough sliding and then, a specific question. I think you said that the weekend journals so far the weekend edition is meeting its top-line goals. But I’m just wondering is there any risks to that into ‘06 for the weekend edition given that it’s supposed to concentrate more on consumer advertising type categories and that’s why you have seen the biggest weakness from the business right I guess? I would say almost consumer side of weakness feels to less of a temporary weakness, if you look out what’s going on with Auto, with the major pushes that were made on employee discounts that is the very broad and mass type campaign. We didn’t get a lot of that and it’s moved a lot of cards. We combined that with the fact that there haven’t done a lot of high-end luxury car launches this year, and it is not surprising that we’re kind of, bounce in up and down in the Auto category. But looking forward, we do have reasons to be optimistic in terms of 2006 launch calendar and the high-end auto advertising. We also are starting to make gains in the mid-tier more aspirational auto category, if you look at KIA on the weather map page for example, and Volkswagen besides being in the paper. So, we’re making progress there. And we will continue to make progress there. We actually are putting together a pretty aggressive print online approach to auto because, the auto makers are asking more and more for combined printer line packages. So, we’ve got it as an initiative there, Ford putting a full-time auto presence for our lineup into trade, for example as part of that effort. So, we’ve got initiatives going on there and the travel category, you know, we think Weekend Edition helps starts and offer lot with travel and that’s building for us. And we hope that that builds into fourth quarter, and Airlines being bankrupt and hotels being full, we have to reorient our efforts around travel in terms of those driving some of that advertising. On the pharma side, we got, we enter that out that hit on pharma with the new legislation about how you have to advertise and print. So, we have work a way through that a bit. We’re really pleased with our performance on the luxury side both retail and (01:00:01) and that business should continue to build of course consumer electronics, weekend should detail and made for that, as well. So we are not pessimistic at all about the overall consumer category. We had a couple of rough quarters but we’ve got many initiatives in place and underway and we’ve got the hugely asset and weekend edition, we will we will reach people at home on the weekend on Saturday morning, which is when they all do their shopping. So, and we are banging that hard, selling is hard. And that goes to the second part of your question, which is our top-line goal for next year. We said that Weekend Edition in 2006 would be slightly be more diluted than the $0.15 a share in 2005. We don’t have huge revenue goals for next year, but based on the stock we have to do it for the fourth quarter of ‘05 we feel pretty good sending here about ‘06 for weekend edition. Just one more other question if I could. This is completely different subject, but I just wondering is it possible that you could ever outsource your printing, sell the plans to a third party and do kind of a sell leaseback, outsourcing type of, I know the deprecation, I think those plans are appreciated pretty far down? But I’m just wondering is there is any kind you could structure to move that part of the cost off of the P&L or it’s captured some kind of potential savings there. We are taking one piece of that, I mean that reduce web-width obviously often offers opportunities for contract printing. And we’re going to be exploring additional sites, which could result and improved distribution and improve circulation economics. And we are open to looking at a variety of other alternatives but at this point, we don’t have any plans to close our existing plans which operate very efficiently and produced very high quality papers. But we are not taking anything off the table. We’re going to explore all alternatives. [William Drewry] Yeah thank you, just two questions. First is well moving parts in the newsprint consumption, could you just give a view on fourth quarter, that fourth quarter may be going forward considering that this area edition and you moved with compact? And then second, I think Karen was already saying you’ve already reached to incremental revenue goals for citations of the journal. Could you just sort of, give us some context to that? Thanks. [Karen Elliot House] On the third quarter, yes we have the already reached our incremental revenue goal, and I’m optimistic that we will meet them for the fourth quarter phase but I don’t believe I’d said that -- [Chris Reid] Paul, including the impact of the weekend edition consumption will be up modestly, over last year less than 1%. [Paul Ginocchio] Okay, we’ll thank you very much for being with us today and we look forward so talking most of you again in December and then again in January. Thank you. Ladies and gentlemen this concludes today’s teleconference. We thank you for your participation and you may disconnect your 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_233936

Thank you for holding for the Sierra Wireless Fourth Quarter Results Conference Call. During the presentation all participants will be in listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, January 26, 2006. I would like to introduce your speakers, Jason Cohenour and David McLennan, please go ahead. Thanks Vanessa. Good afternoon everyone and thanks for joining the call. I am Jason Cohenour, President and CEO of Sierra Wireless and with me is David McLennan, our CFO. Today, we are going to review our Q4 2005 results and provide guidance for Q1 2006. The agenda is as follows. Dave lost the coin toss and will read the forward-looking statements disclaimer. I will cover business highlights and our product update. Dave will cover Q4 financial performance and Q1 guidance. I will then sum up the call and open the line for questions. So on to Dave. Thanks Jason and good afternoon everyone. This information contains forward-looking statements that are not promises or guarantees but are only predictions that relate to future events or our future performance or state other forward-looking information and are subject to substantial risks and uncertainties that could cause our actual results, performance, or achievements to differ materially from those expressed, anticipated, or implied by the forward-looking statements. These forward-looking statements relates to among other things our revenue, earnings, and other financial guidance for the first quarter of fiscal 2006, plans, objective, and timing for the introductions or enhancements of our services and products. Statements concerning strategies, developments, statements about future market condition, supply conditions, channel, and then customer demand conditions projected or future revenues, gross margins, operating expenses, profits, and other statements of expectations, intentions, objectives and plan that are not statements of historical fact. When using this press release towards may, expect, believe, intend, anticipate, estimates, predicts, and similar expressions generally identify forward-looking statements. Forward-looking statements reflect our current expectations, the risks and uncertainties that may affect our actual results, performance or achievements on many and include among others our ability to develop, manufacture, supply, and market new products that we do not produce today and that may not gain commercial acceptance. A reliance under deployment of next generation networks by major wireless operators and increased competition. These risks factors and others are discussed in our Annual Information Form, which maybe found on SEDAR and in other Regulatory Filings with the Security and Exchange Commission in the United States and the Provisional Securities Commissions in Canada. These factors should be reviewed carefully and you should not place undue reliance on any forward-looking statements, unless otherwise required by applicable securities loss, Sierra Wireless explains any intentional obligations, update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Over to you, Jason. Thanks Dave. The fourth quarter of 2005 represented our second consecutive quarter of strong business execution and improving financial metrics following the restructuring of our business in mid 2005. I believe we have a solid business recovery underway. During the fourth quarter we had three first-to-market product launches. Our HSDPA AirCard for the US, our AirCard 860 was the first of its kind launched in the US. Our second HSDPA card, our AirCard 850 was the first fully functional HSDPA PC card launched in Europe. We were also the first company to launch CDMA and EVDO, Mini Cards for laptop OEMs. We also grew sales by more than 37% over the third quarter; we had strong gross margins and achieved a modest profit and positive cash flow. Intense focus on our core PC card and embedded module businesses is driving this recovery and is strengthening our competitive position in both markets. Markets, which we believe had significant growth opportunities, and we are pleased with the progress we have made, we also recognized that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position, and financial results. Moving to business development, I will start with activities in our PC card and MC business. During Q4 we completed the development of our first HSDPA PC cards. The AirCard 860 for North America and the AirCard 850 for Europe and Asia. The AirCard 850 and 860 are fully functional HSDPA PC cards that are backward compatible with UMTS, EDGE, and GPRS out of the box. In Q4, we became the first company in the world to bring fully functional HSDPA PC cards to market. During Q4 we also had successful launches of our HSDPA PC cards in the US and Europe. We launched the AirCard 860 with Cingular Wireless in the US, while in Europe we launched the AirCard 850 with both Manx Telecom and O2 affiliate based in the UK and Sunrise in Switzerland. We are excited to have a substantially strengthened product lineup with which to compete effectively in Europe. We view our launch of the AirCard 850 as an important first step in what will be a long-term market share battle against established incumbents. We also continued to make solid progress with our CDMA, EVDO PC card business with the launch of our AirCard 580 at TELUS Mobility in Canada. We had strong sales of the AirCard 580 once again in Q4 and continue to see solid sales of the product in Australia and New Zealand as well. With respect to new PC cards and MC products initiatives, we commenced the development of next generation EVDO and HSDPA PC cards. Our AirCard 595 will support EVDO (Rev A) capability while our AirCard 870 will support tri-band HSDPA capability and speeds of up to 3.6 Mbits/sec. We expect both products to be commercially available in the second half of 2006. Additionally, we have projects underway to bring next generation versions of our rugged mobile or MC products to market. We expect to launch two next generation versions of the MC, one for EVDO and one for HSDPA later this year. I will now provide an update on our OEM business starting with activity and currently shipping products. With the announcements from several leading laptop manufacturers of their plans to embed 3G wireless wide area capability inside their laptops. The opportunity for sales of embedded modules has potentially increased significantly. We believe we are well positioned to capture a leading position in this market as a result of our extensive experience in embedding several generations of wide area wireless modules inside mobile computing platforms. We have design wins with Lenovo and HP for our EVDO PCI Express Mini Card and commenced commercial shipments to Lenovo in the latter part of 2005. Our late September launch with Lenovo represented the first commercial deployment of an embedded 3G wireless minicard by any laptop manufacturer, making us and Lenovo first to market. Lenovo had subsequently announced the integration of our EVDO minicard into two additional business notebooks. In early January of this year, HP announced the availability of their first notebooks incorporating our EVDO minicard at the CES Show in Las Vegas. Our EVDO minicard has been certified for operation on both the Sprint and Verizon Networks. Also during the fourth quarter we wrapped up shipments in North America of our EM5625 EVDO module to some of our longtime mobile computing OEM customers such as Panasonic. Panasonic has subsequently integrated our EM5625 module into three of its notebooks platforms. With respect to new OEM product initiatives, development of our first HSDPA minicard modules remains on track for launch in early 2006 and some laptop OEMs have commenced integration activities. As previously disclosed, we have a design win for HSDPA minicard with one of our existing laptop OEM customers. In addition to this win, we have secured another OEM design win for HSDPA minicards with a major laptop OEM focused principally on the European market. We expect to announce, which OEMs these design wins are with as our customers get closer to launch of their platforms. We have also commenced development of next generation EVDO and HSDPA minicard. Our EVDO minicard will support EVDO (Rev A) capability, while our HSDPA minicard will support tri-band HSDPA capability and speeds of up to 3.6 Mbits/sec. We expect both products to be commercially available in the second half of 2006. Let me give some general comments about the state of our business. Our channels reported solid sales of our products in Q4. Bookings in Q4 were strong as they were in Q3 giving us good visibility to Q1 2006 revenue. Our inventory levels were down in Q4 relative to Q3 reflecting strong demand for our products. Demand for some of our products exceeded our supply capability during the quarter. We expect to build a stronger inventory position for products with strong demand as we move forward. Also during the quarter we witnessed continued aggressive deployment of high-speed 3G services by many of the world’s leading operators. We view this deployment coupled with the associated promotional activities related to high-speed data as an important catalyst for our business. We believe this trend will continue throughout 2006. Now, to Dave to review Q4 2005 results. Thanks Jason. Before I review the results, I would just like to correct a typo in our press release, it’s on the income statement incorporated in the press release and specifically the sales and marketing number for the three months ended December 31st 2005 reads on this press release as $3,986,000, as the last two digits for that number were transposed and the actual number is $3,968,000. That does not affect any of the other totals or any other number on the income statement, the total OFEX, correctly factored in the correct sales and marketing, and it was simply a transposition of the numbers on the press release copy. So, I apologize for that, but it has no effect on our bottomline or total results. Moving to those results, our results are reported in US dollars and are accordance with US GAAP. For the fourth quarter of 2005, our revenue was $37.6 million. Gross margin was $14.5 million or 38.6%. Operating expenses were $14.6 million and our net income was $900,000 or positive $0.04 per share. Our fourth quarter results included a number of non-recurring adjustments as follows. A favorable adjustment to gross margin of $1.2 million or representing 3.2% results from the finalization of an intellectual property royalty agreement, the cost of which have previously been accrued for at higher rates. Approximately $600,000 of write-downs in additional amortization cost of certain patents of licenses are also included in the results. An additional restructuring charge of approximately $300,000 primarily related to a change in estimate of our facilities restructuring, and finally a positive recovery of approximately $700,000 of insurance proceeds related to an ongoing legal proceeding. Results for the fourth quarter of 2005 relative to guidance originally provided on October 27th 2005 and updated on January 4th 2006 were as follows. Fourth quarter revenue was $37.6 million inline with our updated guidance of approximately $37 million and better than our original guidance of approximately $32 million. Gross margin was 38.6% including nonrecurring items, which had a favorable impact at 3.2%. This was above our guidance of 33%. Operating expenses were 14.6 million higher that our guidance of 14 million, net income of $900,000 or positive $0.04 per share was better than our guidance of a net loss of $2.9 million or a loss of $0.12 a share. Cash flow from operations was positive $3.4 million and free cash flow was $1.1 million, consistent with our updated guidance of positive cash flow and better than our original guidance of negative cash flow. Q4 2005 results when compared essentially to Q3 are as follows: revenue increased to $37.6 million from $27.5 million in Q3, an increase of 37%. Gross margin was 38.6% compared to 34.9% in Q3. Operating expenses were $14.6 million versus $14 million in Q3 and net income was positive at $900,000 or $0.04 per share versus a loss in Q3 of $3.1 million or minus $0.12 per share. Some of the key drivers behind these numbers, during the quarter sales of EVDO, EDGE, and HSDPA PC cards in North America were stronger than expectations at the time of guidance. As well, we had approximately $1 million of sales of Voq sales, which we had previously written down. During the quarter, Cingular and Sprint each encountered for more than 10% of our revenue at an aggregate. These two customers represented approximately 42% of our revenue. Relative to Q3 EVDO and EDGE PC card sales were fairly consistent. The growth in revenue and primarily from sales of our new HSDPA PC card in North America and Europe as well as increasing OEMs sales. In addition to the favorable IP royalty settlements, which positively impacted our gross margin during the quarter by $1.2 million or 3.2%, our gross margin was also favorably impacted by a greater mix of higher margin PC cards as well as higher volume. During the quarter, our operating expenditures of 14.6 million included some non-recurring items as follows: approximately $600,000 of write-downs in additional amortization cost of certain patents of licenses of which $500,000 is recorded in R&D and $100,000 is in amortization. In addition, restructuring charge of $300,000 primarily related to a change in estimate of our facilities restructuring and a positive recovery of approximately $700,000 from insurance proceeds related to an ongoing legal proceeding. This was booked in administration. Also for Q3 the growth in our operating expenses was primarily driven by additional sales and marketing expenses to support the launch of new products. Looking at the balance sheet, compared to September 30th our cash short and long-term investment increased by $1.9 million dollars to $104.1 million at the end of the year. This increase in cash reflects the improvement in our operations made strong quarter for accounts receivable collection. Inventory levels declined during the quarter from $4.2 million to $3.3 million reflecting continued strong product demand. Looking at our revenue on a segmented basis, firstly revenue by product line Q4 compared to Q3. In Q4 PC cards represented 68% of our revenue or $25.5 million versus 71% or $19.4 million in Q3. OEM was 17% or $6.5 million versus 11% or $3.1 million. Our MC product line was 9% or $3.4 million versus 12% or $3.2 million. Other revenue was 6% in Q4, the same as 6% in Q3. The growth in our core PC card and OEM businesses reflect the positive impact of new product launches during Q4. Moving to revenue by distribution channel, again Q4 versus Q3, revenue through the career channels in Q4 was 51% versus 52% in Q3. Resellers was 31% versus 34%. OEMs were 18% versus 13%. On a technology basis, revenue from GSM based product including EDGE and HSDPA in Q4 were 47% or $17.6 million versus 31% or $8.5 million in Q3. CDMA was 50% or $18.8 million versus 65% or $17.8 million and other was 3% in Q4 versus 4% in Q3. During the fourth quarter initial sales in HSDPA with our AirCard 860 and 850 added significantly to our GSM based business, and we experienced modest growth in our overall CDMA business driven by increased sales of our EVDO embedded modules. Revenue from new products introduced in the last 24 months is as follows: Q4 was 78% and Q3 was 66% as a comparison. Revenue by geography, in the Americas we saw 74% of our revenue or $27.6 million in Q4 versus 75% or $20.7 million in Q3. EMEA was 14% or $5.4 million versus 6% or $1.6 million, and Asia Pacific was 12% or $4.6 million versus 19% or $5.1 million. Revenue in the Americas was up significantly in the fourth quarter as compared to Q3 driven mainly by sales of our newly launched HSDPA PC card and shipments of new embedded module products. Europe also benefited from sales of our newly launched HSDPA PC cards together with increased sales of EDGE PC cards. Asia Pacific sales declined modestly. Overall, we expect product, channels, technology, and geographic segment percentages to fluctuate quarter by quarter based on mix and new product introductions. Moving to guidance for the first quarter of 2006, we are providing guidance, which reflects our current business indicators and expectations for this period. Inherent in this guidance are risk factors that are described in detail in our regulatory filings. Our actual results could differ materially from the guidance presented. Our guidance for the quarter include the higher than usual contribution from recently launched and soon-to-be launched products. There are uncertainties associated with the launch and early ramp of new products that could affect our ability to achieve guidance. All figures or estimates based on management’s current beliefs and assumptions and are subject to change. We expect Q1 to show sequential revenue growth over the fourth quarter of 2005. Accordingly, we are providing record financial guidance for Q1 2006 as follows, revenues of approximately $40 million. Gross margins of 33.5%, operating expenses before stock option expense of $13.7 million. Stock option expense of $1 million resulting in operating expenses including stock option expense of $14.7 million. This results in a net loss including stock option expense of $800,000 or minus $0.03 per share. Excluding stock option expense net income is expected to be approximately breakeven to slightly positive. We expect cash flow from operations to be negative during the quarter, and this expectation of negative cash flow reflects the impact of a significant payment during Q1 associated with royalties for past sales as a result of the royalty agreement referenced earlier and a plan to increase in inventory for selected products. With that I would like to turn it over to Jason to sum up. Thanks Dave. During the fourth quarter of 2005, we saw continued improvement in the financial metrics of our business and continued strong execution on new product introductions. Revenue for the fourth quarter was up 37% compared to the third quarter driven by strong sales of our PC cards and new embedded modules. Gross margin was strong on the quarter assisted by a non-recurring royalty adjustment to cogs and we managed operating expenses effectively. These factors contributed to a positive net income result and strong cash flow from operations. We completed the development of our HSDPA PC cards on-schedule and commenced commercial shipments to Cingular in the US and to European customers as well making us the first company in the world to bring fully functional HSDPA PC cards to market. We have strong execution in our OEM business as well. We were the first company in the world to bring EVDO minicard modules to market with major laptop OEMs. We saw multiple EVDO enabled product platform launches from our laptop OEM customers including Lenovo, HP, and Panasonic, leading our competitors to this key industry milestone by a wide margin. We believe that we have captured an early leadership position in a strategic and potentially high growth market. Building on our success in EVDO embedded modules, we have now secured two-design wins with major laptop OEMs for our HSDPA minicard embedded solutions. We view these wins as critical to our OEM strategy and to strengthening our position in Europe. Development of our next generation products for both EVDO and HSDPA is well underway and on-track for launch in the second half of 2006. Our R&D execution on these programs continues to be strong. Our focus for 2006 is to continue to execute on our new product pipeline and the business development activities related to bringing these new products to market. While we are pleased with the progress we have made, we also recognize that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position, and financial results. We continue to tightly manage our operating expenses while being careful not to put key programs at risk, as we expect these programs to provide the foundation for continued growth and a return to sustained profitability. I continue to be very excited by the opportunities before us. Our core business of wide area wireless for mobile computing offers ample opportunity for growth. This is a space where we have considerable experience and a legacy of leadership. I believe we have all the essential elements for success. A growing market, an excellent team, a strong and growing customer base, rejuvenated product line, and financial resources. Our priorities now and for this foreseeable future of continued strong execution on our core business initiatives, continued revenue growth and our return to strong profitability. With that Vanessa, I will open the line for questions. Thank you. Operator Instructions Our first question comes from the line of Amit Kapur of Piper Jaffray. Please proceed with your question. I just wanted to mainly to dig in a little bit more on the HSDPA trends you are seeing at Cingular. Do you have any kind of initial indications as to what the sell-through is like and if you could comment are we still at a stage where you are dealing with channel sale and getting the products out to the stores or you starting to see some of the sell-through, you know pull through the demand as well? I think its still a little bit early to get any definitive view on sell-through, which candidly Amit we probably wouldn’t report discretely for Cingular and to comment on that generally, but I will say you know Cingular is in the middle of a very aggressive HSDPA rollout, you know lighting out new markets as they rollout infrastructure and as new market gets lit up, you know, we think that’s a positive impact clearly on channel demand and with respect to sell-through that’s going to play out community, the reports so far on the service and our card by the way are very positive and we are pleased that the early reports from some analysts have our card performing much better than competitive cards and have the Cingular service performing at a level consistent with EVDO. So it is another true broadband play and we think that is going to have a positive impact overall a long-term on end-user demand. Great. And may be just a follow up on that. May be you could update us on your thoughts on how you see the competitor environment shaping up the HSDPA both in North America and then your strategy for reentering Europe? Well. We are coming from behind in new MCS plan as you know. With respect to our position in the US, we are more strongly positioned of course because we have got a legacy relationship with Cingular. They bought and distributed our EDGE product for the past 18 months or so. So we have got a naturally strong relationship in channel position there and in us being first to market with HSDPA cards was important not only to us, but important to Cingular as well. So they could launch their service when they wanted to launch it and actually have devices to sell to customers. So with respect to HSDPA PC cards at Cingular both this generation and next generation, we feel like we are pretty well positioned and have strong relationship equity to fallback on there. And with respect to Europe, we have got some early encouraging traction. We saw our sales in Europe bump up, this is the law of small numbers of course, but our sales in Europe were up about 220% and that was driven largely by shipments of our new HSDPA card into European customers, but we are being realistic with respect to Europe. Its going to be a tough market share battle against a couple of well established incumbents, but we are optimistic and we have got pretty good traction with some of our legacy relationships with Europe and some new relationships. Great and may be one final question before turning it over. You kind of mentioned a couple of new products lining up to launch later this year. As you look at the company and the operating expense resources that you have available do you feel comfortable generally with that level as you approach some of those new product launches? Hi. Starting off with the quarter, because there were some one-time items, have you guys calculated what the EPS would be excluding the gross margin benefit, excluding those three items on the OPEX and lastly whether the box phone can create 100% margin or not, from one million box sale? The other adjustments that we talked about would reduce on a net basis a couple of $100,000 in the OPEX line in total. Okay. That’s good. And Jason for the initial - I don’t think its early that Lenovo or even talking through the two carriers, have you seen any cannibalization on the PC card, I imagine the answer is no, but what is your view as I go through both of your Cingular and PC card business? Yeah we haven’t recognized any cannibalization, and I think overall, the impact of embedded in laptop platforms is going to have the impact of growing the overall pie and it will overtime cannibalize share, but as the overall aggregate points grow. So, we look out to 2008-2009. Our view is that while the market grows, the embedded in laptop market grows faster than PC cards and at about that timeframe, we embedded inside laptops it is approximately equal to the volume of PC cards shipped in the market. It takes a few years to get there though in our view. Okay. And this one, the design wins you had for HSDPA, one of them with an existing partner and you did not say what the geography of that one was, right? Got you, and looking at what Lenovo put out this afternoon, the only comment was with regard to their claims of that lead top of the design wins out there? Okay, and lastly on the operating model rates if you get back in the block with the $40 million in revenue. Can you just refresh us as to where you think the margins can go to and then again what is the long-term pretax operating margins can be? Yeah, these are long-term comments and just to discuss it means, you know, immediately, but certainly growth margin in the low 30s would be the target. Total loss action in the lower 20s that would give pretax earnings in and around 12% and net earnings approximately 10%. Yeah. Thanks. You’ve mentioned in the last question that you do expect the module mix to grow. Will there be any perceptible impact on margins as that mix becomes more even as you describe? You know, clearly the gross margins on embedded modules is lower than the gross margins of PC cards as we have indicated in the past, but also we see overall volume growing and so well the mixed impact will be negative to gross margin but volume impact provides a positive to gross margin. So just to reiterate, we view our long-term business model at in and around the 32% on gross margin even with the changing mix. Then with respect to the revisions on the intellectual property licensing agreement you have, can you say whether that was a radio technology license agreement or whether that was some other software or other connectivity, can you characterize that and should we expect, I think you mentioned that we are going to see, if I am not mistaken higher cost going forward associated with that, is there anything else that would be relevant for discussion here? No actually, we don’t expect cost to go up as a result of that intellectual property agreement. We believe that we go on a forward-looking basis with respect to our guidance and frankly our internal filing. We had the right assumption built in on a forward-looking basis with respect to the IP reserve for this particular IP holder. This particular IP holder is a very large company, who has several patents for essential intellectual property in wireless and it has been an ongoing negotiation and previously we were curling at a higher rate for our past sales and as the agreement got closer to closure and ultimately closed in December we had a lower rate on past sales, a royalty rate on past sales than we had been accruing for. So we reversed it up, but on a going forward basis we do not view that as increased tax. Thank you. Final question, in terms of new business development opportunities. Are there other embedded module opportunities that you are looking at besides notebooks that would have comparable total volume opportunity? Anything back in the smart phone area or any other type of opportunity that you are looking at right now? Yeah, we are very focused on mobile computing and that is more than just laptop computers. Smart phone opportunities come up from time to time. There are not as many and not as well developed as the laptop opportunities in our view. And we are seeing opportunities in the router space as well, we are incorporating our 3G wireless modules and size but that’s a developing area that we are interested in and have some early customer interest in as well. Hi, good evening guys and congratulations on a very good quarter including a very good forward-looking guidance as well. Just had a question first in terms of the possible traction in Europe. In terms of the productivity in David’s comment, Jason I think less details have been given regarding the possible tractions with respect to carriers and PC cards in Europe. Given the company’s marketing relationship with Nokia and Cingular having around, I think three properties going forward with Nokia as well as (low audio) in banks with O2 and kind of the alliance that, what are your thoughts in terms of when we will be able to share any kind of definite announcements with Nokia alliance helping out in terms of all those carriers. Yeah, we basically did, we have had a relationship with Nokia as you know and as we have announced and that has opened up some interesting opportunities. I am not going to comment specifically which opportunities of course we are getting any benefit out of with respect to that relationship, but with respect to new announcements and launch announcement of our HSDPA PC cards in Europe. We need to be mailing those down now and we are and you know hopefully in the first and second quarters you will see some news flow on that. Okay. Specifically this is with respect to the one that was announced in the Philippines the Globe Telecom, can you confirm or deny that (low audio)? Okay. Then turning around in terms of I guess the 2.6 version of a HSDPA PC card. Do you think that, I mean, Sierra has always said that we will always be and try to be the leader in terms of new releases of both the power factors? Do you think that having Cingular trial with 3.6 version of the competitors, are you going to be in a similar position you believe as Cingular moves from 1.8 version to 3.6 version with effect that you have relationships? First, I will comment on the development issue. We are going very hard on a 3.6 initiative. We made it to market first with 1.8. Our goal is to reverse the market with 3.6, but we know it is going to be a horse race. We are not overconfident on that, but that is certainly our aim to be first to market again with that next generation version and with respect to our relationship with Cingular we are confident in our relationship there that we have got a good strong relationship. We supported them extremely well. They recognized that and we have got we have been very busy with them in the sales marketing inside as well in terms of stimulating demand and closing deals. So, I am confident we will have a very good opportunity there when it comes to 3.6 as well. Okay, I guess the only reason I asked is because the company review says that it is going to be tri-band origin in both the form factors that is PC card as well as in embedded module so are there certain frequency bands or certain geographies, which are excluded from that. Well no, when we get to our next generation, it will be a tri-band UMTS, so it will cover the 2100 MHz bands for UMTS, as well the 800 and the 1900. So, effectively all the global UMTS bands as well as all four of the global GSM bands. So, it becomes a global device. Did that answer your question, Dev? Yes, thank you. And just in terms of, Jason, you said that you guys are working with some laptop OEMs have already commenced integration activities. Is that with respect to, I guess, which will be the new laptop OEMs and are these wins the potential wins that you might announce with respect to HSDPA or HSDPA as well as EVDO and what would be the timings you think right now that you guys will start shipping the products to some of these new OEMs? As we said, we finally start shipping HSDPA minicards in early 2006 and we have not disclose specifically when you will see those laptop partners launch, but count on them being you know certainly not past the first half of the year. Okay because I mean, I just want to distinguish that you guys have announced two wins and you said the comment is that there are some additional laptop OEMS which have already started commencement of the individual activities. So while we hear about these wins as we go through the following weeks I am saying, are you seeing is there any kind of a shipping base ahead of you right now, which is going to be like in Q2, Q3, or how is it playing out in terms of timing? Early 2006 is when we will commence commercial shipments, and early 2006, yeah, I want to make sure we say that correctly, will commence commercial shipments and then I think we you will see platform launches from our laptop OEM customers on a similar timeframe. Okay. A question to Dave, obviously the last one would be what is going to be your tax rates in ’06, Dave? I think, that is still in the model Dev, I would put in a very low number, we will incur some capital tax and very small amount of income tax as well. Hi gentlemen, it is Amy for Paul Coster, couple of quick questions, first of all regarding various entering mistakes. Our senses is that perhaps not as great as we once thought they were, Verizon spoke this morning that carrying 6 PC cards, what is your impression I guess of the competitive landscape right now and in terms of CRF specifically being able to differentiate your product in light of so many competitors. Okay, I had not heard anybody carrying 6 PC cards, but you know we feel like, I think your ask was about the US, so specifically with respect to the US, we have very strong relationships and ship significant revenue to both Cingular and Sprint. They are both 10% customers in the quarter and with respect to product differentiation, I mean we have already seen one analyst do side-by-side tests of the two available Cingular HSDPA PC cards and I think there is a clear performance difference and that certainly has been recognized by independent parties and I believe it is recognized by other users of the card as well and you know with respect to both of those relationships, we think they are quite strong, both of those companies recognized not only our product capabilities, but also our capabilities in the channel and the strength of our brand as well within user enterprise customers and so we feel pretty good about the way we are positioned and as our product line continues to strengthen and I think that will help us even more. Okay, in terms of the supply constraint this last quarter, could you give a little bit more color in about what was the, I guess the positive upside obviously in terms of demand, what have you done to remedy that situation on a go forward basis? I think as we indicated in guidance, you know, one of the reasons we are guiding for negative cash flow as we were intending to build inventory. We intended on doing that in Q4 frankly, but demand was a bit stronger than we anticipated and ended up selling it instead of stocking it, but as we move forward, I think we have got our production capability lap sufficiently such that we then begin building a stronger inventory position and not leave demand unsatisfied. No, certainly not, I mean from an SMP capability standpoint and from a logistic standpoint, I mean, we have got virtually limitless capacity. The challenge on supply chain always is components and those challenges are daily challenges, right, so on any given day our ops team is putting out, you know 10 or 15 different fires and the next day it will be a different 10 or 15 components and that’s just because worldwide demand is quite strong and we are just battling to get components and so, but I think we got our supply chain revved up appropriately and I think we got our purchases on the supply chain size appropriately so that we’ve minimize any unsatisfied demand. Okay, and then really quickly, housekeeping Dave, in terms of any remaining Voq related revenues, the million this last quarter. How should we think about that going into 2006? We continue to have a small quantity of both products. We did write it down at the end of second quarter 2005. So, it is going forward, it is still our sales that would be pretty minimalistic. Thanks. First couple of clarification questions on the guidance. Dave, the stock compensation of $1 million in Q1 is that something you expect to continue to see as go through 2006 or how should we model that? I think that is a pretty aggressive set of number, Glenn. I think using that number would not be a bad process. Okay. And as you were developing those guidance for Q1, I mean looking back to Q4 you originally had guidance of $32 million, you exceeded that by over $5 million granted those about a million of Voq sales in there. So, I am just wondering with regard to your perspective on Q1 guidance. Did you go at or is it going to be the same way as you looked at it in Q4 in terms of your kind of rationalizing the opportunity versus what you are going to give this guidance would you say at the same sort of the level of conservatism that you are taking a look at Q1? When we set guidance Glenn, I mean we tried to set guidance such that it actually at the end of the quarter is the number we achieve with respect to Q4 guidance and we said as we gave the guidance then that we had some significant risks and uncertainties with respect to new product launches. It was a big new product launch quarter for us and that had risk to the downside. It also had risk to the upside, right. And as it played out particularly with respect to HSDPA PC cards, we were able to complete those products right on schedule, which you know rarely happens, but we completed it right on schedule and we were able to wrap manufacturing very quickly and you get products shipped out and that is really where the upside came from. So, while we are reliant in Q1 as well on some new products we are not in as an aggressive brand new product launch cycle. So, we are not launching as an example of brand new PC card if you want, so we have a little bit more predictability. We are going to be launching new mini cards. So, I think we have a little bit more predictability as we go into Q1 and I think we are also going to be in a little bit of a stronger inventory position as well. Okay. Thanks for the clarification there. With regard to laptop vendors and the opportunities that you have there you indicated that you would talk about who those customers are and have they are closer to launch. Are you waiting for these customers to make a public announcement about the fact that they are going to launch product or is it a matter of they have announced already and you are waiting to get closer so that they give you approval, but you can talk about it and that they design from a perspective is complete and ready to go? Yeah. With respect to disclosing, who the OEMs are, we would hold the names of the OEMs out of respect for the OEMs on publicity plans and typically the OEMs want to, they are shy about disclosing any specific launch plans or partnerships before they are materially down the path on development. So, you know as we saw with some of our previous customers that it is actually quite close to launch of the laptop PC where disclosure of availability and who they are partnered with occurs and with these more recent design wins I see us going through the same in publicity schedule. Okay. And last question with regard to you activities in EMEA you have indicated that obviously it is going to be a long battle with incumbents. Can you talk a little bit about what your strategy is, how you are going about trying to kind of get back into the EMEA market and how you are working at developing these relationships with the carriers to get design wins? What additional efforts you have to put or what additional infrastructure you are having to put in place in order to be able to achieve this? Well you know, when we first started our HSDPA development efforts, we first off decided to layer in some beefed up certification resources so that’s been, you seen that in our engineering OPEX now for a few quarters that was a big part of our get to market fast plan and certification resources particularly at the end of the development cycle and leading up for launch are vital. So, I think, we are quite strong in that area and that has helped us plough through some regulatory and carrier certification activities faster than our competitors. That is one key thing and then the other key thing is, I think we have mentioned it before. In June we did a bit of a restructuring of our European sales and marketing team too and really restructured that team to make it more confidently Europe focused, so we let some people go in June and we have rehired new people in Germany, Italy, and France and that is getting us closer to the customers and gives us a better capability to build relationships with the key operator groups in their countries and speaking the same language and I think that is quite important. Were you actually able to hire anybody from the carriers to act on your behalf, so basically buying a Rolodex of contacts within the various carriers to be able to break in as opposing to have to developing a report? In general terms, when we hire for those positions, we always looked for people who have relationships with our target customers. It is one of the key hiring criteria. And you know sometimes you are successful in getting salespeople that have a great Rolodex sometimes the higher salespeople who instead have great skills and leverage our existing contacts. Hi guys, I just wanted to congratulate on a good quarter and good guidance. So, I just have one question, just a quick one, can you guys talk about the pricing environments in the, I guess in the EVDO space given that there are some new entrants at Sprint and also what your expectations are for the pricing environment in HSDPA going into Q1, should I guess another supplier emerge at Cingular? Our pricing environment, I think we characterized the pricing environment as intense before and it continues to be intense in both technologies. And so, I expect that is going to continue through this generation of HSDPA and EVDO and into the next. So, our job is to be competitive on price and win the deals and be competitive on cost and make a good margin and get our products to market before our competitors can support our customers better. Has the, I think last quarter, if I am not mistaken, you are suggesting the EVDO pricing environment was somewhat stable, I guess you are saying that it has not changed? Thank you. Our next question comes from the line of Deepak Chopra of National Bank Financial. Please proceed with your questions. I will be quick here. Can you talk a little bit about what the book-to-bill, and what’s your backlog is entering this quarter and if it can be designated as qualitatively? Yeah. We do not disclose book-to-bill and we do not disclose backlog, but qualitatively bookings were strong and they were strong in Q3 as well and we have got good visibility into Q1 revenue. And typically, what is it thirty or sixty days lead time you won from your customers in terms of the PC card business or can you help us understand the buying cycle a little bit better? Sure. Typically, what we try to do is get a six-month on the PC card side. We try to get six-month roll in our forecast from our customers and generally we are successful getting that, not always, and then we build the forecast. So, you know our goal is to meet our customers forecast so that they can put DOs on us 30 or 60 days in advance and we are able to meet that demand. Okay perfect just a moment. Our next question comes from a line of Jeff Kaval of Lehman Brothers. Please proceed with your question. Yes. Thanks very much. You folks have done well being the coming to market first with a new technology and in the past that has led to some fluctuations as market shares changes in those channels. So, I am wondering if any of that situation may repeat itself at to what extent the competition may be a threat for you at both Sprint and Cingular over the next several quarters? And then the second part is that is do you think that Verizon will, do you have an opportunity to regain share with Verizon with the DO Rev A card in the second half of the year? Sprint’s competition has been – I mean there has been a third provider, who has just entered there, but we have been competing, we have not done a lot in that channel and we still managed to keep strong share there and we got a very strong relationship. They are a strong contributor to our Q4 revenue. So, I think we are competing pretty effectively there. And so, our job is to make sure that history does not repeat itself like what happened with us at Verizon at the start of 2005 and I think, we have learnt some lessons there, learned how to do things a bit better and as I said earlier, while we expect competition to enter the Cingular channel. We were confident in our position with them or we are confident in our position with respect to the products and planned products and I think as long as we do the right things, we will capture good strong share there. So, we are working hard to make sure history does not repeat itself and I am pretty confident it will not. And then with respect to Verizon, yeah, Verizon continues to be our customer, they are not a big customer of ours, but we did get new orders from Verizon again during Q4 and we shipped against those in Q4. They were not a 10% customer, but they were important customer and I do think with respect to capturing more share than we have there, our chances of doing that are greatly improved as we get closer to a Rev A PC card launch. Yeah, thanks very much operator and thank you to everybody for joining the call. As always management is here in the office and available to take your calls if you have additional questions. Thanks very much. Ladies and Gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you to please disconnect your line.

EarningCall_233937

Here’s the entire text of the Q&A from Gilead Sciences’ (ticker: GILD) 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. Today's question-and-answer session will be conducted electronically. Anyone wishing to ask a question may signal us by firmly pressing the * key followed by the digit 1 on his or her touchtone telephone. We will call on you in the order that you signal us. If you find that your question has been asked, you may remove yourself from the roster by pressing the * key followed by 2. As a reminder, we will be taking a maximum of two questions per person at one time. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Jeffrey Porgis with Sanford Bernstein. [Q]: Thanks for taking the question. Congratulations on a good quarter, guys. I just wanted you to give a little bit more color on the HIV market. You mentioned some growth numbers, but I'd be curious about what the underlying growth is in the patient number on HIV treatment in the US and non-US and how many new to treatment patients you think you'll see this year, then perhaps a little bit of sense of whether you think that's likely to continue in the future. Thanks. [A]: Hi, Jeff. It's Kevin Young speaking. I'll try and fill as many of your questions as possible. I think that we expect that there will be some increase in new patients coming through. Basically, you know, those 40,000 patients newly diagnosed. So we expect that to be a little bit higher on an annual basis. If I just deal with essentially what I call the utilization of Truvada, on a launch-to-date basis about 60% of Truvada has been composed of switch business, and about 40% is been composed of new patients. And that picture will gradually change as Truvada gets older. The components of new patients will get bigger and bigger. In terms of the buckets in which we have essentially scooped our patients from, of patients as I’ve commented earlier, we’ve now estimate that 60% of new patients who are put on antiretroviral therapy go onto Truvada. And again, we're optimistic defects of proportion of new patients will increase. And then if you then look at just the switch business where we have essentially captured the patients from, we believe that we have penetrated about half the patients of Viread plus Emtriva, and about a quarter of the Viread plus 3TC patients. And then finally we believe we penetrated just a little 10% of the Combivir patients. And again, those calculations come from independent market research and are based on from launch to where we are today. So essentially 12 months. [Q]: Thanks very much. That definitely answered the first question. I was wondering if you have, I know it's early days in Europe, but if you have a similar sense in terms of the major market countries in terms of percent of patients that you've cannibalized versus new starts, and I'm wondering also if there's a different sense about the need for Combivir switched in Europe. [A]: Actually Meg, it's a good question. I was just running budget reducing in Europe last week. It is early days. But what we can see from sort of UK/Germany, it's actually a pretty similar picture. So I think there's remarkable consistency. I think some of the European markets potentially because of their grouping of patients in sort of the hospitals have the ability to switch on mass more patients. So that could be an upside for us, you know, on the Combivir switch. But I think it's a little bit early days now. [Q]: :I'm going to use both my questions. First, Kevin, is the status of the 24-week data from the 934 study being incorporated into promotional material? [A]: I think actually what we want to do just to sort of a correction there, Craig, is that we want to get the 48-week into the Truvada labeling in the US. And the only guidance we've given on that is basically in the first half of 2006. [Q]: Maybe you can help me understand that. Why wouldn't you want to try to get some of the 24-week data into the promotion material? [A]: Craig, can I answer the question? Craig, 934 actually was a requirement to get full approval for Viread and that was a 48-week end point. The primary end point was 48 weeks. So, we submitted the study report in May, and it has a 10-month due per date. Essentially the US time line for approval of the 48 weeks is incorporating the USPI is March of '06 and I want to add in the European union we have the 48-week data, which has got the CHMP a positive opinion on that. And we will get it incorporated in the next three months or so when we get European Commission approval. [Q]: Okay. Second question is on the GS-9137 data, maybe you could describe the patients involved in that study that were prepared to evaluate that data when it comes out. [A]: Okay, Craig, this was a dose-ranging study that looks at various doses of 9137 in HIV-infected individuals dosed for 10 days. It was eight to two randomized active to placebo. And we will make the decision on how many doses we're going to and whether we go up or down in those based on emerging data. We are looking at, you know, b.i.d. and q.d. dosing in depth. I don't have any news to tell you now because these are all ongoing blinded studies. [A ]: These are both treatment experienced and treatment naïve, we don't make a distinction. And as you may remember in the March study we actually did not see a difference in terms of response between naïve and experienced patients because it's a novel target. [Q]: Thank you very much. I had a question. I am little bit confused about the US HIV numbers particularly when you look at them on a sequential basis. If we take the Viread and Truvada sales and strip out the potion of Truvada that is in Emtriva, you end up with all Viread growth from second quarter to third quarter that would look like $156 million to $159 million despite having taken a price increase at the beginning of the third quarter and it being at least partially effective during the quarter. Can you help us understand what some of the factors are there. did you see a sequential decline in overall prescriptions for NRTIS, or was there something on the image 45 that might explain that? Thanks. [A]: I'm not sure I fully get your question and we could probably get more details and get back to you. Just one thing to clarify, you got to watch the effects when you're looking at the NRTI market, the effect of the denominator changing because you've got products that move from essentially single products into combined products that alters the dynamic. So one thing to watch is sometimes market share does not alter but volume does go down, that is the case, for example, with Combivir, Combivir's share has not altered that much, but if you look at the volume decrease, it's quite significant that’s because essentially the market is shrinking because single products are going into double or triple products. So that might have some influence on, the picture you're seeing. But in terms of more detail, I think we probably need to get back to you on that. [A]: Yes, just looking at the volume data now, so clearly Viread volumes did decrease quarter over quarter but that was more than offset by the Truvada gain quarter over quarter in terms of volume. So, those two things certainly led to the number. It was a tricky question. I'd have to write it down to get if t right. The other thing that you mentioned was the price increases. And one thing to be clear is the way the price increases were implemented is they come in slowly. Which is, there is some inventory that is out there that previously established prices that flows its way through naturally. And also the price increases that the government payers, Medicaid, things like that only go up due to cost of living. So it's only implemented partially throughout even after a period of time. But that first quarter, the effect is much smaller than you might anticipate based on a simple model. [A]: And just one final comment again about the dynamics of this market. If you look at just the total Tenofovir molecule what comes from essentially Viread and Truvada, since the launch of Truvada total Tenofovir has increased by 30% in terms of NRX. Contrast that with total abacavir, and that's only gone up 5%. I think that illustrates that in terms of capturing more patients on to the Tenofovir molecule whether it be Viread or more importantly now Truvada, we're getting naive patients and we getting switch patients going onto Truvada whether they switch from Viread based or whether it be from other products. [Q]: Can I just ask a followup on that last point? If you look at that Tenofovir share or volume on a sequential basis, you said it's up 30% since the Truvada launch. Can you tell us what it was from 2Q to 3Q? [Q]: Hi, good afternoon. Very nice quarter. Wanted to ask a quick question, yourt guidance for the year is gross margins between 85% and 86%. You've been pretty much annualizing, I mean, the last nine months an 86%. What would perhaps take the gross margin down to 85%? I mean, there shouldn't be any sort of stocking that you would run through at this point. Am I correct to assume that? [A]: Yes, there's no stocking, let's be clear about that. But as Truvada has an Emtriva component to it, and that Emtriva component has a smaller margin than does Viread and so. And even with the royalty buyout, that is not affected because we amortized that cost of that royalty buyout through the cogs line. So what you're seeing is the product mix makes more Emtriva sold, it drags down the margins a little bit. So that's the largest factor that's affecting it. The other thing, of course, that happens over time is worldwide pricing changes. There's a gross dynamic there, a price decrease in some areas versus price increases in other areas that can affect gross margin, as well. [Q]: Okay. It seems to me up to now this could have been a possibility in this quarter, as well and we haven't seen that. In terms of having any impact on gross margin. [A]: Yeah, clearly with the guidance we've given, we don't expect any change throughout the remainder this year and we're not yet thinking about gross margins for next year. Our guidance just ends at the end of the year. [Q]: Just want to quickly followup on one question if I may. If the integrate inhibitor is successful and you're move that into phase II, I am sure there will be nothing n the contract with Bristol with Sustiva to stipulate that the you would not be able to run the combination study Truvada with the integrated inhibitor head to head versus Sustiva and Truvada. [A]: Of course not. Let me see clear the contract with Bristol Myers gives us freedom to operate in a lot of different areas with, you know, other protease and inhibitors and other new molecules. Basically anything that comes into our portfolio is fair game. That which is the right thing to do under this kind of agreement. [Q]: Thanks for taking my question right. First just to follow up on the HIV franchise. You said the price increases are not fully reflected yet. I was just kind of curious when do you expect the full price increases to be reflected in the US and I just have a followup question. [A]: So quickly, It basically amounts to about a one quarter lag, which, you know, it takes us about that long to flow things through there. More or less a one-quarter lag. Then again, those price increases, the full extent of which is not felt in the public sector except that we do increase slowly as the consumer price index goes up. So it's tied to that directly. So there's always a slight increase in those markets. But you know over time that we'll never catch up to the full price increases over time. [A]: Its not related inventory, it's just the dynamic of how things flow through and the mechanics of how price prices are manifested in different pair groups. [Q]: Okay, to follow up on Tamiflu, can you just review for us the size of the government orders that you've received to date and just update us on the manufacturing capacity and any steps taken there to ramp up capacity. [A]: Well, to be clear, we don't take any orders on Tamiflu, these are all Roche orders. And they've given guidance, first of all. They've been very clear that they're not giving external guidance on their manufacturing capacity, nor we were able to give any guidance on our capacity. They have certainly been strongly stating to the press that they have increased their capacity over time. They have been working to qualify plants and new facilities much like they had in the announcement they had today on their new capsuling facility. I believe the guidance for the remainder of the year and if again, this will be on tomorrow's call, but the guidance for the remainder of 2005, I've got this right I'm going to give it to you in dollars, about 250 to 295, in dollars for the second half of '05. We've converted that from the switch frank guidance, which is 300, 350. We used a conversion factor to get those numbers. [A]: Right. So that what they have given guidance on. So we look forward to tomorrow's call and updated guidance if any. [Q]: Hello, thanks. I have two questions. One is could you give us a little bit more color on us ex-US Truvada sales as to why do you see the update being slower than probably what we expected. And the second question is in the co-formulation of Sustiva and Truvada, as to why you are not considering co packaging of the two drugs. [A]: Hi Sabana it’s Kevin speaking I don’t think I said here, I hope I didn't give the impression that the European uptake was any slower than the US. We've been absolutely delighted. I think there is a remarkable amount of consistency albeit that we've got only very early data from Europe, but we see a very, very similar picture. And that's perhaps highly surprising because of the consistency around treating HIV worldwide, the use of guidelines. If you look at the VHS guidelines with Truvada being in the first-line position, that's very, very similar and paralleled by the Beaver guidelines, that's the British guidelines on HIV which, again, are representative of very much the European thinking. So our expectation is we will see a very, very similar type of uptake. We saw the same thing with Viread. Viread paralleled uptake in the US, in Europe, and our expectation is it's going to do the same for Truvada. We are every bit as confident about Truvada in Europe as we are here. [A]: And in regards to co-package, I can answer that. We have very carefully thought about co-packaging the two products. It certainly sounded fairly straightforward to do. But we have decided not to make that our first priority because simply the outer commercial groups felt that this concept of one pill once daily would be the big selling point for patients and a big advantage. [Q]: Thanks. When you gave your guidance, you gave guidance of 1365 to 1385. You also talked about the price increase that is going to start that will show up in the fourth quarter. I guess what I'm curious about is sequential growth is based on your guidance is a -2% to a positive 3%. I'm just trying to understand that guidance. Is it just conservativism, or is it something that you see in the fourth quarter? [A]: Eric, your numbers are exactly right in terms of the sequential growth. I'd say the best way to think about this is we're facing a really strong product launch going on in Europe. We're facing considerable pressure in the United States because we've had such a strong launch now. We've gotten a lot of the easy patients. And I would say that this is a number that we're very confident in for the remainder of the year. But we have missed some opportunities that we thought we might have to get some data out there. And so, for example, _____ the meeting where we had planned on having a number of events, we missed because of Katrina. And so a lot of our marketing is now delayed so I think that's probably a little bit of our nervousness, up what after the fourth quarter. So I don't see any bad events, we just missed opportunities. Now the good news is I see great opportunities going forward. In November, there's a meeting at EACS, which is in Ireland. We have ICAC in December. We have in the first quarter of next year we're, we have the retrovirus conference. And then we have the expanded label occurring in March. So really for the next five months, we have four key events. We'll be able to get data on 934. We'll be able to get data on comet, showing how effective this product is in switches. We'll have a label update in the US. Probably also now a label update in Europe. So this will all help us going forward. But some of the tools we ‘re taken out of our hand in September, unfortunately, because of the hurricane. [Q]: Okay. Just a question on Tenofovir in HPV. What is the relative pricing of to Tenofovir versus Hepsera at the current time? [A]: Well, it's lower. It's about $100 a month lower, if I'm recalling it correctly, in the United States per bottle. So its a significant decrease in price. So it's an overall benefit to the health care system to have Viread take in the mix versus Hepsera. [A]; Obviously, it would be considerably cheaper than Entacavir, because as you know Entacavir is priced at a very large premium compared to Hepsera. So we're seeing the opportunity to bring a product that's as good or better we believe than Entacavir to the market. It certainly has higher viral load decreases and there is published data out there showing significantly stronger viral activity in patients with Viread. So 5 log plus decreases versus, you know, 3.5 log decreases on Hepsera. So better viral control. Huge safety database of patients who have been treated with the product, which is the big advantage. And clearly a pricing advantage. So to offset any erosion from Hepsera, we clearly have to build the market to a bigger stature than it is today. [Q]: Hi thanks and taking my positive view the clear in terms of inventory changes for Viread really enable the products in the US. Any of the decrease in the US due to or any of the products in the US. Is any of the decrease in US due to inventory you mentioned I think it's great that you were providing the HIV drugs at no cost to people affected by the hurricane. Could you quantify what if any sales impact there was in the quarter as a result of that program. Thank you. [A]: Jason and John can come in. Basically there's been no change, no fluctuation in terms of inventory. So our inventory management agreements that we have with the three major wholesalers are working very well. So I'm pleased to say that there's nothing in the results that are reflective of any inventory situation. It's very difficult to actually put a number on just affected patients. We think we've helped about 1,000 patients with our access program for a short period of time. When we stepped in, these were basically people who were just displaced and needed coverage because they were in another state. We again, you know, consider it's very small and relatively inconsequential to our performance. You know, quite honestly, it was more about the values and the right thing to do for humanity than essentially worrying about our revenue. We feel it was the right thing to do as a corporation. [Q]: I won't argue with that. Just I am trying to see f there was a number you could put behind it. The inventory agreements that you have is a, you haven't changed inventory. The inventory hasn't changed on a dollar basis or on a week of sales basis. Because as Viread comes down one word expect that just if you estimated a certain number of weeks of inventory, clearly that number would, you'd have to draw down on the inventory. Could you clarify that. [A]: Sure. We'll be more precise. You're right, when we say it hasn't changed what we mean is that the inventory management agreements are effectively keeping the inventory within the prescribed ranges that we look at. So there's a forecast both backward looking and forward looking that brings things into a prescribed range. So we watched it gently cushion the fall of Viread as Viread sales have decreased. But then on the reverse side, they are building inventory as it relates to Truvada as we've seen the rapid increases in number of prescription. So one is going down and one is going up. And it seems to us, and as evidenced by the price increases, the smooth transition this quarter, that they worked very effectively because we brought things in just exactly as we had forecasted. [Q]: Two things quickly on the repatriation. Just remind us what the steps are in terms of forming and then submitting a plan. Remind us if that allows you to undertake various transactions in calendar 2006 accordingly. [A]: So the homeland investment act would allow repatriation of foreign earnings in an advantaged tax rate. And we do have some offshore earnings we've built up over time. So we would be, we can effectively repatriate those at a favorable tax rate. For some companies, this is a net negative. For Gilead it would be positive to our effective tax rate because they have sufficient reserves for those, the case rate of earnings. So it's a positive event for us. If we choose to do this we'll be careful because we have not yet elected to do anything in this. But the thing to say is that we have some time in order, which to deploy the money repatriated and specifically market concerned of that including R&D and things of that nature. We do have some specific ideas as to how we would use it or potentially use it. But we can't communicate those until we officially make the election and talk about this publicly. [Q]: What kind of amounts of money might be considered, can you undertake transactions? [A]: I can't disclose that at this time. [Q]: Okay. The other question related to you comments made in the prepared remarks about the future of hepatitis C therapy and the company's belief that a combination therapy could be the future there. I think people would love to hear more on the perspective of the company that's so deeply involved in the number of infectious diseases. Certainly HIV therapy with supported combination therapy. I suppose there's been some use of combination therapy in bacterials and not really so much so in hepatitis B and to a limited extent antifungals. I guess that is mainly due to concerns about antagonism, but help us understand better where this view comes from, and I want to make a distinguish in Hepatitis C being a combination therapy future as opposed to a sequential therapy future. Thanks. [A]; Well, Mark, we absolutely agree with you that we think, we said a lot of us at Gilead believe that the future of Hepatitis C treatment will go the same way as HIV treatment. Which is combination therapy with small molecules that can be taken orally and that's exactly why we are pursuing the lines of research and development that we're pursuing. We're working with a collaboration with Gene labs on nucleotide ploymerase inhibitors against hepatitis C. And we have a collaboration with Akileon on protease inhibitors of Hepatitis C. And internal research program as well. I hope that answers your question. [A]; Mark, I think you also alluded to hepatitis B in there. You know, the hepatitis B part, you're right, has not been proven in terms of combination therapy. They're not really good examples and certainly no large, controlled studies, which have shown combination therapy to provide benefit. There is certainly a theoretical consideration that longer-term benefit would include less resistance, which is really the important thing to consider in this. So for example, in our trials, we will take some patients who have failed other therapies and try Truvada to see if combination therapy can work. But it's not proven. And we're kind of taking a stepwise fashion into that. You'd also mentioned sequential therapy and sequential therapy generally bring out lots of resistance. So there's a general feeling, certainly in HIV it did. And so there's a feeling that sequential therapy based on that model would more likely generate resistance than not. And it will take multiple mechanisms to get us where we need to. [Q]; Hi, yeah. I just had a question on the triple combination formulations. You now have three bi-layer formulations. I'm wondering if you’ve gone back to the drawing board and have formulations beyond that? And the second question is surrounding the commercial viability of pills larger than 1,600 milligrams and whether those would actually be viable. [A]: As we pointed out in our conference call previously by Kevin that we're working in parallel on three bi-layer combination formulations. And if any of those proves to be bio-equivalent we would file the NDA in the first half of '06. Beyond that of course as we always do, we work on backup programs, and we have formulation six, seven, and eight currently in development at our partly bi-layer partly tri-layer combinations. And then regarding the pill size, yes we do believe that the 1,600-milligram pill size is absolutely viable. And if you look at some of those multivitamins that are available on commercially, they are about the same size tablet. We also have done a very limited market research with the 1,600-milligram pill and have not found any issues that patients had with regard to swallow ability. [Q]: I'm wondering beyond 1,600 milligrams. Does there become a problem, in case you have to actually go larger than this? [A]; Yes, our goal is not to go beyond 1,600 milligrams because simply the tablet becomes somewhat large. And then I think we would have to go to two separate tablets rather than one. Thank you, operator. Thank you all for joining us. We appreciate your continued interest in Gilead and look forward to providing updates on our future progress. [Operator]: Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. And you may now disconnect. Have a wonderful 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_233938

Here’s the entire text of the prepared remarks from Juniper’s (ticker: JNPR) 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. [Scott Kriens, Chairman and CEO] Thanks, Randi, and good afternoon to everyone. Today, as Randi mentioned, I will be talking about the third quarter performance, the foundation that's built for us at Juniper, and the trends and the potential that we see for the Company over the intermediate term. And we'll focus today on the near-term condition of the Company, and then on the next call in January, as we review the full year 2005, we will take a longer-term view. So first to the third quarter's results. We had a very strong quarter growth, which is a result of our continued focus and execution of the strategy we have talked about many times, which is being the best supplier of traffic processing infrastructure for the delivery of virtual network services. In addition, we built new beachheads in both new and existing markets. We have extended our strategic relationships, and as a result we have avoided some of the seasonality that can otherwise occur in those markets and we'll talk more about this on today's call. Total revenue for the quarter was $546.4 million, up almost 11% from last quarter, and fully diluted non-GAAP EPS was $0.19, up from $0.18 last quarter. GAAP EPS was $0.14 for Q3 compared to $0.15 last quarter and $0.09 during the same quarter of last year, and please see the press released on our website for the reconciliation of non-GAAP to GAAP results. We also continue to be pleased with the contributions of our key strategic partners and resellers, and this is evidenced by today's results. Siemens was again our largest partner, contributing more than 10% of total revenue during the quarter, and we're very pleased with the sequential growth across all of our businesses as well as our geographic balance. The infrastructure products represented 65% of total product revenue and grew over 8% sequentially in the last quarter and have grown over 36% year-over-year, and our service business was up once again as well, and exceeded the goals we set at the beginning of the quarter. Obviously, we are very pleased with this growth and the share gains and the success in the market that this represents, and Bob will provide details in a few minutes on the service and infrastructure business and the Service Layer Technologies. As this is the first quarter of reporting on Service Layer Technologies or SLP, we will be establishing a baseline with which to compare growth in future periods. But given that the security business in particular has been top of mind for many investors and this is the transition quarter to the new reporting format, I'd like to spend some time reviewing the momentum we are enjoying, specifically in the security products. The security products grew approximately 8% sequentially this quarter compared to Q2 and over 37% year-over-year on a normalized basis. The reported growth rate was even higher, but we deflated that growth to reflect the purchase accounting impact and to more accurately reflect the condition of the business. These year-over-year security results have outperformed all industry peer group companies by a substantial margin; in fact, as much as doubled the growth rate of most of the security competitors we see in the market. And if we take a look at the last few quarters, security revenue experienced strong growth in Q1, which is a seasonally weak quarter, and slower growth in Q2 in what is typically a seasonally stronger quarter, and then this quarter we grew the business significantly once again. The numbers have been sometimes counter to typical trends, which is why even though we posted a strong quarterly growth rate this quarter, it's probably more instructive to look year-over-year, especially on a competitive basis. The growth we see is sustained and sustainable, and the result of our investment in these markets and products is generating returns to Juniper, which we've expected. We have aggressively invested in both the market and product development areas; announced several new products during the quarter; we've been recognized as a leader by the industry analysts; and we've had significant compliments in expanding our channel presence. So in keeping with our look at of Juniper in our current status, let's look at four separate cornerstones that have been put in place as a result of the sustained growth we are demonstrating and which, when taken in total, have allowed us to build a solid and sustainable foundation for the future of Juniper. And so to the first cornerstone, our financial fundamentals. Today's results now give us a total of thirteen consecutive quarters of revenue growth. We are now running the business at an annualized rate of over $2 billion a year, which is triple the revenue run rate of only two years ago. And during that time, while revenue has tripled the earnings have increased five-fold. We have cash balances of approximately $2 billion, and we're generating cash from operations of over $0.5 billion per year. As I mentioned, we're growing faster than our competition, which leads to the second cornerstone, our market and mind share. I would like to review some of the data on the relative growth of Juniper. First, in infrastructure. Last quarter in the broadband access segment, Gartner recognized Juniper as the leader in broadband aggregation routing, which is indicative of our success with the E series product line that has been shipping to customers across the globe for more than five years. In the core, the T series was awarded more than 1/3 of the total market share for over two years with over 100 customers and a thousand units, and the M series has proven to be extremely successful with greater than 25% of the multi-service edge market. In security, the latest Gartner magic quadrants put Juniper in the leader's quadrant for IDP and SSL, having been evaluated on vision, execution, and product breadth. We were recognized as the SSL VPN market share leader by Infonetics Research with 36% of the total market, and the leader in high-end firewall VPN with 35% share. And to our newest market in application assurance, Gartner recognized Juniper as a leader in the market scope and magic quadrant for the WAN optimization and application delivery products, respectively, while we spearheaded this emerging market with best-in-class technologies. And so to the third cornerstone, expanding our market presence, a key strategic initiative we have been focused on. With regard to the Juniper brand, Infonetics Research sought insight from 180 enterprises about how they evaluate and select routers and vendors, when asked which vendor they would buy from Juniper ranked No. 2 out of 6 vendors based on a number of factors including customer satisfaction, price, value, security, technology, management features, product road map, financial stability, and service and support. We have also committed to expanding the breadth of the channel, and last year the channel business, as well as the number of resellers, grew substantially. We've made new investments in our global channel and partner network, and our sales and marketing efforts in more than 75 countries have been re-aligned to move our solutions deeper into the enterprise. We are very pleased with our progress in these areas and, of course, we still have some work to do. And to the fourth and final corner stone, the power of our portfolio. We continued to innovate and invest in best-in-class solutions. In Q3 we shipped the new E320 broadband access router and have received very positive feedback from customers. We announced the new, secure access 6000 SP to enable service providers to deliver additional revenue generating network-based SSL VPN managed services including wireless LAN and Voice over IP. We recently announced the availability of integrated intrusion detection and prevention, or IDP, functionality on our ISG 1000 firewall VPN appliance giving us the ability to offer medium and large enterprise customers a range of platforms that provide increased levels of delivery and threat control. And continuing our SSL VPN market leadership support for the enterprise intranet architecture, we have introduced four new secure SSL VPN hardware platforms providing enterprises with enhanced delivery control through best-in-class performance, scalability, and redundancy. So with these cornerstones and this foundation for the future in place, what are the trends in the market on which we're now capitalizing? And the most predominant, or mega trend, has been first, the establishment of the new IP infrastructure and the push to secure these infrastructures and the users. And now the second wave, and that were being to offer new and expanded services over these next generation networks. As we've discussed before, this is true of both the public networks operated by service providers and private networks or enterprise networks operated by commercial companies, governments, and educational institutions. So let's look at some specific examples in both the public and private sector, which form the primary data for understanding of these trends, and by extension from the basis for our success today and the positioning of our plans for success going forward. The first and perhaps most talked about trend is triple play. Our service provider customers are continuing to transition beyond simple Internet access and single-service offerings to more advanced and profitable conversed voice, video, and data services, better known as triple play. And supporting Voice applications over IP is becoming more of a priority for our customers every day. Voice traffic is extremely sensitive to network quality standards, as seen in measurements of behavior such as jitter or latency or packet loss, and basically too much of any of these will lead to poor call quality. Service providers and enterprises are seeking to gain the cost advantages of Voice over IP technology. In addition, IPTV has become one of the most talked about new telecom services, and it is an excellent opportunity for service providers to help retain existing subscribers, acquire new ones, and grow revenues in the process. And rightly so, service providers are now placing a high priority on delivering video over IP as a means to complete their triple-play service bundles and, as overpass all emphasis, network reliability and stability are more critical than ever. For example, KPN is deploying the second major phase of their core network, which, when fully implemented, will lay the groundwork for the new Voice over IP video and multimedia services such as IPTV and video streaming. In addition, Korea Telecom is deploying multi-service edge routers to deliver advanced IPTV, Voice over IP, and WiBro, which is Korea's wireless broadband standard. And here in the U.S., Verizon's fiber optic project is a major strategic initiative to enable multimedia services for their customers. And the other major trend is to secure this mission-critical infrastructure, because the delivery of security is not separable from the infrastructure itself. There is no such thing as an infrastructure without security because you must attach that security to the asset it is intended to secure in the first place, otherwise the gap created between the two by designing security and infrastructure separately is the very breech that we must prevent to begin with and with the secure infrastructure, what now becomes possible. Well, a secure infrastructure allows a business or a carrier to provide more services with a higher degree of confidence in the reliability of the infrastructure. And the more confidence the users have in the network, the more they will use it. So securing all types of traffic, data, Voice over IP and video over wire line, wireless, and cable infrastructure is an increasing trend around the globe. Service providers are looking for integrated firewall and VPN solutions to secure voice access over their client's remote network, and in addition there is a need for security, service assurance and address translation where technologies like session border control can help ensure the integrity and reliability of the service, simplify deployment, and minimize the need for additional equipment or changes to the network. For example, the state of South Carolina and the state of Delaware's Department of Technology and Information are building secure and assured networks with a combination of routing and security solutions. In addition AvantGo, who delivers rich, personalized mobile websites to PDA's and smart phones has deployed routers as well as integrated security appliances in the network to rapidly and efficiently funnel traffic through its network securely. And finally, NTTPC Communications in Japan has improved the security and scalability of their Voice over IP service by deploying session border controllers. So these trends are happening now and customers want and they need strong and stable companies, best-in-class solutions, and a commitment to innovate that will position them for competitive advantage. And our opportunity at Juniper is to capitalize on the situation. So let's look finally at the third topic for today's discussion, the potential that we have to grow from the foundations we have built and the position we enjoy relative to the trends that we've talked about. What has become possible for Juniper, and how do we take advantage of the opportunity we have with this company that we have built at the intersection of these trends and our capabilities? First of all, we're in a unique situation and we realize it. It is really quite unusual; actually, because we're strengthening our position in a growing market while at the same time the number of qualified competitors in the field is shrinking. And among the declining number of truly capable companies who can compete for a place at this intersection, most are burdened with their legacies, having defined themselves decades ago when the market and structure of success was much different. So we're not smarter than anybody else, but we do have the freedom to focus on the future and that allows for a clarity that makes focus and execution much easier to achieve and to maintain. The potential we have and the momentum we currently see in the business is powered by a compelling formula. There is great demand for services over a secure infrastructure, and the more of each of these elements we can deliver, the more demand we create for the others. The more secure the network is the more services will be trusted over it. The more secure service there's are the more benefit will be realized and the more infrastructure demand there will be and so on. Said simply, success is creating demand and demand makes our success possible. And this self-perpetuating formula is the driver behind Juniper's current momentum. In the process, the innovation and the solutions we deliver enable Juniper to become more strategic to our customers and we have the ability to establish strategic relationships in other sectors similar to those we built initially in the service provider sector. This has been our strategy for the last several quarters and it may surprise some to know that today our enterprise business currently represents approximately 1/3 of our total business including routing, security as well as application and acceleration products. We build best-in-class solutions for customers with strategic problems and in doing so we are establishing Juniper as a trusted partner for both public and private network operators. This also explains, by the way, some of the counter seasonality we have seen in our results over recent quarters. Strategic projects don't go through some of the same fluctuations that other more discretionary projects can exhibit. This quarter our business was balanced across all product groups, but it is important to know that this is a byproduct of our growth and not our primary goal. Our primary goal is to build the Juniper brand and to establish a trusted relationship with our customers and to provide them the answers to their strategic needs. If growth is balanced across all products as it was this quarter, great. And over time, growth of all our products is, of course, important, but we're measuring our success and setting our goals for our sales teams in terms of absolute grown and increasing our presence in the process. Winning the game as we have for the last three-plus years is the target we've prioritized, and exactly which products score the points in any particular quarter is a secondary measurement. So, in summary, the foundation we've built for the trends that we see, the power of our portfolio, and the freedom to focus on our future translates to one thing: The opportunity to deliver sustained organic growth. Juniper is in a position to realize the benefits of a market converging at an accelerating rate to a place we have designed this company to serve. This is our formula. It has been working for many years now, and our continued success will require the commitment to focus an execution that we relied on since the founding of Juniper. And finally, most importantly, all of this is possible only with the support of our employees whose continued commitment and incredible efforts make these results possible, as well as our many partners, our customers, our suppliers, and our long-term shareholders. I would like to thank you all for your continued support and confidence in Juniper Networks. So Bob, I'll now turn the call over to you. Thanks, Scott. I'm very pleased with all of the financial metrics for the quarter. Which I will review in detail. However, please remember that our business will be lumpy by application, by geography, as well as by product mix. Total reported revenue for Q3 was $546.4 million, an increase of almost 11% from last quarter and over 45% from the year prior. The third quarter represents the first full quarter of revenue from the acquisitions closed, contributing approximately 2% points of the sequential growth. We are very please wetted growth in our infrastructure products, recognizing product revenue of $357.2 million, up over 8% from last quarter and up over 36% from last year. This includes revenue recognized from the new E320 platform where we received positive customer acceptance, as well as continued to add [T Service] customers at a healthy rate. We recognize revenue on a total of 2,377 units this quarter, and we shipped 35,797 ports this quarter. This quarter, the core represented more than half of our infrastructure business, which is a reversal from last quart where the edge represented more than half. This mix reflects the oscillation we continue to see between the edge and the core and is likely to be a continuing phenomena given the specific service provider requirements. We're also very pleased with the growth in our Service Layer Technology revenue which includes security, J-series, central border controllers, and application accelerator solutions totaling $109.3 million reflecting an increase of over 17% from last quarter. This growth includes recent acquisitions, but it is important to note that we are extremely pleased with the growth in our security portfolio, which grew about 8% quarter-over-quarter and over 37% normalized year-over-year. Total service revenue was $79.9 million, up approximately 15% from last quarter. This increase was due to higher service attachment rates and renewal rates with a strong focus on the security side of the business, as well as the inclusion of service revenue from recently closed acquisitions. The total book-to-bill ratio was greater than one in the quarter. As Scott mentioned, Siemens represented greater than 10% of total revenue in the quarter. From a geographic perspective, the Americas represented 44% of total revenue. We saw growth in the Americas driven by the competitive dynamics by the service providers and cable companies as well as a requirement for more security. Asia represented 24% of total revenue, also showing absolute growth from last quarter, which is a reflection of the investments we made in our high-touch enterprise sales model during the quarter. We saw strength in Australia, China, and Korea. The drivers vary by country, but generally speaking, Asia has been aggressive in deploying consumer applications with high bandwidth requirements like gaming. Europe represented 32% of total revenue, where we saw exceptional growth despite traditional seasonal trends. We saw strength in Belgium, Germany, Netherlands, Sweden and the UK. This was driven by infrastructure build outs based on the carrier's ability to aggressively promote and sell business-driven, next-generation services like triple play, VPN, and managed services. We expect to see continued lumpiness by theater as quarter trends fluctuate; however we were very pleased with the geographic balance we continue to generate. Revenue through our direct cells was approximately 25% with the remainder going through 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 reminder, all enterprise orders are required to be filled through a channel partner. This policy was established to prevent channel conflict with the direct sales force. Gross margin was 68.7%, up slightly from the 68.5% last quarter, in line with the higher end of our expectations. This was due to slightly more positive product mix. We do expect gross margins to be lumpy as geographic and product mixes fluctuate going forward. Service margins was approximately 51%, flat from last quarter. Our service revenue increased significantly. The non-GAAP references that I am about to discuss exclude a one-time charge for a patent cross-licensing agreement, the amortization of purchased intangibles, deferred compensation, in-process R&D and a restructuring credit. Please see the press released on our website for the reconciliation of non-GAAP to GAAP results. As a reminder, all of the operating expenses include a full quarter of expenses from the recent acquisitions. R&D expenses were $90.5 million and accounted for 16.6% of total revenue, which compares to $81.2 million or 16.5% from last quarter. This absolute increase is due to head count growth, including recent acquisitions, and increased programs given our focus on internal development. During the quarter we invested and expanded on our global R&D efforts, specifically in China and India. Sales and marketing expenses were $116.2 million and accounted for 21.3% of total revenue, which compares to $102.3 million, or 20.7% last quarter. This increase is due to head count growth, including recent acquisitions, and an increase to our high-touch model for the enterprise opportunities where we have already started to see the return on investment, as well as channel and partner investment on brand development. And G&A expenses were $16.8 million and accounted for 3.1% of total revenue, which compares with $15.4 million or 3.1% of total revenue last quarter. Operating expenses were $223.5 million and accounted for 40.9% of total revenue, which compares to $198.9 or 40.3% of total revenue last quarter. Excluding the impact of our recent acquisitions, revenue growth outpaced the increase and operating expenses. Operating income was $151.4 million, or 27.7% of total revenue, compared to operating income of $138.9 million, or 28.2% of total revenue last quarter. Net interest and other income totaled $14.7 million compared to $12.3 million last quarter. This increase was due to an increase in our cash balances and investment returns as well as higher interest rates. Our effective tax rate was 31%. Non-GAAP net income increased for the quarter to $114.7 million, or 21%, compared to $104.3 million, or 21.2% last quarter. Diluted non-GAAP earnings per share were $0.19 versus $0.18 in Q2. On a GAAP basis, which includes the amortization of purchased intangibles, deferred compensation, in-process R&D, and a restructuring credit of $33 million in Q3, our operating expenses totaled $266.5million our net income was $84.1 million, or $.14 per share, compared to net income of $89 million, or $0.15 per share in Q2. Now, a few comments regarding the balance sheet. Cash, cash equivalents, short- and long-term investments totaled approximately $2 billion. We are extremely pleased to announce that we generated almost $145 million in cash flow from operations during the quarter. Accounts receivable was $205.4 million, and day sales outstanding was 40 days versus 38 days last quarter. This is in line with our target range of 30-40 days. Total deferred revenue was $243.2 million, which is made up of service, channel, inventory, and product currently unrecognizable for revenue. CapEx was $18.2 million, and depreciation was $13.5 million during the quarter. We did not repurchase common stock this quarter, but we expect to be more aggressive in Q4 than we have been over the last few quarters. We ended the quarter with 3,784 in total head count, up from 3,425 at the end of the last quarter with approximate approximately 140 of the increase coming from recently-closed acquisitions at the beginning of the quarter. In addition we invested heavily to expand the R&D and sales organizations. We have an increased focus on our internal R&D as well as sales, where we have made investments to address new and emerging opportunities as Scott outlined earlier. We hired people in all other areas as well to support and scale the growth moving forward. Before discussing the guidance I would like to state that our number one goal is to grow revenue and earnings and to deliver that growth within our operating model. We remain comfortable with the 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 can vary for a number of reasons, including those mentioned in our most recent 10-Q filed with the SEC. Now for our goals and guidance. Over the last couple years we have been given a first half and second half outlook followed up with a three month update and we will continue that by providing our three month update for the 4th quarter of 2005. 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. We are increasing our revenue and earnings guidance for Q4 05. We are currently forecasting total revenue of $570- to $575 million reflecting growth across each of our businesses. Please remember that Q3 included the first full quarter of revenue from recently closed acquisitions, and this guidance reflects all organic growth. We currently expect similar gross margins from those we reported in Q3 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're currently forecasting operating expenses to grow slower than revenue in Q4 and we would expect operating expenses to be flat to up, approximately $5 million. This would come from additional investments in R&D and sales. From an R&D standpoint, we are focused on simultaneously investing and expanding feature sets on current solutions, building new best-in-class products, as well as integration among platforms and software capabilities. In terms of sales and marketing, we are investing in our market coverage, brand development, and channel partners. This guidance would reflect an increase in operating margins, but please remember that we expect operating margins to be lumpy from quarter to quarter depending on development cycles and sales investments. I'd like to emphasize that we will continue to spend prudently and focus on the areas that give us the return on investment, which will enable both revenue and earnings growth as we saw in Q3 and expect in Q4. We expect the tax rate to remain at 31%. And we expect shares in the range of 610 to 615 million, and approximately $0.20 of non-GAAP EPS which includes one penny of dilution from the recent acquisitions as previously disclosed. The GAAP EPS target is not accessible on a forward-looking basis due to high variability and low visibility with respect to the nonrecurring charges which are excluded from the non-GAAP EPS estimate. Finally, we'll continue to focus on our objective of delivering high quality financial metrics. Now, we would like to take questions. Please limit yourself to one question.

EarningCall_233939

Here’s the entire text of the prepared remarks from Baidu’s (ticker: BIDU) 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 evening and thank you for standing by for www.baidu.com. Third Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen only mode. After the call, 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. I would now like to turn the meeting over to your host for today's conference, Ms. Cynthia He, Baidu's Investor Relations Manager. Hello, everyone. I am pleased to welcome you to Baidu's Third Quarter 2005 Earnings Conference Call. I am Cynthia He, Baidu's IR Manager. We announced our third quarter results after market close in the US today and you may find the press release on our Web site at www.ir.baidu.com as well as on the wire services. Today, you will hear from Robin Li, our Chief Executive Officer, and Shawn Wang, our Chief Financial Officer. After their prepared remarks, Robin and Shawn will be available to answer your questions. But, before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the results discussed today. A number of potential risks and uncertainties are online in our public filings with the SEC. Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law. As a reminder, this conference is being recorded. In addition, a Webcast of this conference call will be available on Baidu's corporate Web site at www.ir.baidu.com and all right, at this time, I would like to welcome Mr. Robin Li to give you an overview on our third quarter developments. Thank you, Cynthia. Good evening or good morning to you, as the case may be, and thank you for joining our first earnings conference call as a publicly traded company. Today, less than three months away from our successful IPO, we are very pleased to report that during the third quarter, our growth momentum and financial performance have exceeded our original expectations. We believe that the stronger than expected performance is attributable to robust traffic expansion, strong grinding effect of our successful IPO and the progress that we made in refining our pay-for-performance platform. We are delighted to share with you that our user traffic enjoys the most significant expansion among the leading Chinese Internet Web sites and Baidu.com became the number one Web site in China according to Alexa user traffic statistics. At the same time, our active online marketing customer base extended to over 53,000 or by 29% from the previous quarter. For Q3, the growth in user traffic and our customer base translated into sequential revenue growth of 28% from the second quarter and 174% year-over-year. Total revenues were RMB 89 million and this result is a continuation of Baidu's strong growth momentum since 2004. At the same time, we also focused on making investments in areas that we believe are important for long-term growth. For example, we continued to build on our R&D capabilities by hiring top engineering talent and maintaining our focus on developing innovative products and world-class technology. Secondly, we established a new data center in Beijing during Q3 and increased our bandwidth to prepare for future traffic growth. We also strengthened our sales and distribution network to further improve effectiveness in both customer acquisition and service. During the third quarter, we opened our direct sales office in and we have been encouraged by its initial performance. We also strengthened our ties with distributors through customer service enhancement training and channel marketing initiatives. The results of this effort are evident in our top line growth and customer base expansion. We believe our success is due to our understanding of China's user needs and our ability to offer them innovative search products and services. In order to better understand that unique characteristics of the Chinese Internet search users, we joined forces with Peking University to establish a Chinese Search Behavioral Study Center during the quarter. Findings of the Study Center will be applied to our product innovation. During Q3, we also launched three new products, Baidu Map, Baidu Greetings by which users can leave tailored messages for one another on their chosen key words, and Baidu Currency, which is used on an experimental basis within the Baidu Web site for various paid features for consumers. I'd like to report another piece of good news. Just a few days ago, we welcomed Mr. William Decker as a new Independent Director and also, the Chairman of the Audit Committee of the Board. Prior to his retirement in July 2005, Mr. Decker was the senior partner in charge of Price Waterhouse Cooper's global capital market group and has more than 20 years of experience in advising companies on issues relating to US capital markets. Mr. Decker brings unparalleled financial expertise to our board. We are pleased that his arrival will further facilitate our efforts toward strong corporate governance. As I report to you our Q3 results, I'd like to emphasize our commitment to invest aggressively for the long-term growth in Chinese language search. Internet adoption is still in its infancy stage in China with only an estimated 8% of the population online compared to almost 70 for the US. I urge everyone to look forward, to look beyond today and try to envision the capacity of this market 10 to 15 years from now. The growth potential of China's Internet industry is greater than that of any other region in the world. And as the leader in this market, we are well positioned to capitalize on this ongoing growth. I'll now turn the call over to Shawn, who will highlight some of the important financial aspects of the quarter. [Shawn Wang Chief Financial Officer] Thank you, Robin. Hello, everyone. I'd like to join for Robin's remarks by drawing your attention to the two most important themes for Baidu, top line growths and investments for long-term opportunities. We completed our third quarter with total revenues of RMB 89 million, representing approximately 28% increase from the previous quarter and 174% increase from Q3 of '04. Online marketing revenue for this quarter were RMB86 million, representing a 29% sequential increase from Q2 and 189% increase from Q3 of '04. Revenue growth was driven by a solid increase in the number of active online marketing customers, which increased to over 53,000, reflecting a 29% increase over Q2 of this year. Average revenue per active online marketing customer remained steady from last quarter at around RMB1,600. We're very pleased with the pace of customer expansion, which we believe will continue to provide strong support for future revenue growth. We significantly increased our investments in several areas during the quarter. We recruited, increased the number of engineering talents, invested in servers and equipment, expanded spending on branding and on our sales and distribution infrastructure. Overall, we increased our headcount to over 1,000 from over 700 at end of Q2. Capital expenditures totaled RMB39 million for the quarter, representing 149% increase from the previous quarter. Related to capital expenditures, depreciation expenses of servers and network equipment were RMB8 million, representing a 64% increase from the previous quarter and a 319% increase from Q3 of '04. A cost item related to capacity expansion is bandwidth. Our bandwidth cost for the quarter amounted to RMB7 million, reflecting a 66% sequential increase from Q2 or a 334% increase from Q3 of '04. R&D expenses for the quarter were RMB11 million, a 59% sequential increase from Q2 and 224% increase from Q3 of '04. Our R&D expenses were generally headcount related. Despite the significantly increased investments and spending for future growth, we still managed to produce solid bottom line operating results. Net income on a GAAP basis was RMB9 million, a 189% increase from the corresponding period in 2004. And that is a 29% decrease sequentially from Q2 of '05. If we look at the non-GAAP measures, net income, excluding share-based compensation, was RMB19 million. That is a 6% increase from the previous quarter and 148% increase from Q3 of '04. Operating cash flow for the quarter was approximately RMB53, representing a 66% sequential increase and a 205% increase from Q3 of '04. Adjusted EBITDA, a non-GAAP measure defined here as Earnings Before Interest Taxes Depreciation, Amortization and Other Non Operating Income and Share-Based Compensation, adjusted EBITDA was RMB28 million for the quarter, representing a 12% increase from the previous quarter and a 177% increase from Q3 '04. Lastly, I will quickly comment on our balance sheet. As of September 30, 2005, our total cash and cash equivalence balance was RMB966 million, up from RMB211 million at the end of Q2. This increase is mostly attributable to our IPO proceeds. Thank you, Shawn. By all measures, this is an exciting time for Baidu. As the leader in China's Internet search base, we are benefiting from the explosive, yet long-lasting growth of Internet adoption from both the user front and the customer front. Although Baidu has made a good start with our high profile IPO, we firmly believe that the success lies many years ahead of us. Let me once again thank you for participating in our first investor conference call. And for those of you on this call who on Baidu share, I speak for all of us here in welcoming you as our shareholders. We look forward to being in contact with you in the quarters and years 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_233940

Here’s the entire text of the Q&A from Ameritrade’s (ticker: AMTD) 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 Instructions We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from Prashant Bhatia of Citigroup. Hi. Just in terms of the margin rates, they moved up about 100 basis points or so this quarter. In your outlook statement you've got them moving up, I think, about 40 basis points more. Is it fair to assume, if the Fed keeps raising, you have more flexibility there to go even higher, number one? And is it also fair to say that you're not seeing a lot of client sensitivity there, because we see the balance essentially higher at the end of the quarter? In terms of question one, Prashant, the answer is yes. There will be more flexibility if, indeed, the Fed continues to tighten. And with regard to the -- question two, we do see an inelastic response for the most part from our clients. There are some exceptions to that, but that would be true for the vast majority of the client base. Okay. Great. And in terms of the rate paid, I was just wondering if you have any sense of historically -- I guess when you were kind of two separate companies, Ameritrade/Daytech, and rates were a lot higher, what the actual rates -- what the kind of high point was for rates paid to clients versus kind of the outlook statement of 75, 85 bips? It is a function of what the market will bear. If the question is really getting to spreads, the interesting thing about our business versus banking is that spreads a bit narrow as interest rates came down. And they are expanding as interest rates are going back up. On the payment side, it really is a function of what the market will bear. So I'm not sure there really is an answer in terms of what we're managing to, in terms of net interest spread. Most of my comments were about how we've been able to expand our spreads by 190, 193 basis points this year. Okay. Great. And then just finally, in terms of -- I know one of the big decisions you said had to make was the RIA platform. And while, obviously, you're not going to tell us what you are going to decide on that, could you just walk us through what the thousand or so RIAs on either your platform or the 2000 or so TD's platform would have to do, once a platform is selected? Do they have to move every single client over to the new platform? How does that work? Prashant, what is going to happen is both our -- both the Ameritrade platform and the TD Waterhouse platform will operate simultaneously for a period of time, at which point a decision will be made to move everybody to the TD Waterhouse platform. We think that their platform is far more robust than the current one that we have at Ameritrade. And we don't anticipate that being too much of a challenge, to move our people eventually over to their platform. Just briefly on the night hedge. It says it -- in the Q it states it matures in various states from fiscal year 2006 to 2007. When -- can you maybe tell us when you expect these to start maturing? Obviously, I guess on your fiscal year, so should we start to expect them to mature in October 2005? The first one was a four-year pre-paid forward. And that was the vast majority of it. That was about 5 million shares out of the 7.9 million. So the second two traunches, or roughly around 2.5 million, 2.7 million, I think it was. They were three-year prepaid forwards. So the transactions were entered into back in '03. I think the first traunch was done February 27. And we completed it sometime I think around May. So the first traunch was four years and the second two traunches for 2.7 were three-year. Okay. That's helpful. And on the -- maybe just an update on the TD Waterhouse acquisition. Any more clarity from the regulators as to whether you expect to receive positive or negative consent on the sweep account? We have -- now, TD is regulated by the New York Stock Exchange. They have three broker dealers. We are regulated by the NASDAQ. TD Waterhouse currently has a sweep program through the NYSE. So we're working with both regulators now on that sweep program. We'll let you know when we get a response from them. But I don't expect any issues. Okay. And lastly, Randy, I apologize. You went through this kind of quick, I didn't catch all of it. The unusual items you were talking about. The 5 million of severance to a former executive. Is that one former executive or several? Okay. And the bad debt expense -- I didn't catch all of that. It seems like you said there was 4 million of debt expense related to some employee trading? I'm not all set though. First, Randy, can you remind us what a Fed rate hike is in EPS? You -- in previous quarters you talked about the sensitivity. A Fed rate hike is equal to X -- Okay. So now on the outlook statement, you've got the margin lending rate going up. And you've got the interest on seg cash going up. No, no, actually, that's a good question, Rich. I probably should have covered that in my comments. But, that rarely reflects what has already transpired. It reflects sort of where we already are. So no, that is not forecasting further rate hikes. And so this $0.93 you say -- if just things were status quo in regards to trading and in regards to the margin loan run rates, where they are at, that doesn't include this impact of the EPS from what, at least Bloomberg consensus says, is we're in store for three Fed rate hikes. No, I think we also follow what the futures market is predicting in terms of rate increases. But I think our policy has been pretty consistent over the years to not include those rate hikes unless they materialize. Understood. Understood. The next question is, your month of September was slightly different because your accounting -- you end up on Friday of the last month. Before, you've given us what the -- actually the increase in trades were, if you were on a regular calendar, starting the beginning of September, rather than August 29. Yes, we can -- in other words -- I'm looking at my guys -- we want to normalize September trades per day. Okay. And then, Joe, E*TRADE closed their acquisition, surprisingly, relatively quickly. And I was just trying to see, what are the differences between how they were allowed or how they got approval to close Harris Direct as quick, and TD Waterhouse, a bigger transaction. But can you explain -- I don't understand the differences here. Yes, Rich. Number one, the deal that they did was basically a cash transaction that didn't need shareholders' approval. Ours was a stock transaction that required shareholders' approval. Therefore we've got to go through all of those respective processes and steps with respect to regulatory agencies. That automatically takes that much longer. Had we bought TD Waterhouse for cash, I think there is a decent chance that the deal may have already been closed. But who knows that? Got you. Got you. And I guess lastly, if the Fed did raise even one Fed rate hike, I know you've got concerns -- well, I mean it's probably clear how it impacts Ameritrade standalone. But you've talked about -- I know it probably -- I guess the biggest positive impact to the acquisition as far as yield curve would be if the curve steepened. Is that correct as well? Now, don't forget that what we're trying to do is go out on the yield curve, so you're correct. Our strategy is to take advantage of two-year money rather than overnight money. So you're absolutely correct. To the extent that the yield curve steepens, that would make the opportunity a bigger opportunity for us. And Randy, I guess my questions are, the benefits that you're seeing of the Fed rate hikes, you can't get much more -- unless the curve went inverted, which is a possibility. But if you assume that it doesn't go inverted, the benefits that you're seeing now from the front end Fed increases, Ameritrade standalone will benefit. And then potentially you could even get a double dip and you could see the sweep benefit, if the curve ever steepened from higher rates, which we expect them to do, to raise. Hi, this is actually Dave Chamberlain. I'm curious, just on the outlook with regards to the commission rate, is there any reason why you're coming to 12.5 or $13 versus -- it seems like it's kind of been able to stay stable in the 13th change level. Just curious -- What happens over time -- actually, if you look, David, at the history of Ameritrade, that number comes down every year. And it's mix of business. Our base rate for an equity trade is 1099. There are also option trades, have contracts with them. So as the business gets bigger and the options become a smaller percentage, the other thing that is an element in there is the payment per order flow. And that's come down over time. Recently, the last year or two, it did not. It has maintained some stability. But that would account for the slight decrease that you're seeing. Those two things. Joe, you started off by giving your thoughts on growth for the next three years and prospects for the long-term investor space. I know your team, in the past, has been a big proponent of this, the product demand poll rather than pushing product on customers. But do you have any updated thoughts on penetrating that marketplace, with or without incorporating banking products into the suite? Yes. Offhand, Howard, one of the things that we are planning to do -- I am not announcing this now. But one of the things we are planning to do is, post-close, is probably have a session with the entire analyst community where we roll out exactly what that client segmentation strategy is, what kind of products -- suite of products and services we are providing for each individual in each of the respective segments, how we're going to handle the advisory business, et cetera. So we are going to roll that out as it becomes more clear, post-close, and we will give everybody an update on that. The bottom line though, is you can't have a good long-term investor value proposition if you don't have the appropriate products that an individual cares about. A great portfolio allocation tool, which we think we will have, a competitive edge on, with regards to Amerivest, and then the other array of products, whether that be fixed-income, mutual funds, what have you. ETS, etcetera. And, second question: if I look out at the time between deal announcement and today -- in my mind, Fed has raised rates a few more times than you've baked in at deal announcement. And you generated more free cash than I had anticipated. So you have a bit more extra cash than expected. Mechanically, shouldn't that just simply suggest that baseline deal synergies have gone up? I think the answer, mechanically, you would say yes to that. But without the deal actually closing and us have a really exact handle in terms of what the base numbers are in every one of the product areas, every one of the distribution areas, every one of the business areas, we would rather wait until after the close to give you a good solid update on that rather than speculate on individual numbers now. Right. Great. And last question, Randy, it's a small number, but I noticed you're no longer providing the stock lending bar revenues in the outlook statement. It had been running at I think about like 5 million a quarter. The first question, what was it this quarter, and is it fair to assume that number is about 5 million still, a quarter, going forward? Actually, we do break it out on the outlook statement. So in my comments, I mentioned that the -- quarter-over-quarter, that increased by 2 million. But if you go to the outlook statement, we do break out -- it's the securities lending interest and the securities lending expense are gross. So you can follow that. And so take the net of those two and that's the number that we use to provide net. I'm always afraid to get behind line with Rich, because I start out with ten questions, by the time he's done I'm down to two. But at any rate, I wanted to follow up on something he did hit on, though, which is talking about the benefits you guys have gotten so far with the rate increases versus your outlook for the TD transaction. Now, if I look back at your original presentation, you're looking for $200 million in benefit. It would seem to me that you've already gotten an portion of that 200 million simply by the rise of the short-term rates. And I'm just curious: if the yield curve stayed as it is, Randy, today, would that $200 million incremental, once the transaction closed, actually be a little bit lower because you've already gotten some of the benefits? Does that make sense? I understand the question. The way you said it -- let me restate your question. I think the way you said it at the end was a little confusing. Yes, the purpose of getting to 200 million is to take advantage of moving out to two-year money. The fact that overnight money is now approaching two-year money, yes, a lot of the -- some of the 200 million, and we're not quantifying that yet. We're going to come out with, at close, a very robust call on this. We have to be very careful about what we're telling you now because we have our proxy out there. And so, yes, the answer to your question is absolutely yes. And as the yield curve, as Rich mentioned, as the yield curve does become more inclined, there is obviously more opportunity if that yield curve becomes more inclined. So the first question, have we realized some of the 200 million? Yes. Is there opportunity for more than 200 million if the yield curve becomes more inclined? Yes. Makes sense. Thank you very much for that. Second of all, Joe, you mentioned -- you talked a little bit about, in your prepared remarks, the branch strategy and what you're planning on doing with increasing the sales effort. Can you talk to us about what TD's branch personnel do today, what are they there for, what service are they providing, are they bringing in sales today, and how you expect that to change once you guys are combined. Today their emphasis is to provide both service and be an asset gatherer in the branches. Going forward, we will handle the vast majority of the service in our call center. And the investment consultants in the branches will be expected to go out, in effect, and sell PD/Ameritrade, sell Amerivest, sell the long-term investment -- platform and bring in as many assets and business as they possibly can. Again, Mike, we will give you much more color on the specificity behind that after we close in our next follow-up meetings. Okay. So there will be some changes in their responsibilities. There will be some retraining and everything like that that probably has to go on. Finally, on the impressive increase in your client assets during the quarter, I guess it was up about 10%, can you give us an estimate of the mix between appreciation in client assets versus actually new money brought into the account? We haven't typically done that. Why don't we consider whether we will do that. We do have the information. We've never disclosed that. And so that would be a big change in how we present data. Let me take that under advisement. I love this space so much, I've got more questions. The point I was trying to get here on this net interest income, Randy, if you take a look at -- I'm looking at next year, what you're forecasting. It looks like -- I know this quarter had 98 days. It was a big quarter. But you reported 125, 128 -- excuse me, 126 million. But next year, with the run rate, it looks like 125 is a pretty good run rate as well for a 91-day interest day quarter. So I guess my question is, when you annualize that, you get 500 million. 125 time 4. That's up 100 million from what you reported this year, the 398 or so. To me -- what is the incremental margin? If that's all profit, to me that's an incremental $0.15, if you tax it and take it on the shares, because you're saying $0.93 in flat conditions, that would tell me it's got to be 96 or so, plus upside with the Fed rate hikes. Right. But then the other side is what we're paying out. Now, that's why I went to great pains to talk about spreads. And I think Prashant asked a good question at the beginning of the call, which is, we've seen expanding spreads for the business. The difference between paying out 69 on cash, client cash, and receiving in a little below 7% on the margin loans, and I think it was 335 on said cash. So the spreads that we've seen increase have been about 190 and 193 basis points. Remember that as rates came down, those spreads compressed. Now they are expanding back out. I think Prashant's question was, how much can they continue to expand? Isn't there a point where your net interest margin -- it's not infinite. Market will say, gee, you're charging us too much in terms of margin loans or you're not paying us enough on client cash. So what is the net interest margin that you're managing to? I fully am aware and sensitive to that fact. But the 125 million run rate factors in that spread. It factors in the cost that you're paying on to clients. So I hear what you're saying, Randy, but it just seems conservative. Because that 125 is net of what you pay -- of what you're paying the clients. Rich, if you're -- you're exactly right. The additional 100 million or so, that -- it was roughly $0.14 a share. So I don't disagree with your concept. Rich, I think that's fair. I think especially since -- the key to what is going to happen in '06 and '07 is going to be the success with which we run and deliver on the integration. Today if we're just talking about Ameritrade by ourselves as a standalone, if anything, I think it would be prudent to air on the side of being more conservative than not. But again, I want to emphasize that what has happened in the past 12 months with the number of increases we've had, I wouldn't assume that if you have another four increases that we could increase the spread like we've done this year. I fully agree. And that's why I'm just saying, in a static, if you just took the run rate, it would be $0.14 or $0.15. And anything above that -- Yes, we're agreeing. Absolutely. If you remember, at the announcement, we even did that. We took and showed you -- or actually, it was the last earnings call -- we showed you on a bar chart, we built that slide. Had we not done projections here for purposes of not having too many projections out there while the proxy is out there. Hey, I just wanted to touch on how your market share number of trades. It seems to me you've been pretty consistently losing share the last few quarters. This most recent quarter it looks like your trades are up about 5%. Most of your major competitors seem like they're up between 10 and many closer to 20%. I mean, I understand there are some timing differences, in terms of when you closed the quarter and that kind of stuff. But can you talk about why you think your customers seem to be trading a little bit less than others? And how you guys plan to address some of the market share slippage. Yes, Mike. One, I agree with you. We see those numbers as well. Secondly, there are two basic reasons why a client -- when we do our analysis, we have two reasons why a client leaves. The first one, for those that have greater assets, is because they are choosing to consolidate their accounts at one place. That means, for them, today we don't have an adequate enough long-term investor solution to satisfy their long-term needs. For the clients that we have that don't have much in terms of assets, they may leave primarily because of price. That's one-two in order, as far as why somebody would leave. The real focus for us is again to roll out a client segmentation strategy where we have different value propositions for different types of clients. Different price points for different levels of service and different product suites. Frankly, we probably would have rolled that out by now, had it not been for the TD Waterhouse acquisition. It didn't make sense to do that when we were trying to integrate both firms. That's the reason why I say, going forward, when you look the our market share and growth, a big part of us being able to achieve greater numbers in that arena will be the rollout of the client segmentation strategy as well as a movement from a marketing organization to both a marketing and a sales organization. Is it possible to get any color on just the mix of your trade? I know you guys have a couple of offers out there. The iZone kind of $5.00 trade offer versus the kind of core pricing. Any difference in mix, in terms of where you're seeing activity, stronger or weaker? We don't disclose the specificity behind that. But suffice it to say that the vast majority of that comes in on the basic Ameritrade offering at $10.99. Okay. On the payment for Ameritrade, I think you mentioned that it's been kind of stable the last year or two. It is still a number less than 5% of overall kind of commissions, just to give us a ballpark of where that is running? Yes, we've never -- not in recent years. We've not disclosed a specific number. But it is definitely below 10%. It is not very significant to us anymore. Okay. And then just the last question, I was wondering if you could give us any color on where some of your margin rates and client credit balance rates and saved cash rates kind of ended the quarter or maybe where they are averaging around today, just to give us a sense of how that compares to the average for the quarter. Actually, have you gone to the outlook statement? Because we are painfully clear with going through the -- both the average balances as well the ending balances. So rather than taking up everybody's time on the call to do that now, why don't you take a look at that outlook statement. If you still have a question, Bill, myself, Tim, somehow we'll all take your call. But that's all very, very detailed at amtd.com, at the outlook statement. For '05. If you look at -- this is Bill. If you look at '05, those rates are static in all categories throughout the year. That's essentially where we're at right now. A comment, and that is, I mean a good third of the questions and many of the questions that we got between quarters from different investors and the analysts dealt with, really, what is going to happen with the TD Waterhouse acquisition and what are things really going to look like post-close. We do recognize that. And I think we have always erred on the side of giving the marketplace as much transparency in as many arenas as possible. Our job is to continue to do that. But we thought it would be much more practical and the information would be far more succinct and accurate, just to make sure that we give everybody a really good solid update shortly after we close. So please, bear with us as far as that goes. Remember, we will give you guidance thereafter on a regular basis as well. Having said that, again, we are incredibly proud of the last three years. We're proud of the record year that we had this year. But as proud as we are of the last two years, I can't tell you how excited we are as far as our future goes. 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_233941

Here’s the entire text of the Q&A from NetEase’s (ticker: NTES) 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 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 are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. In the interest of time, we ask that you please limit yourself to two questions. Once again, that is “*” “1”, to ask a question. We will proceed in the order that you signal us. And we will take as many questions as time permits. Good morning, Michael and Denny; a couple of questions. The first on the Online Game side, could you elaborate a little bit Michael on your comment about the unexpected seasonality I believe or slowdown in summer time. It seems like this slowdown came quite suddenly; your games were enjoying significant sequential gain in the prior quarter, and it kind of came down to a very abrupt halt almost. If there were some competitive factors, could you tell us what areas was competition especially affected, or were there other areas in terms of the decrease in demand that caused the sudden drop? Yes, sure of course. The summer time and also together with, school starting in September has been slower than what we thought and partly as we mentioned also because of competition. And this competition mainly comes again from Warcraft, which is if you look at the overall market’s growth and a lot of that is driven by World of Warcraft during this quarter. And of course for us, the result has been slower than what we thought or expected. We recorded Game business by 8.4% sequentially and compared to this actual cost, I think we are still kind of, okay job compared to other companies. Okay. And then switching on to the Advertising side, your growth was quite robust this quarter well ahead of the market. Given that last year, Q3 was very strong for all of the portals, could you give us a sense of how fast your real growth is? Is there some adjustment that we have to make to actually see how fast your growth is going on, on a seasonally adjusted basis? Yes Safa, this is Denny. On the Advertising business, you will notice that in the third quarter this year, we actually grew by around 37%, which I believe is one of the highest growths among the market segment in China in this quarter. And this is due to several factors due to the continuing improvement of our content and also the strengthening of the marketing efforts. In particular, I can give you some highlights on the growth because in the third quarter we actually increased the spending from the advertisers by different business segment, in particular for the internet-related which increased quarter-over-quarter by more than 36%. And from the IT business segment, it was increased also by more than 35%, and the others, for example the telecom, which increased by more than 40%. And these all contributed due to good performance in this quarter. And comparing with last year in the same quarter, last year it was because mainly of the Olympic event during the quarter that drove the growth last year. But this year, it is more, I mean to say, its more organic plus a little bit off the summer peak season. That’s why it’s also reflected in our guidance for the fourth quarter. Because, fourth quarter in China is typically a slower season for online Advertising business in China, so that’s why we are guiding the 10% sequential decrease in our online Advertising revenue in Q4. But on the overall, we are very optimistic on the prospect of this, online Advertising business because as you can see, the growth rate of the Company is actually higher than our piers, although we are starting from a smaller base but I think we are improving slowly on this. Hi, good morning guys. First, I wondered what’s your outlook for the Westward Journey II and Fantasy Westward Journey in terms of when to expect them to flatten out? And then my second question is, what is your initial read for the practice systems (ph)? Okay. I’ll catch up it. For the 2 games that we’re operating right now, Fantasy Westward Journey and Westward Journey II, first about Westward Journey II online; the game has been running for about a bit more than 3 years right now, and as I think, I’ve mentioned before we are seeing that the game might peak out in our experience around 3 years of operation. So, we are looking at the possibility to peak out in this quarter or next quarter. And, this quarter, I’m meaning the fourth quarter and the next quarter meaning the first quarter of 2006. And that’s, again it depends very much on the expansion packs that we are going to release in the first quarter of 2006, and compared, relatively actually Westward Journey II seems to be a very stable game. So, even when the game peaks out, we feel that game will probably plateau for a while, for another quarter or so before we actually see a bigger drop of revenue from game. And then for, Fantasy Westward Journey, as we also mentioned before, our experience is that these games will probably run for about 3 years before we see a peak out and Fantasy Westward Journey started in January 2004, so we are looking at probably a peak-out in late 2006 or even a bit longer than that. Again, it depends very much on the expansion packs that we are going to release; we have recently released an expansion pack for Fantasy Westward Journey in late September, but the results of that is yet to be seen because we’ve focused enough time in fine tuning the contents of that when we released the expansion pack. And also for Fantasy Westward Journey, there might be a bit of a difference with that Westward Journey Online II because it seems that most of the other operators in the market are trying to come up with games that is trying to compete with Fantasy Westward Journey; for example, QQ Fantasy which is a game developed by Tencent. And so, we received more competitions for Fantasy Westward Journey but we have confidence that with the expansion pack and with the also competitive advantage that we have, we will continue to see the growth of this game until the end of 2006. And then, for the practice system; so far we have, to update you on that, on October 20 we have released 2 servers with the practice system built in, and each server in each of the games, so 2 servers altogether. So, Fantasy Westward Journey and also for Westward Journey, Fantasy Westward Journey we have around 280 servers right now, and Westward Journey Online II we have around 220 servers. So, there is only one server out of this many servers. And for that particular service the result is I would say normal. I mean, there are users who would particularly like to have this kind of practice system in the servers because they feel that it is more fair to play with other players who do not spend too much time on a particular server. So, let’s say, I’m an office worker or something and I could only spend like 2 to 3 hours per day and he actually feels more attracted to such kind of server to play with other players who cannot play more than basically 3 to 5 hours. So, there is some demand on that, but we don’t know exactly what will happen, if we are going to implement this kind of practice system over all of our servers, but we also haven’t come to any conclusion with the government or with other operators on when or how we are going to implement the practice system in all of the servers. So, we are yet to announce that. But, I think, if we are going to do that, I think we have a very good competitive advantage over our competitors because of our in-house development capabilities where we can design our games in a way that we can try to minimize the effect of the practice systems. Next question? Okay, thank you. Yeah, actually I have 2 questions on your Online Games business. First Lee, can you give us a breakdown of revenue coming from these 2 games? And also, I would like to know the ACUs for these 2 games. It seems like the PCU to ACU ratio probably has increased during the third quarter which actually resulted in lower than expected growth from the revenue from these 2 games. And also, my next question is on the new game, what is your anticipation for Datang; for example which will go live first into the first quarter of ‘06? Thank you. Thank you, Lu Sun. In terms of the breakdown, the growth of Westward Journey II Online was 0.3% quarter-over-quarter and the growth of Fantast Westward Journey was 13.9% quarter-over-quarter. And then, in terms of the ACU and the PCU, the ACU achieved over the quarter as we mentioned for Westward Journey Online II was 514,000 and then the daily average users online for September was 193,000; and then for Fantasy Westward Journey, the peak on current users achieved was 827,000 for the month of September, also for the quarter, and then the ACU for September was 310,000. And then on the new games, I think it’s a bit too early to say that expectations on, specifically on numbers of these games that so far, for Datang we have internal, external growth beta started sine the middle of September, it’s about 1, all close to 2 months now, and so far the response has been very good from the users. I think, I also mentioned before that we have received lots of applications to become fate of (ph) users for the game just for a few hours when we opened the application; we sent more than 30,000 to 40,000 applications on that, and the game seems to have a very good response also when the gamers try out the games. Also, we continue to fine tune the game player of this game and we are looking forward to a launch in the first quarter, and that’s for Datang. So, we cannot give our specific number for Datang and of course for Tianxia. Okay, just to follow up; so it seems like the PCU number has fairly grown much faster than ACU number. Is there any particular reason to that? Or do you think the trends will change going into the fourth quarter or going into 2006? I think, they don’t seem like, one of the reasons that we are looking at this is it’s possible of, how to say that? The early assumption of the practice systems; that means that some of the users already see the practice system coming along and they are changing their habits of playing the games already. So, this is one of the possibilities, and the other possibility is that, the numbers that I just gave you was the September number, and in fact if you look at the August number, which I can give you for XY2; XY2 ACU was 205,000 and PCU was 477,000. And then, also, for the month of August for Fantasy Westward Journey ACU was 370,000 and PCU was 760,000. And, you can see that’s the ratio of the month of August and September is very different. And, I also would think that’s the month of September we are seeing some strange patterns being used by the users. But, I do not see that as a long-term change, and we actually are seeing some, a bit of a pickup in the October month in terms of this kind of ratios. Hi Michael and Denny; thanks for picking up my question. I think, first of all, recognize deferred revenue in this quarter actually increased quite substantially. Does that mean that you are expanding the number of unique gamers quite dramatically and you are selling more prepaid cards, and do you think this trend will continue, say in the fourth quarter? And secondly is, I just want to get an update on the Advanced Casual Game status. Thank you. Yeah Wallace, this is Denny; let me answer your first question, regarding the deferred revenues. The increase at the end of September, is mainly because the long national day holiday has fallen, which is the first week of October. And, I think the people, the distributors are stocking up for the holiday season, which does not indicate anything on increasing the users number. And, the casual game… And for the casual games, again I want to explain that the Casual Games is that, so far we have released 10 games on the Casual Games platform that we have and these games we continue to develop and to roll out games basically on a month or 2-month basis. So, I think, we are looking at releasing another 2, or 3 to 4 games by the end of this month, and I think by the end of this year to be a bit more conservative by the end of January, we are looking at, releasing around 20 games altogether, so an additional 10 games to the 10 games that we have released before. And, in terms of the Advanced Casual Games, I think the trend is that all of these 10 Casual Games that we are going to release in addition around 1 or 2 of them are what I would call Advanced Casual Games, and these Casual Games will not be the kind of Casual Games like the board chess games or the kind of puzzle type of games, but it will be more like sports games or something like that. So there should be around 2 by the end of January. By the end of January; can you give us more updates say in terms of the latest numbers of the Casual Games drop-off (ph), say in terms of PCU or ACU? The PCU is very small; it should be around 20,000, a bit smaller than 20,000 actually. In terms of the number of registered users, there are 1.6 million registered users right now. Hi Michael, Denny; I have 2 questions and the number one the rising competition in the online game business, especially from World of Warcraft, and QQ Fantasy, what do you expect your sales to be differently than a couple of quarters ago when you had less competition? Number one; number two is that if you learned from your past experience in terms of game design, what would you do differently now for your new games Datang and Tianxia other than 2.5D and other 3D games? Thanks. Thank you; in terms of the competition, yes you are right that World of Warcraft and QQ Fantasy are closest competition to us than the other competitors, and it seems to us that World of Warcraft, one of the reasons I want to elaborate at this point is that during the past quarter, World of Warcraft has penetrated into a bit of more other smaller cities than we would have thought that they could penetrate into. And they have opened up a new service group, I think in early September or something like that. And, have penetrated into more cities than we had thought. And then what we think is it seems that the game has kind of stabilized and is not, of course that would be a question that is better to, as denying, but it seems to us that World of Warcraft has kind of stabilized rather than expanding very, very strongly. And then, for QQ Fantasy, their game is in open beta right now and it seems to be doing quite good. But, I think with the expertise that we have and also the understanding of the game market that we have, I think we will continue to come up with new good content and internet content for both of our games in order to compete with new games in the market. And, there will always be new competition, and I think the most important thing is that we continue to have very good game designs, innovative designs. I would not be able to tell you exactly what kind of innovations that we are going to implement in our next expansion pack, but I can tell you that from our past experience, for example when we had our Fantasy Westward Journey over the last 2 expansion packs, we had the home building, we had the family building all these kinds of new innovative contents that we have and experience that we have. These are new stuff even compared to, got splendid (ph). And, I think we are very confident that we will continue to add innovations out of the expansion pack that we are going to release. And I think what is more important is that distribution platforms that we have and also the portal and, together with innovative marketing strategy that we have like the corporation with the internet cafe and so on, I think we will continue to have high confidence with our games and competing values. And, I have a follow-up question regarding your marketing spend, and clearly a surge of marketing costs for this quarter like for your web content and also for spending on other channels, would we expect the same pattern to persist, or you may scale back marketing expense going forward? Thanks. Richard, this is Denny. And for the marketing expenses, you are right that in the first quarter that we have increased a little bit on the marketing on the campaign and also on the different channels that lead to part of the reason for the increase of good performance of our online Advertising business. And, if you look at the percentage in terms of net revenue, in the second quarter marketing expenses for the company as a whole is around 9% of net revenue. And for the third quarter, it increased to around 10.3%. And for the fourth quarter, we don’t expect that as a percentage of net revenue, say it this way, will not be bigger than the third quarter. It will be reduced a little bit in terms of the percentage. Hi, good morning guys; one quick question on the Online Advertising business. Denny talked about trends in several industries. Do you see any weakness in any industries, if any? Thank you. As you can see Frank because our advertising revenue increased by 37% and those business segments that I have mentioned the Internet-related, the IT, the telecom, and also some I have not yet mentioned, for example motor, et cetera, they all have a different level of increase. So we are not seeing any particular weaknesses for our company specifically, in terms of different business segment, which slow down the advertising spending. Thank you very much; I have a question about the culture of your games versus World of Warcraft. Last quarter, World of Warcraft had not taken a bite out of your gaming business and I believe that one of the reasons you gave was because there were cultural differences between your games and World of Warcraft. Now it seems that World of Warcraft is taking a bite and the explanation seems to be because the 9 release to server and penetrated second and third-tier cities. Are you guys still maintaining that the Chinese culture of your games gives you an advantage and in light of what’s happened in this quarter what are the implications for the competitive advantages of Tianxia, your 3D game, which will compete head-to-head with the World of Warcraft in its Chinese cultural game even though World of Warcraft seems to be doing well? Thanks. Yes, I think in the last quarter we explained that of course, World of Warcraft has a very small minimal effect on our games because of a few reasons; one is because of the culture; second is that on the hardware requirements and also the penetration in the smaller cities. And, I think in terms of the culture, how to say? I mean, World of Warcraft is a very exceptional brand name in the market, and it is single PC player game for the past 10 years and has been pretty famous in the game industry. And of course, even with that I think there is still a huge difference between the users when they look at the culture of World of Warcraft and that’s why even with such an exceptional brand name, Warcraft has been doing good but not exceptional, yet I think. And, it has been able to penetrate into the smaller cities; it is something that I think we have understated or unexpectedly that they would be able to penetrate into those smaller cities, that we thought would have a difficult time in penetrating. And, that is mainly because of the hardware requirements rather than the culture that we think is the problem. And then, the culture, I think, yes, they have penetrated into smaller cities but the culture effect is still there and then, it has affected us a bit more, but it’s not affecting us like a head-to-head basis, as yet I think, especially in the small cities. Great and my follow-up has to do with expansion packs; last year your fourth quarter guidance was a little bit weaker than people expected and you’ve characterized it in some ways as a transition year and you in fact delivered really accelerating growth throughout 2005 off the back of that. Part of that was due to you stepped up the release schedule for your expansion packs. I’m wondering as we look out into 2006, in light of the fact that there’s going to be more competition, especially for Fantasy, will we see the same pickup as a result of the expansion packs or are you more betting that the 2 new games, Datang and Tianxia will make up or any kind of deceleration growth with the expansion packs will give you guys will make up for it by having 2 new games out on the market? Thanks. Well, I think, we will just look at t his both ways that we continue to have separate teams looking at the different games. So, for the current games that we are operating right now, those teams will continue to come out with new and innovative expansion packs, especially expansion packs that we think we should be able to compete with the market, for example, like QQ Fantasy and so on and so forth. And then, that is still quite a different market. I mean its still, 2D and then also Q’s version type of gamers. And then, for the new games that we are coming out, of course, like Datang and also Tianxia and that’s with the actually is more the kind of head-to-head competition, we’ve added in terms of games like World of Warcraft and Legend of Mir or, these campaigns. And, I think, it’s just difficult and there is no particular reason to say, we have to focus on the old games or the new games. Thanks; could you just give us a sense of what we can expect on the expansion pack side for 2006? When can we expect the first set from Datang and Tianxia as well as Fantasy Westward Journey Online? Thanks. Yes of course; for Westward Journey Online II, I think the next expansion pack is going to come out around January, it should be before the Chinese New Year. And then, for Fantasy Westward Journey, it should come out around March or so. And then, for Datang and Tianxia of course, we haven’t decided exactly when these games will be released but definitely the expansion packs of these games are already in development. So, we are looking at around 6 months time after the release of each of those games that we are going to have an expansion pack. And that’s the kind of preliminary plan right now. And, I think the next question will be our final question. Okay, it’s going to be 2 final questions, so I apologize. First question, just an accounting issue, it appears that your business taxes on your game division declined quite sharply quarter-on-quarter. I’m looking at the gap between the gross and the net gain revenue? Yes, James you are right; during the quarter we have managed to get the tax preferential treatment on business tax, in particular for our Online Game division in (indiscernible). In the past, we were paying 5.5% business tax and in the third quarter we paid only 3.3% and we believe that going forward it will continue to be 3.3%. Okay thank you; that clarifies that. Second final question could you attribute your fourth quarter gain revenue growth by 2% to 4% between Westward Journey II and the Fantasy Westward Journey? I’m pretty curious about Fantasy Westward Journey given on the one hand, you had the upgrade in early September but on the other hand QQ Fantasy came out across the quarter end. Right, well I think, well, for the 2% to 4% of the total business, the attribute is basically around the same for both games, so, both games it’s going to grow around the same number actually. So, it’s not much of a difference. And then especially for Fantasy Westward Journey, I think we have to take into account the new games coming out basically QQ Fantasy that’s when we look at the kind that’s here. And that does conclude our question-and-answer session for today in the interest of time. Mr. Tong, I’ll turn the conference back to you. Okay. Again, thank you for joining us today and if you have any other sort of questions, please do not hesitate to contact me, Denny, or our IR representative. 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_233942

Here’s the entire text of the Q&A from VeriSign’s (ticker: VRSN) 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 – Todd]: Hi Stratton, can you just kind of walk through the regulatory change that you have seen in the UK and in somewhat of what’s going on in Germany and talk about how they are impacting your processes in terms of signing up subscribers or renewing subscribers, and how do see the risk of that moving to other market like the US, is that in your forecast? [A - Stratton]: Right, thanks Todd. So I need to point out at the combination of things, there are some regulatory things but those are really related to some of the recent noise you hear around, times of advertising and types of advertising, that we can do. Those are probably, the smallest factors, what we are really more being impacted by, is the guidelines that we are being made to follow by either the carriers in given countries or by certain groups that oversee those areas in these countries. So, for example it is having an effect in the way in which we have to advertise the service in terms of how much fine print in text has to be in the screen to acknowledge the subscription in the ways in which the voice levels have to be delivered and in the ways in which the SMS message exchange has to be architecture, so that in Germany obviously its a double octane terminology. In U.K it’s not truly double octane but the effect of all the messaging we have to do back and forth is the same. So, the reason its impacting us is because for a given amount of churn of the backdoor of subscribers who leave the program in Q1, we would be able to advertise and bring new subscribers in the front door or see all subscribers come back on. The friction in getting somebody on the platform is now much harder than it was earlier in the year because of all these messages that have to go back and forth with different conformation, it just makes it harder to get new subs at the same time our retention programs have not kicked in well enough to keep more of the existing folks on the system. And I think its particularly harsh in the U.K at the moment given the rapid ramp we had in the U.K late last year and early this year and of course the lack of new content just kind of accelerating the churn there. I do think we will see normalization in the U.K by the end of Q4, quite frankly we continue to lose subs at the current rate in the U.K we are going to be at a very small base there by the end of the fourth quarter, no matter what. Meanwhile the base in Germany look to be churning less, we did see some improvement there in churn rates from Q2 to Q3 losing less subs in Germany in that quarter and obviously we are monitoring what’s going on, in the U.S as well, but I don’t think you are going to see the kind of restrictions that we are seeing in the U.K or the kind of guidelines go cross the globe in any great shape. What I actually think is the pendulum over time will swing back the other way to our more moderate marketing. As you recall much of the revenues we deliver does in fact go to the carriers themselves and if they are seeing these impact I think you will see them working with us to improve the model. [Q – Todd]: So you are not seeing any indication that T mobile or Singulair are concerned by the headline risk in proactively making changes to see what you can do? [A – Steven]: We are constantly making changes with them to those marketing messages and have been since we launched in the U.S so I don’t think that the things that are happening in the U.K are really having effect here and they are thinking about this and certainly they are both benefiting from off portal model having taken some hold. It doesn’t mean we won’t see continued changes over the course of the next 6 to 12 months as we roll this out. [Q – Ed Maguire]: The programs or the strategies there, I mean what is it going to take to keep subscribers really on the hook. Is it going to be more price rate content, is there sensitivity to pricing and could you also address some of the issues with elasticity and push back on pricing in some of the different markets you are entering? [A – Steve]: Ed I will be glad to answer your question but we missed the first part of it, you were not live so, could you repeat them sorry. [Q - Ed Maguire]: I apologize. Yeah. Could you provide bit more detail around what strategies for retention programs and whether you have any plans to try and secure more exclusive content deals and I just want to understand a bit of dynamics of the role that pricing has played and your understanding of how pricing is effecting churn? [A – Steve]: Sure okay. So on the retention programs, in early August and through the rest of the quarter we began proactive retention programs as in the UK and Germany in particular, things as if telling people of course that as they were asking to cancel their subscriptions to remind them if they did have credits that had not been used and they might want to stay on the program until they were done using them. To offer them up sell opportunities, to offer them coupons various things and then begin to create some community like services around pointing out that what other people of their demographic were doing and downloading in terms ring tones. So proactive marketing of what’s hot, proactive marketing of your remaining credits on the account various things like that, and we did see some impact from that to the positive through August and then had much of that washed away in terms of benefit as we entered September with new restrictions in the UK. So I think we will continue to roll those programs out and do more of it and be smart about the customers there. And I do think as well at some level of churn you then begin to have a stable or base of existing customers, who are more inclined to stay on than not. As relates to plans for new content, we do have quite a large seen working on new content creations of our own lots of products in the areas of graphics and screen savers and games and the rest, and we also are continuing to have dialogs with certain of the labels around doing special productions with them of various seasons of content, so we will keep doing more and more of that and I think in the long term that becomes differentiated for us with our own production group and with good promotional capabilities with the labels, obliviously in the short-term it is not going to have much impact. Pricing has not been something that, I think has been a big reason for the churn in concern, we will continue to test new pricing program, here and in Europe and in new markets we roll out just trying to find that could mix. [Q - Ed Maguire]: And is just a follow up on the your analysis at least of the, impaired subscribe acquisition rate given. How does that impact your profitability model in Germany and UK and the way you are allocating your advertising resources there? [A – Steve]: Well obliviously its harder to sign somebody up, than it means for cost for acquisition of a customer for every commercial we show is more extensive, so as those dripped up, we have to redefine and rethink through where we are going to advertise, how we are going to advertise and the rest. So, that is the careful market management we have to look at in Q4 here, as we get in to the holiday season there should be a lot new popular content and it would look to be a time period where a lot of new handsets sales are going to get done but meanwhile we want to be very careful about those marketing expenses until we see an improvement in the front end acquisition cost. [Operator]: Steve Mahedy with Bank of America. [Q - Steve Mahedy]: Thank you. I was wondering if I didn’t quite hear you about the content I thought it was 115 but it broke up a little bit and if in fact that was the case, looking at the estimates for Q4 and using the September run rate, I wonder if you could give this kind of a little bit of an overview on what the ramp looked like in July, August and September, and was August a better month than September or not? [A – Steve]: That’s kind of, the reason for the guidance going forward I did say 115 approximately for Jamba jims for Q3 and 90 to 95 for Q4, that is exactly a fallout of what you are talking about, that’s the September run rate and because we had the big loss in the U.K in September I think that’s impacting obviously the quarter the most and then that’s kind of what you start with as you enter October. So that’s really the thing we are watching and trying to focus on in terms of stopping the bleeding in the U.K and continuing to expand in some of these other markets. We did see that in for example in the U.K we had almost stopped the churn for the month of August and then you see restrictions accelerated again in this September, so I think that really cleared it to us what had the impact in the September period in the U.K. It is these new restrictions because again we had come off of a fairly high churn in July almost having eliminated that in August through these other programs and then saw it turn back on again. [Q - Ed Maguire]: Just a follow up question relative to …maybe the relative base is the better performance in Germany, is the content mix similar between the two or is just demographics and how would you kind of explain the kind of differential between the two. [A – Steve]: I think the content mix is very similar, I think culturally, there’s probably I would say a higher ____ for these types of services in the German market than potentially in the U.K and the base there is so much larger because it’s Jamba’s home market and I think that also is helping. [Q - Ed Maguire]: Okay thank you [Q – Sterling Otte]: Hi guys, may be a little bit of qualitative question but is there a census hike to disaggregate the impact here from the regulatory side versus the lack of creative content and then just looking at fourth quarter preliminarily do you think that the up margin then based on these preliminary numbers would be flat with the third quarter? [A – Steve]: Qualitatively I think it’s hard in the U.K market to separate the seasonality from the imposition of these new guidelines and restrictions, as I was just saying the second ago we had really seen a much better improvement in the U.K in August coming off of July and then it hit again because of the restriction. So I think ourselves, trying to kind of analyze it all and figure out the best approach in the U.K. As I said that is going to have to normalize just by the sheer mathematics of it in the U.K pretty quickly In Germany we are seeing, we saw less churn in Q3 than we saw in Q2, in terms of absolute numbers and so that’s good and we hope to see that continue again here in Q4 and I think as we get through the end of the fourth quarter in those two big markets we really should have much better definitive answers around what the normalized basis for both market. [A – Dana Evan]: And then on the operating margin side given the guidance that Stratton gave that would indicate operating margins in the 23% range. [Q – Sterling Otte]: Okay may I just one last, in the rest content how is ____ and some of the SMS performing? [A – Steve]: More or less on plan, I would say that in terms of the picture messaging and MMS interoperability as you have seen we made a lot of announcements on that during the courses of Q2 and Q3 and are continuing to pursue lots of new activity there and the SMS stuff continuous to see message traffic grow pretty substantially. [Q – Sara Friar ]: Good Afternoon may be just following up briefly on the last question on the SMS, MMS side should we assume then that in the September quarter that grew on a quarter-over-quarter basis. [A – Steve]: I am sorry the SMS? [Q – Sara Friar ]: The SMS on ____ of the content division? [Q – Sara Friar ]: Okay and then can you give us a sense in your forecast for what you are breaking out for the U.S I know I am getting into the ____ shop but I am trying to understand how much do we see the U.S continue to grow given that you are rolling with new carriers etc., versus the shrinkage that you are seeing going on in U.K [A – Steve]: I think at this point until we get through closing the books on the quarter and get to the announcement of the final result, I think I will hold off trying to break it up by any given market [Q – Sara Friar]: Okay but is your expectation with the U.S still continuing to grow or has it actually started… I know it is such a young market… but it is important because it is the U.S having such trouble getting off the ground, that kind of leads me to wonder why that will be the case? [A – Steve]: Yeah I think we saw modest churn in the U.S in the summer again because of dialing back some of the marketing efforts because there was really no new content. Spring came on in mid to late September in a very limited way. WE would expect to turn that on more fully in Q4 as well as land B-to-B deals and so I think our hope is that the fourth quarter we will see the U.S grow again but at this point again it is too preliminary to tell. [Q – Sara Friar]: And then just one more question on the competitive landscape, are you seeing any changes placed on focus ability to get content in other ways, there seems so much talk about what happens with being able to download iTunes onto your phone can you customize that serving cost and just wondering outside of the core market of who you think you can be with ____ of the world, is it bigger the Apples of the world starting to have any effect? [Q - Laura]: Yeah. Can you talk a little bit about the ability to forecast this since you bought it, it has been higher than expected lower than expected? So, I guess my question is going forward how comfortable are you with that you have modeled it correctly, cause you know it is so incredibly difficult to model and then separately, I wonder how sustainable the business is, given that it is based on hit, and given itself to people that are sort of a trendy age, so I guess there are two different questions, sustainability of the business long term and the ability to forecast? [A – Steve]: Yeah. Those are great questions Laura. A couple of things that I would say and clearly our ability to forecast, on 90 day windows has been very difficult so when it was out stripping our original guidance in last year and early this year and now of course this has seen some bumps the other way. So I think it is a tough market to gauge on a 90 days window. Now I will remind everybody that if end at 2003 has the $40 million business and it is about 10 times plus that today, so from what all of us in technology would think of as a high growth product line this clearly is it, it is having its growing pains and probably was over heated from a demand perspective early in the year because of some other perfect storm things that you got with the Crazy Frog plus the US market launch plus the impulse by advertising model kicking in, in some new areas. So I think we are going through those growing plains, I do think it will settle out and I do think that people have to remember its not just ring tones that this whole notion of mobility in entertainment as we are seeing at the PTI show this week, we will bring T.V, we will bring video, we will bring full track music channels and rest, so I don’t think the market is a sad market nor do I think to use demographic is the only demographic that is going to be targeted here as we will start to see sports and more live action video probably target older the demographic so we are in the first year, what I expect will be a 5 to 10 year explosion in mobile entertainment and I think ring tones are just the tip of the iceberg and right now they are going through their ups and downs in terms of growth rate. [Q - Laura]: Kind of a strange question in the past you have entered businesses that, where they did not work out as you saw, you were able to cleave or sell out part, how long will you give this that kind of be a business that is one that continues to grow and help the stock instead of hurting it, as it has over the last couple of quarters? [A – Steve]: Yeah I think, bought this business after consultation with several of our customers who wanted us to provide them an infrastructure platform for mobile content and so the main pieces around why we entered the content area was to provide VeriSign traditional infrastructure platform for delivering mobile content to carriers around the world and we are doing that. The consumer brand of it obviously took of with the impulse by marketing activity and so we are going to continue perusing that I think the customers that will tell us if we can win large portal deals if we can win large white label para deals and we can continue to promote the brand as the premium brand in mobile content I think all those things you know will kind of play out, we continue to manage these things profitability and will listen to what our customers tell us, is the most effective way to deliver the services for them. [Q - Rob]: Yeah, you mentioned incremental phase of content, like sports and live action video and I think it was today, yesterday you mentioned you announced weather bug but what types of other content can we expect and what is the time line on that? [A - Steve]: I think, you have to separate the couple. So what are the other product areas here, clearly there are video related products whether they be video messaging, on-demand video highlights, video ring tones or full track download videos. All of those things we believe show up second half of ’06 and beyond because the networks in the handset are much better. And if you look at the Sprint announcements or if you look at the Horizon announcement and TV ads around ____, you are starting to see video come to the market. Our bet is not in any substantial way till the second half of the next year. You talk about the games obviously we think the games are going to go through the same phenomena as ring tones lots of early demand, lots of early hype, better realization that PC games on a handset probably aren’t the best experience and then you are going to start to see new games emerge that are really designed for that environment. And then we talked about sports and news and weather and other things that targeted demographic of adult kind of them beyond the 30 years old range like the rest of us. And I think those things are easy to do in terms of sourcing the content I haven’t seen packaging yet that makes it compelling for another $5 or another $10 what exactly would I as a subscriber want to get. So to make a long story short the product road map here have dozens of new products on them. Some of which are dictated by handset networks some of which dictated by figuring out compelling packaging that actually a consumer would want a pay for, and as I said I think this is just still the beginning of this market and it will be measured in tens of billions of dollars by the end of the decade. [Q - ]: Okay and as your analyst said I think you showed us about 60% of your Jamba business was ring tones and rest was graphics, games and others. Is that mix still pretty consistent, or have you seen ring tones increase as a percentage of the total. [A – Steve]: Ring tones are probably about 70% and I am now going also end of Q2 numbers if I remembered I don’t have numbers obviously yet for Q3 but it doesn’t seem like there is a big shift yet. [Q – Greg]: Okay thank you Stratton first of all I guess just a clarification does the Q4 guidance include nominal revenues from Sprint or none at all and then also I was wondering if you’ve given in the past a total projected dub number worldwide by the end of the year. And just kind of a triangulating that with the new Q4 guidance if you had an update on that? [A – Stratton]: I would say to answer your first question, there will be nominal Sprint revenues in the guidance we just gave. But again we will be clearer on that when we give the earnings the full final earning announcements on the 19th. Sub counts at the end of the third quarter were still north of 10 million worldwide I am not yet capable of projecting what they are going to be at the end of the year. But I think we are still at the highest numbers of subscribers in the state and obviously monitoring that number very closely as we look at the decline in the UK and Germany hopefully offset by growth in the new markets. [Q – Greg Melcovich]: Okay and I am just wondering if you could may be give an update on the Verizon and then there is a lot of talk reaching over the past week or so, any comments or thoughts about continued discussions with them and is it mostly a technical issue at this point or is it a _____ still at play as well? [A – Stratton]: Yes we continue to have good discussion with other carriers about launching the Jamster brand here in the US including Verizon, Verizon has it’s own schedule for how they will announce those opening up the off portal with them. So I won’t say any more than that. I have heard conflicting stories from Verizon spokes people in the last ten days on that myself in the press but our view is, that they will continue to move forward on opening up the off portal opportunity to ourselves and other and that we will be one of the earliest participants. [Q - Steve]: Hi, I was just wondering if you could may be comment on how the new markets are ramping up in France and Spain in Europe? [A - Stratton]: I don’t have the end of quarter numbers and haven’t really been focused on those market place. [Q – Steve]: What roll do you see Jamba playing in the distribution of full track MP3 current hits in the future? [A - Stratton]: As we said before we do intend to have an operating there likely first will be in international market and likely first will be as a beta B play using our platforms. [Q -Jason Lilly]: Yeah good afternoon, I just want to know if you can give me a little bit more detail on the Beta B side of the business you started to talk about it a bit more here recently, if you get some times of what type of the contributors that is now quarterly and may be some just of kind of been broad sense of that, what you expect from it going forward? [A - Stratton]: First currently less than 10% of our Jamba and Jamster revenues we do think it will grow significantly over the course of the next 12 to 24 months and we are positioning it as the leading platforms to do white label services here in mobile and overtime in broad band and not just with carriers right with others who are interested in distribution of these types of products. [Q -Jason Lilly]: And just on the new market I was wondering if there was any market In particular that they contributed to the growth you saw in the third quarter from the new segment? [A - Stratton]: I am surely was, but I don’t have that in front on me I just have a rest of world number in front on me which is the over 400,000 that I gave but we will give some more detail on that on the 19th. [Q – Kevin]: Thank you. Just I want to get understanding of the magnitude of the reductions in SG& A expenses in the third quarter. I would imagine that the cost of good soul would be up with the relatively lower contribution from the mobile content business and is it that gross margins I understand what you are saying about operating margins but could you provide a little bit of color on that what’s happening on the gross margin line that’s what I can understand with the magnitude of changes on the SG&A expense items and then secondly do you have any kind update on the ____ law suit, is that still expected to begin in November and do you have comment on that. [A - Dana Evan]: Let me take the first part of that, gross margins in Q3 will be a consistent with the guidance that we gave and marketing trend is a reduction of little over 20% on Q2. [A - Stratton]: And on the ____ law suit, as far I know it is still slated for November trial. We still believe that the case is without merit and we will defend it vigorously. [Stratton]: Thank you every one presented on today, the reports to talk these further at our Q3 earnings call on October 19th. 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_233943

Here’s the entire text of the prepared remarks from NetEase’s (ticker: NTES) 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. Hello everyone and welcome to the NetEase 2005 Third Quarter Conference Call. Today’s conference is being recorded. I would now like to turn the call over to Miss Brandy Pearce. Please go ahead. Thank you, operator, today you will hear from Mr. Michael Tong, Chief Operating Officer and Mr. Denny Lee, Chief Financial Officer. After their prepared remarks we will open the call up to your questions. Before we continue please note that the discussion today will contain forward-looking statements relating to the future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the US Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. Risks related to the fluctuations in the value of the Reminbi with respect to other currencies could also adversely affect the Company’s business and financial results. The Company does not undertake any obligation to update this forward-looking information except as required by law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on the NetEase corporate website at corp.netease.com. Overall we were pleased with our progress in our Online Game and advertising businesses. The third quarter represented a period of solid growth in our current markets and concentrated investment in the development of our next generation of products. Total revenues increased 83% year-over-year and were up 11% quarter-over-quarter. As many of you are aware, our leading MMORPG game, Fantasy Westward Journey, continued to be the most popular game in China. And Westward Journey Online II was able to hold on to top 3 positions in terms of number of players. We attribute this success to our successful expansion packs and increase service capabilities we rolled out in the second and third quarters. Although we were pleased with the continued success of our games, that generated revenue growth in the third quarter, we were slightly disappointed that the summer season was slower than we expected, which we believe resulted in part from increased competition in the markets. We do not view this as a long-term issue for the health of Online Game business or the ability for us to continue to lead this market and remain a developer of innovative and cutting edge Online Games as we roll out our 2006 next generation of MMORPG products. Our Advertising business performed extremely well, which further demonstrated the strength of the NetEase brand. Our performance in the third quarter was partially due to the third quarter’s seasonal increase in online advertising and our accelerating popularity among our product users. In the third quarter, we witnessed strong year-over-year growth of approximately 44% and an increase of 37% quarter-over quarter. In terms of advertising revenue the increase was mainly due to increased spending from our existing advertisers, as they increased their marketing activities during the summer months. And also new advertisers gained during the quarter. NetEase continues to drive its advertising revenue through a combination of website content enhancement, and an aggressive focus of broadening its network of market channels and sales efforts. We continue to deemphasize our wireless value-added services business, until we view the market as one that’s we could bring increased shareholder value to our investors. I would now provide a more detailed overview of our Online Games business for the quarter. Total revenues for this business grew 119.4% year-over-year, driven by the continued success of Fantasy Westward Journey and Westward Journey Online II, and grew 8.4% sequentially. As mentioned in the third quarter of 2005, Fantasy Westward Journey grew to 827,000 peak concurrent users in late summer and maintained its leadership position as one of the most popular MMORPG in China. We are very proud of this success and attributed to a number of factors, including continued content enhancement released during the third quarter, and continued efforts to expand the company’s distribution network to accept gains and distribution of point cards and enhanced sales and marketing efforts, and also online driven event which resulted in further penetration into the markets. The success of our in-house developed 2D games is not only evidence by the continued help of Chinese MMORPG market, but a true testament of the skills of our team to bring to markets in producing games that drive loyalty from our users. We believe we have strong views in combining traditional Chinese culture and advanced gaming technology, which has always proven to be a winning combination for us. This gives NetEase a distinct advantage over our competitors. Now turning, to our new game pipeline. Currently both our 2.5D game and 3D game are in various stages of beta testing. Datang, our 2.5D game is under external closed beta and Tianxia, our 3D game is under internal closed beta. We expect the commercial launch of these games to be in the first half of 2006. As we mentioned in our earnings release, NetEase has strong brand recognition in the online game community and is known for not compromising quality for quantity. We are taking our game portfolio to new levels and continue to focus our efforts on driving performance of our existing Online Games, which allows us to continue to invest in NetEase next generation of games. Before I turn the call over to Denny, let me first say a few words about our ProForma loss we experienced with departing of our acting CEO, Ted Sun in late September. On behalf of William, Denny and myself in our company, we are all deeply saddened by his departure. Ted was involved with NetEase since 1999 and was an extremely influential contributor to making our company what it is today. With Ted’s commitment, our company was able to step-by-step executes on our strategy to become a leader in the internet market in China. Those of you that knew Ted understand he was a man of high moral commitment, dedication to the job at hand, and invested a large part of his life to our Company. His legacy is one that we are all proud of and our management team is dedicated to carrying on his vision and further driving the Company to reach new levels of success. Regarding the announcement of Ted’s successor, we will update you on who we choose for the role of our CEO position once the Board of Directors has reached a decision. Now I would like to turn the call over to Denny, who will go into more detail on the financials for the third quarter. Thank you Michael, and thank you for those kind words. I will now provide a financial overview of the third quarter. Total revenues for the third quarter were US$57.2 million. This represents strong year-over-year growth of 82.6% and a sequential quarterly increase of 11% driven by our Online Games and advertising business. We report another solid quarter of net profits which reached US$32.0 million or US$0.89 per diluted ADS in the third quarter. This represents 137.2% increase over the corresponding period in 2004. Revenues from our Online Game services increased to US$46.1 million. This represents a significant year-over-year increase of 119% and an 8.4% increase over last quarter. Revenues from Advertising services for the third quarter were US$9.1 million, representing a strong year-over-year increase of 43.8% as new advertisers continued to be attracted to our large base of loyal users. We reported total revenues for our Wireless Value Added Services segment of US$2 million for the third quarter compared to US$2.4 million in the preceding quarter. Overall gross profit for the third quarter was US$45.8 million, a 95.4% year-over-year increase and a 13.5% increase over last quarter. Due to the higher bandwidth costs incurred in the quarter, our gross margin for Online Game declined slightly to 89.7% to the third quarter. Gross margins in our Advertising Services business improved in the third quarter due to increased economy of scale. Gross margins for Wireless Value Added and others decreased to 11.3% in the third quarter from 18.4% in the prior quarter, mainly due to the charges associated with our services with emails, free emails which are included in this segment. Total operating expenses for the quarter were US$11.7 million, representing a 17.4% increase over the corresponding period a year ago and an 18.3% sequential increase over last quarter. Due mainly to marketing costs associated with web content enhancement and increased outdoor advertising and channel events. Our effective tax rate increased in the third quarter mainly because of the write-back of the tax provision of approximately US$2 million in the second quarter due to the confirmation of a lower tax rate for one of the Company’s operating subsidiaries during the second quarter. There was not such similar write-back in the third quarter of 2005. Moving to the balance sheet, as of 30 September 2005, our total cash, hand deposits and held-to-maturity investment balance was US$392.4 million; representing a 16.5% increase from the previous quarter’s 329.2 million. We reported an operating cash flow of US$52.5 million for the quarter, representing a 56% increase from the previous quarter’s 30.8 million. We reported an US$790,000 in exchange laws which resulted from the translation of our net monetary assets and liabilities, which are denominated in currency other than RMB as of the end of September. Thank you Denny. I would now like to take you through our financial guidance for the fourth quarter of year 2005. Please note that the following outlook statements are based on current expectations. These statements are forward-looking and actual results may differ materially. We expect that the total gross revenues of the Company in the fourth quarter this year to be between US$56.9 million and US$58.3 million, with Online Game Services revenue to increase by 2% to 4% quarter-over-quarter; Advertising Services revenue to decrease by 11% to 8% quarter-over-quarter, and Wireless Value Added Services and Others revenue to be flat to a decrease of 10% quarter-over-quarter. Net profit we expect to continue to increase during the fourth quarter to be between 31.4 million to 32.6 million. All of the result figures are based on an exchange rate of US$1 to 8.092 RMB as of September 30, 2005. Let me conclude by saying that to date, NetEase has sustained an extremely high growth rate and record success of our, in the industry. Maintaining our leadership position in China’s internet market as the number one online game developer and one of the leading internet portals takes a strong, steady, and conservative approach to how we drive growth within the company. We are very focused on our growth for 2006 and view the fourth quarter as a transitional period such, we will actually allows us to execute on our Online Game strategy, while maintaining a focus and diversified approach to our Online Advertising business. We believe we have the right strategy, resources and pipeline to deliver on our initiatives for 2006. And maintain our costs to diversify our game platform further use of cutting-edge self developed on technology. And leverage our internet portal asset base to drive new growth from the market. 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_233944

3rd Quarter 2005 Earnings Call October 21, 2005, 8:00 a.m. CDT Operator Good morning, ladies and gentlemen, and welcome to the Gold Banc quarterly 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 press the star followed by the zero. March 1, 0000 ET With me are Mick Aslin, the President and CEO of Gold Banc; Rick Tremblay, our Chief Financial Officer; and Ben Clouse, our Controller. In a moment Mick will discuss our third quarter earnings and results of operations and comment on some of our plans for the future, then he and Rick will be available to take questions. Before that, let me cover a few necessary items, then I will give you information about how to access a transcript of this conference call. Today's call may include information and forward- looking statements, which relate to matters that are not historical facts. These statements are subject to significant risk, assumptions and uncertainties, including but not limited to those described in the periodic reports we filed under the Securities Exchange Act of 1934 under the caption, "forward-looking statements and factors that may affect the future results of operations, financial conditions or business." Because of these and other uncertainties, our actual results may be materially different from those indicated by these forward-looking statements. You should not place any undue reliance on these statements, and we will not update them even though our situation may change in the future unless we're obligated to do so under federal securities laws. You may view a transcript of this conference call by visiting the Gold Banc website at www.goldbanc.com and clicking on the presentation link that you will find there after 5:00 o'clock Central Time on Thursday, October 27th. After Mick has completed his remarks, we will give you the protocol that you will need to ask questions. Good morning, everyone. I regret this quarter was not free of extraordinary items as we had hoped, and as appeared to be the case until the middle of September when discussions with the IRS began. I am pleased, however, that another issue is behind us. The fact that the expense and a substantial part of the recovery overlapped two reporting periods was regrettable, but unavoidable. Bottom line, we experienced an after tax reduction in earnings of 8 cents per share in the third quarter and expect a 3 cent per share addition to earnings in the fourth quarter as a result of the settlement and recoveries recorded to date. This relatively complicated situation is described in great detail in the 8-K filed on October 18, 2005. If there are questions on this topic, we will be happy to address them at the end of the call. As reported in last night's earnings release, GAAP net earnings for the third quarter were $5 million, or 13 cents per share. GAAP net earnings for the nine months ended September 30, 2005 were $38.4 million, or $1.00 per share. Core earnings for the quarter were $8.1 million, or 21 cents per share. Core earnings for the nine-month period were $24.2 million, or 63 cents per share. Our target for core EPS for the quarter was 24 cents per share. We missed our target largely because of an $800,000 provision for loan losses that was higher than in our plan, and an approximately $200,000 shortfall in net interest income, along with a negative variance of approximately $300,000 for our subsidiary, Gold Capital Management. Net interest income fell short because of higher cost of funds than budgeted, and because loans and a significant part of the loan growth came later in the quarter than we had expected. The provision for loan losses during the quarter exceeded net charge offs by $600,000. It was $1.6 million higher than the same period a year ago, and exceeded plan by the $800,000 I just mentioned. This came notwithstanding the $4.1 million improvement in non-performing loans, and the essentially flat level of other real estate owned. The increased provision came as a result of a recently completed, and what I would describe as very extensive, internal loan review and the downgrading of approximately $25 million in credits from the past category to special mention. We continue to feel good about our loan portfolio. Net charge offs to average loans year-to- date is .13%. Non-performing loans to total loans remain below 3/4 of 1% at .72%, which was down slightly from a year ago. Other real estate owned at $4 million is down nearly $7.5 million from September of last year. The downgrades I mentioned earlier reflected our views of increased risks in the credits, in light of current macro risks in the economy. Those risks include rising rates, increased energy prices and increasing inflationary pressures associated with construction materials cost. Notable, and I believe reflective, of our efforts to address issues early, was the fact no credits were downgraded to special mention, doubtful or loss. It will continue to be our great endeavor to identify issues in credits early to ensure that we have an opportunity to address them before they become critical. Gold Capital Management continues to find this a difficult environment for fixed income sales due to their largely loaned up, smaller community banks in the Midwest. On the positive side, we expect a good fourth quarter from its public finance advisory business with several refinances expected to close during this period. We are pleased with the improvement in operating efficiency for the company with the efficiency ratio coming in at 58.6% for the quarter, and 65.4% year-to-date. The gains we have experienced so far are largely attributable to reduced expenses. Much of our future opportunities will come from revenue enhancements. We are also pleased with the slight margin expansion to 3.10% for the quarter. This is about 11 basis points better than one year ago. The improvement from last quarter was in the range of 4 to 5 basis points less than we had hoped for, but increased cost of deposits came into play, particularly during August and early September. Our loan growth remains on plan with $83 million in growth for the quarter, or 2.9%, and $306 million, or 11.4% year-to-date. However, nearly $30 million of this growth this quarter was booked in the last 15 days of the quarter. More than 57% of our loans, or about $1.8 billion are variable rate and currently have an average yield of approximately 7.1%. Approximately $1.2 billion are fixed rate and have average yields currently of 6.3%, and, on average, the years to the next re-pricing is 3. Real estate related loans totaled 74.4% of the portfolio, and commercial loans currently account for 21% of the portfolio. 67% of the portfolio is in the Kansas City metropolitan area, 25% of the portfolio is in Florida, and 8% remains in Oklahoma, largely with our three branches in Tulsa. Deposits grew $109 million, or 3.7% during this quarter, and we are up $235 million, or 8.4% for the year, despite a reduction in broker deposits of $160 million during this period. This includes a $30 million reduction in brokered CDs during the third quarter. I might add that FHLB advances are down about $160 million year-to-date. About $75 million of that came in the third quarter. This combined reduction in wholesale funding of $320 million so far this year has been a significant part of our plan and, to some extent, has exacerbated a faster rise in cost of funds than we might otherwise have experienced, but something we intend to continue. The growth in deposits is nearly all in interest bearing transaction accounts and in certificates of deposit, most of which are in the 18- month maturity range. Florida is 29% of the deposits, or about $866 million, and Oklahoma is about 7%, or $225 million of the deposits. On the litigation front, both the class action lawsuits in Oklahoma, as you know and as we've talked about multiple times, are on appeal. They were sent to the Supreme Court in Oklahoma. The Supreme Court has, at first, sent that back to Oklahoma City, and now the cases have been assigned to an appeals panel in Tulsa. One of the cases had been dismissed and is under appeal by the plaintiffs. The other class had been certified and is under appeal by us based on that certification, and also under the no private right of action concept that the other case was dismissed under. We have a case in Federal District Court that we brought against the U.S., and against the Secretary of Agriculture in his official capacity, to try to bring clarity to what we believe are unconstitutionally vague regulations that exist. In that case, the government has filed a Motion to Dismiss. We have responded to that Motion in brief. The government has a period of time now to respond to our brief. I can't give you any timeframes that decisions might come down. Nothing has changed in our view with respect to the merits of the case, and we feel good about the legal aspects of all these cases. The goal of visibility remains very dear to us. That is increasingly difficult in the world today, the world of accounting today, particularly, and some degree of lumpiness is likely to be the norm. We will continue to address issues as they arise, like we did with the loan portfolio and the increased provision. I can't say enough that I'm very comfortable with the quality of the portfolio. We have policies on the percentages that we will reserve for various classifications that we identify in our portfolio, and we will stay true to that. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. If you'd like to decline from the polling process, press the star followed by the two. You'll hear a three tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using a speakerphone, you will need to lift the handset before pressing the numbers. One moment please, for the first question. Good morning. Can you go through and say the deposit numbers again? I think you said $1.9 billion in Kansas City but can you break that out between Kansas and Missouri and then also give the amount of brokered deposits at quarter end? I think we have remaining brokered deposits of about $377 million. The deposits in Kansas are 27% of the total, about $823 million. In Missouri, $430 million, or 14%. So 27% of the deposits in Kansas, and 14% in Missouri. Charley, there's a couple hundred million dollars in public funds that we don't show at the state level, we show it within our treasury department. We sold branches in Oklahoma. That would account for some of it, but we continued to try to drive efficiencies through. We've had consolidation of a lot of functional areas. We've moved into our Services Center early in the quarter. Some benefit comes out of that. So you're starting to see some of the fruits of the consolidations of the charters, along with the reduction of five branches in Oklahoma at the end of June. We consider a normalized tax rate 35%. We do expect a lower tax rate in the fourth quarter than that. As we talk about our expectations of 24 or 25 cent core numbers in the fourth quarter, that would include about 2 cents benefit of adjusting taxes to actual returns and reclaiming some amounts that have been over accrued. Hi. My main question is as we continue to see disappointing fundamental results here, doesn't this steer you and the Board towards more aggressively looking at selling the company as a more efficient means of unlocking shareholder value here? I'm not at all disappointed in the quarter. We will continue to look at options as they're presented, as we always have. These results, you're not disappointed? You don't think you can do better than this and it doesn't make you look at other options a little more aggressively? Not disappointed and not thinking we can do better are two different things. We certainly think we can do better and expect to. We're running the company and Herb Kelleher expressed it very well when he said all hands on deck, they're shelling the ship. We're of that mind. We're going to run this company in a way that it is a very good earner on its own. If something presents itself on an acquisition, we certainly are ready, willing and able to discuss it. We're a large shareholder. We want you to run the company, but with the results that we've seen lately, it seems like a more efficient way to unlock the significant value that your franchise has might be to look at this more aggressively here. That's all I'm saying. Herb Bookbinder Mick, it's Herb Bookbinder. Just a quick question. What's your attitude towards acquisitions right now in Florida versus Kansas City versus opening up new branches? Mick Aslin We believe … proceed at current multiples, and based on what our future opportunities look like, we're more inclined to acquire our stock back than other people's stock. That's why we did announce the additional $20 million in buyback. We'll certainly consider opportunities, but that's not a priority of ours. Mick Aslin We will open two branches in January in Hillsboro County, Florida, the Tampa Bay area. We expect to open a third in Sarasota County in the early second quarter of '06. That is probably all we'll open in '06. It's conceivable a fourth branch could be opened in the late fourth quarter of '06 in Sarasota or Manatee County. We expect to open one branch in the Kansas City metro area by the end of '06. Bain Slack Hi. Good morning. I wanted to ask if you could give us a breakdown of the deposits among the types. Also if you could discuss with the deposit growth you're seeing how the rates are in the markets you're in and where you all sit within that. Has there been any cannibalization going on within your own product base of customers migrating to higher cost products over the last quarter? Thanks. Mick Aslin Well first, consolidated non-interest bearing deposits are about $305 million. Transactional deposit accounts are in the $1.0 billion range, broken down from regular NOW accounts to a product that we call our Treasury Checking Account, which has been one of our largest growth areas. That product has cannibalized some other lower deposit transactional accounts, but we feel that is a product that is clearly designed to compete with the money market mutual funds as rates have increased. Time deposits of $1.8 billion. So yes, we are seeing some cannibalization. We intend to maintain our relationships and we are intending, and are in fact becoming, significantly better at cross-selling products to people who are brought in by some of these higher paying accounts. We are intentionally focusing on being among the top five rate payers in our markets. Bain Slack In the press release you had mentioned you do expect to see the margin up slightly in the fourth quarter. Does that take into consideration these trends that you've seen and specifically if there's a rate hike that there may be a little bit more movement from free funds into some higher cost accounts that you can still get some margin expansion? Mick Aslin Yes and with our 57% variable rate, we think we can still capture two or three basis points of a 25 basis point increase in rates. Brett Buckley Hi, guys. With respect to the payments you received from the trustee, they entered into a settlement agreement with you and so they've been released from liability. Is that correct? Brett Buckley Where I'm going is, are there either from they or other parties, the potential to receive subsequent further payments? Mick Aslin Yes. We are continuing to review all of the records, money in and out from various of the trustees. We're looking at all options that we can, and are hopeful there can be additional amounts, but we have made no other formal demands at this time. Brett Buckley The $16.60 transaction from last year, that may or may not have a breakup fee attached to it, is it safe to say at this point that that's no longer potentially due given the theoretical scenario where there is a proposal made for the company? Mick Aslin The contract with Silver was set to expire October 11, 2004, so on October 11, 2005 it would have been one year, and I believe that would eliminate any question that there is an additional breakup fee out there. Jon Arfstrom Good morning, guys. A question for you on the loan review. Can you talk about what prompted that? Was there anything that ... ? Mick Aslin Nothing prompted it other than we have our loan review. We do reviews throughout the year, but we try to, at least annually, do a comprehensive review of 60% or 70% of the total portfolio at one time, and a very thorough concentrated look in light of current conditions. That's it. It was not an unscheduled review. Mick Aslin Went from a ranking of past 3 to a ranking of 5, a special mention. In our case, a special mention has a 3% reserve set aside. Mick Aslin More of it was in the Kansas and Oklahoma markets, virtually all of it was in Kansas, Missouri and Oklahoma, so the Midwest. Jon Arfstrom Then, Rick, I don't know if this is you or Mick, but on the guidance that you had last quarter, I think you were saying core numbers of 91 to 95. What I'm trying to reconcile is we had the 3 cent differential between your expectations and what the core number was of 21 cents this quarter. Is there something else in there that I'm missing or are some of the nonrecurring items from this quarter that caused that range to come down? Mick Aslin No, I think we're 3 short this quarter and we believe we will be 1 cent short of where we expected to be next quarter. Jon Arfstrom Is it anything specifically that you can point to that's causing it? I know that you talked about average loans being tougher than the period end numbers but it seems like that's a bit better. Is there anything else that you see right now that's changed relative to three to six months ago? Wayne Archambo I'm just following up on an earlier comment about you stating that this was not a disappointment. I look at the numbers ... Wayne Archambo I guess the prior question was the fact that it was disappointing. The return on assets, ROE 7% versus mid-teens to the peers; the efficiency ratio is significantly higher than the peers. I'd just follow up on an earlier comment that was made that I just think management and the Board should seriously consider what's in shareholders' best interests, which is to obviously with these poor results that I just stated, I think you have an obligation to shareholders to maximize shareholder value and obviously if it can't be done through this management team, then you've got to do what's best for shareholders and find an outside entity that could enhance these values. Mick Aslin I think we tried to say we agreed with that. We'll continue to look at all options to enhance shareholder value. I don't know what more to say on that front. Ron Peterson Good morning. A follow up to the credit review process. Could that have any impact on your loan growth expectations going forward given the tougher environment? Also with the credits that have been downgraded, are those things you might work out internally or are those loans that you might try to work out of the bank and might that also have an effect on loan balances going forward? Mick Aslin Remember we're talking about loans considered special mention. Many of those ... loans from time to time will move from past to special mention and you still want to continue to keep the relationship. We'll work with them to improve it. There will be some that we will work to move out of the bank. Our loan production pipeline continues to look good through the fourth quarter. It's difficult to see much beyond that, but we continue to feel good about opportunities for loan growth. Jon Ashe Hi. First I wanted to say I think you're doing the right thing and we appreciate the efforts of you and all your employees. I wanted to ask about the securities portfolio. If you anticipated higher loan growth this quarter and you were drawing down the securities portfolio, that would have led to the net interest income decline. With loan growth looking better this quarter, will you continue to bring down the securities portfolio? Thank you. Mick Aslin We do not view the securities market as a particularly good place to be in this flat or nearly inverted yield curve. We'll continue to try to put all of our assets that we can into loans. We have some continued regularly scheduled run off; we're not looking to sell any of the loans. Mick Aslin I thank all of you for joining us. I don't want to go off this phone without making sure that everyone is very aware of the disappointment in the raw EPS numbers. Neither do I want you to go away with any misimpression of how pleased we are with some of the underlying fundamentals of the organization. We realize fully that we have to turn those fundamentals into the EPS and EPS growth. We're committed to doing that, and we, at the same time, will have and will always look at all options to increase shareholder value. Operator Ladies and gentlemen, this does conclude Gold Banc Quarterly Earnings conference call. You may now disconnect and thank you for using ACT Teleconferencing.

EarningCall_233945

Good afternoon. My name is (Christy) and I will be your conference facilitator today. At this time I would like to welcome everyone to the second quarter, fiscal 2006 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you (Christy) and welcome everyone to Quality Systems’ fiscal 2006 second quarter conference call. Paul Holt, our CFO, Greg Flynn, our Executive Vice President and General Manager of the QSI division, and Patrick Cline, President of our NextGen Health Care Information Systems Division, will once again join me on this afternoon’s call. Please note that the comments made on this call may include statements that are forward looking within the meaning of the securities laws, including without limitations statements related to anticipated industry trends, the company’s plans, products, and strategies, projected operating results, capital initiatives, and the implementation and potential impact of legal, regulatory, and accounting requirements. Actual events or results may differ materially from our expectations and projections, and you should refer to our SEC filings, including our forms 8K, 10K, and 10Q for discussions of the risk factors, management discussion and analysis and other information that could impact our actual performance. We undertake no obligation to update any projections or forward looking statements in the future and also please continue to note that the company’s past performance is not necessarily indicative of future performance. I’ll now provide summary qualitative and quantitative comments on the quarter, and Paul, Greg, and Pat will follow with additional details. In the September quarter revenue totaled $29.5 million, up approximately 39% over the prior year. Fully diluted earnings per share at 43 cents exceeded prior earnings of 28 cents per share by 54%. The quarter’s top line results were driven by a record revenue at the NextGen Division. The $25.5 million in revenue attained by the division for the quarter represents a 48% year over year increase. The QSI Division’s $4 million in quarterly revenue is about even with prior year performance. Company profitability for the quarter was positively impacted by both divisions. The NextGen Division reported operating income of $9.9 million, a 62% increase over prior year, while the QSI Division’s reported operating income increased $160,000 on a year-over-year basis. Also impacting overall company profitability was a nearly $300,000 year- over-year increase in interest income and a $900,000 year-over-year increase in corporate office expense levels. Note that approximately half of the year- over-year increase of corporate spending levels was driven by the contested proxy situation. More on that topic in a few minutes. EDI revenue for the quarter came in at $3.2 million; up 23% over the prior year, though less than I would have liked to have seen. EDI grew 48% on a year-over-year basis at the NextGen Division and declined 6% on a year-over- year basis at the QSI Division. I’ll once again remind listeners that EDI revenue is reported as part of divisional revenue totals each quarter in each division. Full time employee head count at quarter end was 455, up from 417 in the prior quarter, and 358 in the prior year. Taking revenue for the quarter, the 455 employees that we had at quarter end generated annualized revenue per full time employee of $260,000, which is at the higher end of our historical range. As many of you know, two of the four items to be voted on by the shareholders were the subject of a contesting proxy filing from shareholder and director Ahmed Hussein. On October 11th, the company announced the certified results received from the independent inspector of elections, which confirmed the election of directors Patrick Cline, Maury DeWald, Vince Love, Sheldon Razin, and myself from the company’s slate and the election of Ahmed Hussein and Ibrahim Fawzy from the Hussein slate. In addition, the proposed 2005 Stock Option and Incentive plan was approved by shareholders, as was the expansion in the number of authorized shares from 20 million to 50 million. Grant Thornton was ratified as the company’s auditors. On October 26th, the company and those individual directors elected to the board from the company slate were informed that they were being sued by Mr. Hussein over the election results certified by the independent inspector of election. The complaint alleges that the results from the independent inspector of election included certain proxies that should not have been included in the final vote tabulation. The independent inspector certified the aforementioned results after hearing Mr. Hussein’s claim concerning the matter. Attorneys representing the company as well as the individual main directors are currently preparing for upcoming hearings. As indicated in our 8K filings, the company believes that Mr. Hussein’s claims lack merit, and the results certified by the independent inspector of elections are conclusive of this matter. The company intends to defend itself vigorously. Current and prospective shareholders should know that the company will continue to incur incremental expense as a result of Mr. Hussein’s filed complaint and may incur additional expense based on Mr. Hussein’s future actions, if any. It remains premature to speculate on the entirety of Mr. Hussein’s actions or the magnitude of the expense to be incurred by the company. The status of our ongoing acquisition evaluation process continues unchanged from prior calls. During the quarter the company participated in the UBS and Sidoti conferences and held meetings with current and prospective investors in Houston, New York City, Philadelphia, Delaware, New Jersey, Boston, San Francisco, and San Diego. I’m pleased to announce that for the fifth consecutive year QSI was named to the Forbes Magazine 200 best small companies list. This year we came in at number 11, up from number 32 in the prior year. In closing my prepared comments for this afternoon’s call, it’s once again my pleasure to point out that the performance of the company for the quarter has exceeded our internal expectations and I’d once again like to thank each and every individual on our team for their leadership and performance during this quarter and beyond. I also want to clearly point out again to current and/or prospective analysts and investors that while we’re pleased with the company’s performance during the quarter, there are absolutely no guarantees that the company or either of its divisions will exceed or even sustain their level of performance in future periods. It’s possible that our performance will encourage investors or analysts to set new short, medium, or long-term expectations for the company. And in response to this possibility, please continue to note that we do not give out financial guidance to the investment community, and we do not comment on the guidance advanced by members of the financial community. Thanks Lou, and hello everyone. The September 2005 quarter reflected continued growth in our systems, sales, maintenance, and other revenue. Increases in sales of licenses to existing customers contributed to our consolidated systems sales number rising to $16.7 million this quarter, an increase of 44% compared to $11.6 million the prior year. License revenue from existing customers totaled approximately $2.3 million this quarter, that compares to $.9 million a year ago. Maintenance and other revenue rose 34% to $12.9 million compared to $9.6 million in the prior year quarter. Our consolidated gross profit margin this quarter came in at a record 67.5%, up from 62.6% a year ago. The increase in our gross margin over last year is due to several factors; the largest two being a relatively lower amount of hardware and third party software and payroll expenses as a percentage of revenue compared to last year. As I’ve often mentioned in numerous prior calls, our hardware and third party software included in systems sales varies from quarter to quarter depending upon the needs of customers. The inclusion of hardware and third party software in our sales arrangements is typically at the request of our customers and is not a priority focus for us. Also, despite making significant investments in our implementation, training, and support areas, our revenues grew at a faster rate, resulting in a benefit to our gross margin this year compared to last year. Our total SG&A expense increased by approximately $3.5 million to $8.9 million this quarter, that compares to $5.4 million a year ago. $2.5 million of the increase was from the NextGen Division and consisted of increases of selling and administrative salaries and related benefits, sales commissions, travel expenses, and other general and administrative expenses. The balance of the increase was related to corporate expenses, including professional services, salaries, and related benefits. Included in this quarter’s corporate expense was approximately half a million dollars in costs related to the company’s recent contested proxy election. SG&A expense as a percentage of revenue this quarter increased to 30.2%, compared to 25.5% in the prior, primarily due to the increases in SG&A expenses that I’ve just discussed. The company’s effective income tax rate was slightly lower this quarter at 39%, compared to 40.3% a year ago. The primary cause for the lower rate this quarter was a relatively higher benefit related to R&D tax credits, as well as a new deduction, which went into effect this year called the Domestic Manufacturer’s Production Deduction. In terms of our divisional performance, our NextGen Division again recorded a record software license and implementation revenues, resulting in 46% year over year growth in system sales in the division. System sales in the NextGen Division rose to $16.1 million this quarter, compared to $11 million a year ago. Continued growth of Next Gen’s base of installed users drove maintenance and other revenue in that division 49% higher than last year at $9.4 million, versus $6.3 million last year. Operating income in the NextGen Division was up 62% to $9,853,000, compared to $6,064,000 a year ago. Our QSI Dental Division reported a year-over-year revenue increase of 2%, reporting revenue of $4,018,000, compared to $3,955,000 last year. Operating income for this division was $1,303,000. Moving on to our balance sheet, our cash increased by approximately $5.6 million this quarter to $63.1 million, or $4.79 per share. That compares to $57.5 million or $4.38 at the end of the prior quarter. Last quarter we mentioned that we intended to focus on our DSOs, and this quarter we did succeed in keeping our DSOs close to last quarter at 126 days versus 124 days last quarter. We intend to continue to focus on driving our DSOs lower over the next several quarters. Our DSO by division this quarter was 80 days for the QSI Division and 133 for the NextGen Division. Our deferred maintenance and services revenue now stands at $30.1 million, an increase of $2.4 million compared to last quarter and $9.2 million compared to a year ago. Again, the primary driver of the growth in deferred revenue has been our deferred implementation and training services in the NextGen Division. And for those of you who are tracking this, our non-cash expenses for the quarter break down as follows: $598,000 in total amortization expense; that’s $48,000 for QSI and $550,000 for NextGen and $317,000 in depreciation expense; that’s $40,000 for QSI, $277,000 for NextGen. Deferred stock option compensation expense, which is a non-cash expense is $108,000. And our investing activities for the quarter were as follows: capitalized software, $792,000: $16,000 for the QSI Division and $776,000 for NextGen. Fixed assets, $481,000, that’s $107,000 for QSI and $374,000 for NextGen. I want to thank you all for being on this call and for your continued interest in our company and I’ll now turn things over to Greg Flynn. Thank you Paul, and I’d like to as well thank all of you for your interest in our company. The QSI Division numbers have been reviewed by Lou and Paul already, so I won’t belabor that. As I do consistently point out, I would like to note the continued growth in the Next Gen, EDI business. As you know QSI Division staff are instrumental in facilitating this business. Briefly, on the software development side, as I always report, the quarter saw us continue our integration and interface efforts with a number of products related to our CPS dental records package, from new phosphorous X-ray development technology to expanded X-ray interface offerings. We also continue to bring more information chairside to our dental practitioners through the CPS package. For example, the CPS package now enables notification if a chairside patient has reached their maximum insurance benefits coverage. This alerts the dentist regarding work that may be performed without insurance payment coverage. As I’ve stated before, the clear direction of dentistry is to combine clinical and financial information at the point of care, chairside, to be reviewed and utilized directly between the practitioner and patient. As always, I’ll comment on our sales staffing and pipeline. Our sales staffing remains unchanged from last quarter, and our pipeline is approximately $3.5 million. Our pipeline is defined as sales situations where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days. Now I’ll turn the call over to Pat Cline, our President of the NextGen Division. It’s superfluous of me to say, “Great quarter, Pat.” But I’ll do it nonetheless. Thanks Greg. In the first quarter NextGen executed over 100 customer agreements. About 90 of those were with new customers, which is another record by far. Our sales force now numbers 38 people, which is a reduction of one person since the last call. And our pipeline is steady at $55 million. To answer an anticipated question, it is still our goal to grow the sales force over time, as well as growing our implementation staff and customer service staff. The company continues to fare well against our competition and the market for our products remains strong. We continue to add headcount in all areas of the company. We’re working on a number of new and exciting programs and tools targeted to scaling delivery and service capacity. And in closing, I’d like to thank NextGen’s loyal employees for their continued contribution to our success. And thanks again to our customers for their confidence, and thanks again to everyone on this call for your support. At this time I would like to remind everyone if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Sean Wieland. Hey guys, great quarter. First question is on the sales force front. You know, yeah, and is the goal still to grow the sales force at 30% per year and what are the barriers to doing so? The goal is to continue to aggressively grow the sales force, as I mentioned, as we grow the other areas of the company - our implementation and training staff and the support staff. The barrier, Sean, is finding, training, and retaining great people. In the quarter that just past, we did have a reduction. It was a net reduction of one, although three or four people turned over. Typically where we have turnover in the sales force its turnover that we caused, though not always. And as you might imagine, from time to time it becomes necessary to weed out non-performers from the sales force as we recruit good talent. So, yes, it’s just one of those facts of business life. Sometimes you don’t reach your goal of expansion in an area or two, but it remains a goal nevertheless. Is there a period of time that it’s more difficult to hire sales people, like maybe at the end of the calendar year because of quotas or so on? Are we facing a seasonally tough time of year to hire sales people, or easier time of year do you think, or is there no difference? I haven’t noticed a difference. I think it’s a very good question, and unfortunately I don’t have a very good answer. I think certainly with respect to some competitors who may backend load bonuses as opposed to paying out as their reps reach quota through the year you may have some sales reps hanging on at competitors, if that’s your recruiting ground, to earn their bonus or be paid their bonuses. But I haven’t noticed any trend. Okay. My second question has to do with the $500,000 of expenses on the proxy fight. Now that this lawsuit is filed, should we expect a similar fee in defense and are you going to assume the expenses for the legal defense of all of the board members? Sean, it’s Lou. As you know very well, we don’t give guidance on any part of our numbers and this is included in that policy. I did say in my comments that it is fair to project some additional level of expense, but in fact it would even be premature to project, if we wanted to project, what they would be. Hey Lou. Quick question, now that the annual vote has come and gone and the company has increased the stock, I guess availability authorization, as you think about acquisitions, can you talk about the company’s likelihood of using cash versus stock? I would say that we are comfortable keeping all of our options open. And if, as, and when we have an outstanding acquisition candidate to bring to the table, we will work collaboratively with that candidate and our board to try to figure out a deal structure that is appropriate for the company, the shareholders, and our long-term objectives. I don’t think there’s a magic recipe or cookie-cutter approach that we would take. No black or white answer to that George. Okay. And can you also, I think it was (Pat), mentioned that you guys are working on tools to scale development and service. Can you provide a little more color on what you’re planning to do and how that will help the company? I don’t want to provide too much color on that until we’re ready to roll things out, but essentially we’re developing tools and programs that allow us to leverage our existing expert staff across more customers. Things like web- based training, live webcasts, classroom training, computer-based training, different project management techniques, not to replace what we’re doing currently, which is sort of a high touch, top notch service, as has been our goal, but to augment our traditional approach. Patrick Cline: No, the competitive environment is unchanged, both on the EMR side and on the practice management side. We’ve got the top two or three or four companies that we compete with in each of those spaces. It differs from space to space, and then a bunch of smaller companies that bite at the ankle, so to speak. I don’t think we’re giving out guidance on the Siemen’s situation as far as the quarter-to-quarter guidance, but I will tell you that the Siemen’s relationship is something that we’re optimistic about, we’re happy about, and it’s going well. Okay, just to reiterate, this is Lou, we have stated on many prior calls that we will not be putting up a monthly scoreboard on the Siemen’s agreement. You mentioned you added some new hires and the quarter looks somewhere in the neighborhood of 40 people. Could you just characterize where those hires were? This is (Pat). I don’t have a breakdown for you that is number by number, person by person, but we are hiring in all areas of the company. That is training and implementation, technical services, software development. It’s important to us and important to our customers that we keep the software state of the art. And it’s important to our customers and important to us that we render, as I mentioned, top quality service. So across all areas of the company we’re growing. Great, thank you. And could you, if possible, break out the contracts by maybe the size of the practice, zero to ten docs, ten to 100, 100+. You know I don’t have that information in front of me, unfortunately. I will tell you more subjectively there wasn’t a big change quarter-to-quarter or over the last few quarters in the mix. You know that we have increased or expanded our focus on the smaller practice over the last year or so. And our initiatives within the smaller practices I would characterize as going well. But no real shift in trends. Okay, and last question on Next Gen. The breakout, perhaps, of new sales into practice management versus NextGen EMR versus a combination of the two? At the risk of sounding like a broken record. It’s very much the same as it has been over many, many quarters. About two-thirds of the customers are buying both products, and the remaining third of the customers is a pretty even split. Thank you. And last question is for Greg. You mentioned the QSI pipeline about $3.5 million, is that unchanged over the last quarter? Again, if you would like to ask a question, please push star, one on your telephone keypad. Your next question comes from the line of Josh Stewart. Hi guys. My question is, today I saw a press release from Medicare saying that they were reducing, on average physician rates for next year. I was wondering if you had seen that and if you have any comment I guess on how that effects your business. Are your customers pretty sensitive to Medicare rate increases or decreases? Our customers are sensitive to Medicare rate increases or decreases. I hadn’t seen the press release, but I believe that decreases in Medicare rates are all the more reason for physicians to spend on IT that provides a return on their investment. In other words, if your reimbursement goes down, you can combat that a number of ways. One is by increasing the percentage of the money that you collect, writing off less to bad debt and those kinds of things. Making your office more efficient, streamlining things, cutting expenses through the use of sophisticated IT as opposed to paying more labor costs. So we like to turn that around and we view that as a positive. And I think most of the kinds of practices that tend to buy a product like Next Gen, which is a very sophisticated, robust system, look at those things as well. Okay. And do you know the history well enough? I mean, was this year an up year in Medicare rates or how has the physician Medicare rate trend been over the past couple years? Patrick Cline: I don’t know the answer to that question, though I’ll confess that I have not heard in a long, long time of an increase in Medicare rates. Okay, all right. Well I guess I’m kind of reading that you’re not too focused on that because a lot of the companies that I look at, if it’s really important then, you know, they would know the answer to that. So to you it probably is not that important. It’s more the need for an EMR kind of trumps the need for better Medicare rates I guess. Hey, if you guys are going to stay on the call I’ll keep asking away. First question, is there any region of the country in which you guys are doing particularly well? It’s just I’ve read, for an example, in California Sutter is mandating that Epic make their backend compatible with you guys and AllScripts. So I’m wondering if you’re having any regional strength. We are doing very well in California, though we don’t see any area of the country that’s I would say down. Interest is up across the board and all of our regions are doing well. In California over the last 12 months I’m going to venture to guess that we’ve probably executed agreements covering somewhere between 3000 and 4000 providers. So there is a lot of interest in the west. The west is a terrific region for us. But, again, the interest in the products is broad based. And my last question will be given all the initiatives going on in the payer side of the business with pay for performance and consumer directed healthcare, is the company doing anything to work with payers to maybe set up some type of preferred vendor status as payers try to, you know… We have a number of full time people in the company who are focused on those kinds of things. And you might know that we participate in many of the pay for performance pilots and initiatives. As you know, pay for performance is quite a driver for the interest in electronic medical records systems, as is the government push and the push for quality on the part of employers and the technology itself and a number of other things. But, yes, to answer the question directly, we’re quite focused on pay for performance initiatives. Thank you Operator, and we’d like to thank everyone on the call for their interest and participation and we hope to see you in a few months. Thank you.

EarningCall_233946

Here’s the entire text of the Q&A from CDW Corporation's (ticker: CDWC) 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. Related on The Seeking Alpha Network: Q - Craig Scott: Hi, good morning. Barb, just a quick question on the margin assumptions of the 6.1 to 6.6. As we work out. I got a little cut off there, but it sounds like the 6.6 you are looking for in the fourth quarter and then is it realistic to assume we dip down to the bottom of that range, in the first couple of quarters of calendar '06, or is that still a range where you hope to be toward the top end throughout the entire time period? A - Barbara Klein: What I indicated was that we expect to be at the upper end of that objective range of 6.1 to 6.6% in the fourth quarter of this year, and also at the upper end of that range in the fourth quarter of 2006. I also indicated we would probably be at the lower end of that range in the first quarter of 2006. Q - Craig Scott: Thanks. I got cut out there a little bit. And then as far as the tax rate goes, is there any opportunity to see a further decline in that? And I guess how do you look at the visibility of that, given that we have seen a couple of positive cuts here to the tax rate over the last couple of quarters? A - Barbara Klein: The major change in the tax rate from earlier this year was due to the fact that we began collecting sales tax from our customers in the second quarter. And as a result, we become subject to state sales taxes in all of the states that have income taxes. And so the change in our tax rate was primarily driven by that, the reason we had a modification in the third quarter was primarily due to higher levels of municipal bond investments that had pretty good returns. Under accounting guidelines we have to evaluate our tax rate every quarter, so there's possibility that it may change as we go forward into future quarters, but it's really going to be something we'll have to look at on a quarter-to-quarter basis. Q - Ben Reitzes: Yes, good morning. I wanted to just ask with regard to the top line, what do you see? Do you see these segments continuing to be the drivers of growth into '06 with regard to storage and desktop and servers and then again if you could clarify on notebooks, when do you think that the notebooks pick up again for you? And then I have just a followup. A - Harry Harczak: Ben this is Harry, and I'll take the second part of your question first. Notebooks, part of this, as we indicated, the revenue was a little soft, but our unit volume was very strong, so we actually think that's a positive sign. We have had great response from some of our manufacturers in getting competitive pricing out at the front, makes us much more competitive. When we look at our installed base we have got a lot of opportunity within our existing customer base where we're not penetrated in a notebook category. And then a couple of manufacturers have had some transitions as well. So we're going to focus our efforts and work closely with the manufacturers to try to drive -- continue to drive unit volume but to start to see the revenue volume increase. We are going to put some focus on that in the fourth quarter. In terms of segments that will continue to drive, I think you hit on some top ones. When we look at what customers are trying to do, things around server consolidation and storage continue to be critical. Security continues to be a driver, both from a software as well as a hardware side, and I think the upgrade cycle will continue both on the desktop side and the notebook side. I think we'll continue to see good unit volume there with a push towards mobility of many of our customers. Q - Ben Reitzes: Just with regard to federal, you mentioned that I think things picked up a lot in September, could you just talk a little bit more about that vertical and sustainability you know as we -- as we go forward, and obviously it was year end so that's probably why things picked up, but would you talk about whether you think that's CDW specific or -- and how that looks for you and your results maybe going forward? A - Jim Shanks: This is Jim Shanks. The federal space, as we had mentioned, the end of their fiscal year is September 30, so we always do see a strong push of activity, this year a little more than we had in the past even, which creates a very competitive environment. The key to our success really came from our continued focus on funded opportunities. We continue to get a lot of detailed experience in that space. We understand how the procurement is going to happen not only in the busy season but also in the off seasons. So we feel that that was key to our success. We feel that it's something that we are going to continue to develop and build upon, as you can also see from some of the other details in the call today, we're continuing to find opportunities to invest in that space of future growth. Q - Brian Alexander: Thank you. Just a couple of questions, one on gross margin. Barb, you talked about product margin being up on a year over year basis. Just trying to get a sense for how much of that was due to product mix versus pricing. And then following on to that, I think an offset to gross margin this quarter was on vender incentives, and as I recall this might be the third straight quarter where those have been down year-over-year. I know you don't have a ton of visibility in to that, but just based on your conversations with vendors, is there any reason for us to believe that that could be a trend, or is this an anomaly in the first few quarters of the year? A - Barbara Klein: Brian, with respect to your question on margin, we don't really go into the detail behind the factors that I mentioned before. So we did see improvement in product pricing as we went into the third quarter compared to last year. We have seen that, I think, as we have gone through a couple of quarters of this year. With respect to volume rebate, or vendor incentives and volume rebates, you're correct, we don't have a lot of visibility in to that because it really is driven by what our vendor partners decide to do in terms of the programs that they run. As we said before, our goal is to really make sure we know what the goals are, we understand what the programs are, and then we drive to make sure that we maximize our obtainabililty of those products -- of those goals each and every quarter. Q - Brian Alexander: Can you just talk about how broad based those declines are in terms of vendor incentives? Is it coming from a few major vendors? Is it across the board? A - Barbara Klein: Brian, one thing that you have probably seen in the press that effected us like a lot of others was the Microsoft changes that they made effective at the beginning their new fiscal year, which was in July. So that was one of the factors that impacted us in the third quarter. Q - Brian Alexander: Okay. Great. And then, I guess, the final question on -- on HP just a lot of commentary from them around perhaps investing in fewer partners, particularly those that are loyal to HP. Just trying to get a sense for, where do you think CDW fits into that commentary? Do you expect to be a net beneficiary of the changes that they are making around those vendor incentives? Q - John Edwardson: Brian, John. Our sense from everything that we have heard both directly and indirectly is that HP is -- is going to be putting more eggs into fewer baskets, and what I mean by that, is they are going to be spending more of their money with the partners who generate the most profitable revenue for them. Clearly as their No. 1 partner in the world we get a lot of visibility, and -- and we didn't get to be the No. 1 partner in the world without having a significant attached rate and without being very loyal to HP. But in any event, I am very comfortable with the direction they are heading. It's something that we think makes a lot of sense both for Hewlett-Packard, and for CDW as well. Q - Brian Alexander: Final question for Harry just an update on solution edge. How many solution providers have you recruited, and just give us a sense for how that's going? A - Harry Harczak: In solution end Brian, we have got in total about 30 partners at this point in time. We're still working on implementing the program with those partners in terms of converting customers and training their folks. There continues to be a high level of interest, we have had a couple of recent recruiting events with people and there continues to be a high level of interest. It is still not contributing any significant revenue but we are building the blocks and we think ultimate will be successful and we're going to continue to build and invest in it. Q - Bernie Mahon: Hi, good morning. Question for you on the operating margins for 2006. In order to meet the, kind of, high end of that range, say 6.6, do you need to see a meaningful reacceleration in revenue or do you think the 10 to 11% year over year growth rate will get you to the 6.4 to 6.6 range? A - Barbara Klein: Bernie, you know that we don't give any kind of guidance with respect to future revenue growth. We allow you all to make your estimates based on what we have given to you in terms of information, and just to reiterate my comment that I said earlier, our objective range is 6.1 to 6.6, and our goal is to be at the upper end of that range in the fourth quarter of 2006, but we'll probably be at the lower end of the range in the first quarter of 2006. Q - Bernie Mahon: Thanks. Then, just a quick question on the federal government. So that was flat on a year over year basis in August. Harry, could you just talk how that played out in the month of September? Just the federal portion, not the entire public sector. A - Jim Shanks: This is Jim Shanks. I'll take that question. On -- we did see in August that it was flat, and definitely saw a very strong pickup in September. Most of that heavily weighted towards the very back end of the month, so chasing a lot of the different funded opportunities that were out there, a lot of the activity we also saw came in our last 2 days of the month as well. Definitely strong pushup -- pickup on sales but we don't go into the exact percentages on year over year growth for that. Q - Bernie Mahon: Right. So if you saw a strong pickup in the last week or so, is it safe to assume there's some big deals that maybe slipped into the December quarter? A - John Edwardson: It is -- there are always deals that don't get shipped until the last week of September so that is a reasonably good assumption. Q - Matt Sheerin: Yes, thanks. John, I would like to ask the growth target question again. I know you have backed off from specifically giving a target for growth market plus whatever, but obviously you're investing in -- in warehouse, you're investing in people so you -- you are obviously expecting to continue to grow revenue. You have been running in the 10 to 11% range year over year for the last 4 or 5 quarters, without giving a number, because I know -- I know that you won't, could you just talk about the opportunities, where you see opportunities for CDW, whether it be specific markets, specific geographic areas, where -- where do you expect to grow? A - John Edwardson: A couple of different places, one -- and as the healthcare vertical, and as we look at that opportunity as a significant opportunity, and it was worth doing the reorganization that we went through. So as each of you are looking at your own healthcare costs at your own companies, you know that that market is huge. It is getting more expensive. Automation is ever more important, so that is clearly a focus. We continue to think that in the markets across the US we have somewhere around 5 to 6% market share, so we believe in every single segment that we have that we have profitable growth opportunities. We will be looking at more industry verticals, and more than likely, some time next year we'll do something similar to what we did with healthcare this year. We also believe that as we look at the organization of our -- of our sales groups, we need to align them better with our vendor partners, and so there are opportunities there to joint venture more with -- with our significant vendor partners, than we have done in the past, so those are significant. And Canada, which is not a very big operation, but -- but is growing, much more rapidly than the US market, and we're continuing to build resources in the Canadian market, so that will continue to be an opportunity for growth, and -- and I guess as we look at this, we clearly wouldn't be building or doubling the capacity of our distribution center and our configuration center, and if we didn't believe that we had substantial growth opportunities, and we're building ahead. Usually in the past, we have taken much smaller increments of investment when we built this particular facility, we built it as many of you know in three different pieces that was not a very efficient way to do it. So we have stepped up in this particular case and put most of the money into this facility in the beginning, so we built one building of a half million square feet instead of three buildings that we would continue to add on to. We have put much of the automation equipment into the building, and it will depress earnings a little bit as a result, and Barb has given those numbers to you. But if we didn't feel very good about the future, believe me, we wouldn't be making those investments, and I guess that is the best way to answer your question. Q - Bernie Mahon: Okay. And then just a follow-up. You talked earlier about the opportunities in building inventory and getting some buying power from vendors for big volumes, when -- or would we expect to see gross margin positively impacted by that? A - John Edwardson: You know, those are -- are going to be very difficult to measure, and they happen generally at month end or quarter ends with different vendors or end of life on different product runs and we have begun to do a significant amount of business with many vendors at the end of -- of product life. So -- and these have always been in our numbers, and we were not able to do as many of those, or if we did them, we had so much inventory in our facility that it was basically a log jam time. So it will make operations a little more easier. We'll be able to look a little more for these. But I don't know if -- you're not going to see a significant jump in gross margin as a result. Q - Bernie Mahon: Okay. And just lastly, just quickly, on -- on healthcare, it's the growing part of your business, could you talk about seasonality in that business? A - Jim Shanks: When you look at health care, we really aren't seeing any specific seasonality trend as we look at our data yet. Q - Bruce Simpson: Hi, I wonder if you can provide the breakout of how much of the 350 million run rate was classified from commercial and how much was from public sector, so that we can get more of an apples on apples comparison of CDW's growth? A - Barbara Klein: Bruce this is Barb. We're not going to give you the details of the healthcare channel. We don't give details in general for any of the channels of our business. With the restatement you can get some information from looking at the information from 2004, 2005 on a restated basis, but as a general rule we don't give details for the channels of our business. Q - Bruce Simpson: Okay. Let's hit the cost side of the income statement a little bit and talk about this incremental leased office expense. Is that downtown? Is that in the suburbs? Approximately what size in terms of square feet, or what capacity in terms of salespeople that you think you'll be able to house in there are built into that estimate that you gave us? A - John Edwardson: Bruce, what we're doing is two different things here. In the city, as you may know, we have two different buildings in downtown Chicago that are adjacent to each other. We believe that it will be much more efficient and productive to have our people in a single building, so we are moving all of our people into one of those two buildings and we're -- we're also in this particular case committing to growth in the future, so we will be committing to take more in this building over the next several years, and -- and so there's going to be a little bit of transition expense and moving expense next year, and we have about 950 people or whereabouts in downtown Chicago right now. It is where most of our young people want to live and work when they join the Company. After they have been with the Company for a few years and they get married and have children, then the suburbs look more interesting, and many of them want to move, but at this point much of our growth in Chicago is going to be in downtown Chicago. Likewise, at our corporate offices, we are just completely out of space, and we are renting a space in a building directly across the street from this building. And -- and we'll be working on that building and hopefully moving into it in the next 3 or 4 months. So lots of activity in the real estate group, and those expenses are included in the estimates that Barb has given you for year-over-year SG&A expense change. Q - Bruce Simpson: Okay. Is the space that you are moving into up in the suburbs are you talking about incremental space for Vernon hills or the sales guys in Woodland Falls? A - John Edwardson: That space is Vernon Hills, and we have -- as I mentioned in the sales organization, most of the new demand is going to be in downtown Chicago. Q - Bruce Simpson: Okay. So you have got 950 down there now, when you make this commitment, how many will you be able to house down there? A - John Edwardson: And everybody is saying more, and -- and Bruce, we -- you know, as you look at, this we're going to be growing that number steadily, and much, but not all of the growth will be in that building, but we have room to grow, in one of our New Jersey facilities. One of our New Jersey facilities is already completely filled up. Our Connecticut facility is completely filled. We have a little bit of room for our Alexandria -- not Alexandria outlet -- Herndon, Virginia facility, and but in many locations we have -- have simply maxed out those locations, and we need to provide more room for growth in each of them. Q - Bruce Simpson: That was incremental expense that Barb mentioned inclusive of those other kinds of places that you are out of room, or are those going to be -- Q - Bruce Simpson: Okay. The Vernon Hills space that you are going rent it sounds like it is not sales space but it's rather operational. A - John Edwardson: It is operational, yes. The corporate headquarters group, so it's going to be the finance group, and the purchasing group, and the IT group, and the marketing group, and legal, and -- and you know, and those kinds of functions. Q - Bruce Simpson: Okay. And just to touch on a question that somebody asked earlier, given that there has historically been a relatively limited amount of leverage in this model, when you layer on these incremental expenses, what is the -- the investment thesis that you'll be able to get back into these kinds of 6.5 to 7.0 range by 2007? What's going to drive that kind of leverage once you have this incremental expense? A - John Edwardson: Key theme is going to be simply revenue growth, and we need more of it, and that is one reason we're investing in the sales force as we mentioned. And -- but revenue growth is going to be it. And as -- as we look at the future, we still see lots of opportunities to grow in the US and the Canadian markets. Q - Bruce Simpson: Last thing, John, any change at all on either your strategies on acquisition or on what you are seeing in terms of availability out there? Q - Steven Fortuna: Great. Thanks. Just a couple of short ones here. First would be on the productivity side. You guys haven't shown a lot of great year-over-year improvement. Maybe, Harry, you can talk a bit about some of the efforts you're making to try to drive that. And then second is, I know you guys are trying to drive more education mix, which is generally higher margin than government into the public business. How is that effort going along? And then lastly, kind of a far flung question here, it it's pretty clear that Dell has been backing off on price aggression, particularly on consumer, but also I think to some degree on the corporate side. Have you seen anything, any benefit, as you go to customer that maybe Dell is kind of a little bit less aggressive and maybe that's helping your business a little bit? Q - Harry Harczak: In terms of productivity, we have seen some good results. Some of the things we're doing, Steve, that are helping that is the investment that we've made in our specialist teams. As you recall, specialists operate with the account managers on advanced technology solutions for customers, things like server consolidation, security specialist, mobile wireless. We have seen very good results from our efforts there which are helping to increase overall productivity. We have put in a number of tools that we're starting to see some results from. It's still early, but things such as our portfolio manager tool which gives an account manager the ability to see their entire account base and better understand where the opportunity is in their account base and develop a business plan for penetration, which is a significant opportunity for us. And then the last thing, I think, that has a positive impact this quarter in particular, is we are a little bit seasonal in the third quarter with the public sector and that certainly helps the productivity in the third quarter. So, those are -- there are a handful of other things, but if I had to key in a couple I would say those are some of the top ones. A - Jim Shanks: As far as education, it is definitely one of our key channels. We're continuing our segmentation strategy in that space, allowing us to take and treat private and public higher education differently, K through 12 differently, and also a very extensive amount of work going on with targeting specific accounts in that space, making sure that we are identifying and meeting their unique needs. So as we continue to sharpen our segmentation and hone our skills at identifying those unique opportunities, we can continue to invest not only from a sales force standard point, both with inside and field, but also we can look at unique product offerings and also unique solution offerings that we can start to provide to those customers to continue to grow. A - John Edwardson: Third, with respect to Dell, and I can't speak on much of the consumer business, but my sense is this, many of our -- or several of our major vendor partners, due to changes in their company, are getting their cost very much in line with Dell's. My sense is they are going to be holding Dell's feet to the fire on pricing. Dell -- which will be different than what it has been instead of Dell holding their feet to the fire. I'm seeing a big turn around in that area, and we have some very very competitive partners who are doing a darn good job at getting their costs in line, so that they can be great competitors with Dell. With that we have time for one more question, and -- and then what we will do is let those of you who wanted to ask questions have first chance to talk with Cindy directly at the end of the phone call, but we have about two more minutes before we need to move on to another meeting. Q - Joel Wagonfeld: Thanks very much. I was wondering if you could just comment on the 4% average unit selling price increase in desktops and servers. Was that a result of a mix shift port servers, or are you seeing actually positive ASP trends in both of those categories? Thanks. A - John Edwardson: That is more of a shift in mix towards servers. Desktop average unit price was down just a tad. Offset by the shift in mix to servers and positive ASP gains in the server line. A - John Edwardson: Okay. So with that we have phone calls left from David Manthey, Bill Fearnley, John Goyle, and Richard Gartner. Cindy will give you guys first opportunity as she takes phone calls. Thank you very much, we are pleased to have another quarter record results. We know that you expect more in the future and -- and what you know we'll be working hard to make that happen. For those of you who are not CDW customers, I want to remind you you can reach us at 1-800-800-4CDW or visit us on our website at CDW.com. And if you are already doing business with CDW, we thank you very much for your business. We'll talk to you again in three more months.

EarningCall_233947

Don De Laria - Regal Entertainment Group - VP of IR Mike Campbell - Regal Entertainment Group - CEO Amy Miles - Regal Entertainment Group - CFO Michael Savner - Banc of America Securities - Analyst Gordon Hodge - Thomas Weisel Partners - Analyst Glen Reid - Bear Stearns - Analyst Walter Winnitzki - - Analyst Meredith Fisher - Jefferies & Company - Analyst Matthew Harrigan - Janco Partners - Analyst Robert Tracy - - Analyst Dennis McAlpine - McAlpine & Associates - Analyst Operator At this time I would like to welcome everyone to the Regal Entertainment Group's third-quarter 2005 earnings release conference call. With our host Mike Campbell, Chief Executive Officer of Regal Entertainment Group and Amy Miles, Chief Financial Officer of Regal Entertainment Group. All lines have been placed on mute to prevent any background noise. After management's remarks there will be a question- and-answer period. (OPERATOR INSTRUCTIONS) This call is being recorded. I would now like to turn the call over to Mr. Don De Laria, Vice President of Investor Relations. Please go ahead. Don De Laria, Regal Entertainment Group - VP of IR Hi, and good morning. Before we begin today I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of section 27 of the securities act of 1933 as amended and section 21-E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the Company's expectations are disclosed in the risk factors contained in the Company's annual report on form 10-K dated March 15, 2005. All forward-looking statements are expressly qualified in their entirety by such factors. Mike Campbell, Regal Entertainment Group - CEOThanks, Don, and welcome, and thank you all for dialing into our third-quarter conference call. Today I will provide an overview of the industry and Regal's third-quarter results and a review of current trends in the exhibition industry, including some of our expectations regarding box office trends for the holiday season. Following my remarks, Amy Miles will provide a summary review of our financial results. And as always, we will conclude the call with a question-and-answer session. Now turning briefly to third-quarter industry results, the industry box office saw successful openings and solid performances during the third quarter from several films including War of the Worlds which grossed $233 million, Wedding Crashers 207 million, Charlie and the Chocolate Factory at 205 million, Fantastic Four at 154 million and the four-year-old version of 106 million and finally, Dukes of Hazard at 80 million. And although the third quarter of 2005 included the strong performance of these films, the comparisons with the same quarter last year were difficult. The third quarter of 2004 included Spider-Man, which topped out at 374 million, The Bourne Supremacy at 176 million, I, Robot at 145, The Village at 115 million, Collateral at 101 million and the Princess Diaries at 95 million. For the period that corresponds to Regal's third fiscal quarter EDI reported a domestic box office revenue decrease of approximately 5%. Other industry sources for the period that corresponds with Regal's fiscal third quarter showed declines in domestic box office revenues, ranging from 3.3% to 4.4%. Now turning briefly to Regal's third-quarter results, due to the benefit of our accretive acquisition strategy, we again outperformed the industry topline results as we reported total box office revenues of approximately 416 million which represented a slight increase over the prior year. Also in a quarter of declining industry box office, Regal focused on what it can control, quick and again successful acquisition integrations and maintaining efficient operations. During the quarter our extensive acquisition experience allowed the Company to quickly integrate the Eastern Federal Theatres, our average ticket per patron increased 4.2%, and our price increases has obviously benefited revenue line in a quarter of negative attendance comparisons. We were also successful in increasing the average concession sale per patron by approximately 9.7% to $2.72. Earlier in the year we implemented changes in our concession combo programs and resized certain concession items. The combination of our initiatives and our concession program and to s lesser extent, concession friendly film product during the quarter contributed to very strong growth in our average concession per patron. We also continued to focus on cost controls and we're pleased to report the following quarterly comparisons. We had a same screen decline in other operating expenses when combined with G&A expenses. We had a decline in film and advertising expense as a percentage of admissions revenue. And lastly, a favorable increase in our concession margins for the quarter. Our third-quarter results also include revenue of $26.7 million related to National CineMedia, which produced approximately $18.4 million of adjusted EBITDA and resulted in a 69% adjusted EBITDA margin. Now turning briefly to our outlook for the fourth fiscal quarter and the holiday box office. We began the fourth quarter this year with the Wallace & Gromit movie which has grossed todate about $45 million. Tomorrow we open the Legend of Zorro, Saw II and Weather Man. And next week Chicken Little, a CGI animated film from Disney pictures. The fantasy family film, Zathura opens November 11th followed by one of the season's most anticipated films, Harry Potter and a Goblet of Fire which is the fourth film from Warner Bros. and the Harry Potter franchise. This film opens on November 18th. We are also expecting strong business from the Chronicles of Narnia, The Lion, the Witch and the Wardrobe, which opens December 9th, and King Kong opening on December 16th. Other films rounding out the holiday release schedule include Fun With Dick & Jane, which is a Columbia Pictures comedy starring Jim Carey and the producers, starring Matthew Broderick and Nathan Lane. We continue to be optimistic about the holiday film slate in the Company's fiscal fourth quarter. While September finished up 11.3% versus last year, the October month to date box office through last Sunday was down 8.4%. However, it should be noted that in 2004 the industry witnessed its best October weekend ever with the release of Shark Tale and Ladder 49 on the same weekend. We continue to believe that the 2005 fourth-quarter comparisons with 2004 will be easier as the 2004 fourth quarter was down 6.8% from the same period in '03. The real test of the film slate however will not come until late in the fourth quarter as the majority of the tentpole pictures have release dates in late November or December. We will provide more detail on our outlook for the 2006 film year on our next quarterly conference call. But at this point we are excited about such films that we see next year as Ice Age II, X-Men III, Over the Hedge, Mission Impossible III, the Poseidon Adventure, the DaVinci Code, Pixar's Cars, Pirates of the Caribbean II, Superman Returns and the next film in the James Bond series, Casino Royale. That is our joint venture with AMC and Cinemark. Earlier this year National CineMedia, which is the joint venture between Regal, AMC and Cinemark, was created to better leverage our advertising, marketing and distribution platform and to expand NCM's market coverage. This quarter Cinemark began installing equipment necessary to participate in this high margin opportunity. Once the deployment of the Cinemark network, which will include additional 2300 screens, is completed in April of 2006 the NCM network will cover over 150 markets including 49 of the top 50, reaching approximately 550 million annual fee attendees spread across 13,000 total screens, 11,000 of which are equipped digitally. At the beginning of 2006 NCM will be launching a new preshow, titled First Look, which will retain many of the structural aspects of the previous Regal preshow program while creating a more exciting entertainment and marketing platform that features original content and ads that are made specifically for the Cinema or are premiered in theaters. NCM continues to deliver the financial benefits that we expected from combining the distribution of three major circuits. NCM is well positioned to pursue incremental revenue and other EBITDA opportunities. The advertising outlook for the remainder of the year continues to be very favorable as NCM is expecting to exceed its internal targets for Q4. This momentum is continuing into 2006 with advertising commitments already received for 2006 in excess of 32% of the available inventory. We are confident that this growth will be further accelerated with the expansion of the NCM network, reach, and impression base in 2006 with the addition of Cinemark screens and the launch of a new first look preshow. So in summary we're pleased to report another successful acquisition closing and subsequent integration. We are also pleased with the slight growth in revenues and adjusted EBITDA and what has been a very challenging industry box office environment. We are also excited about opportunities within National CineMedia and the upcoming holiday film slate. With that I would like to now turn over the presentation to Amy Miles, our CFO, to discuss overall third-quarter financial performance. Amy Miles, Regal Entertainment Group - CFO Thanks, Mike and good morning. Today I would like to provide additional detail on Regal's fiscal third-quarter results, provide an update with respect to our balance sheet and capital expenditures, as well as an update on the results of National CineMedia for the quarter. We reported total revenues for the quarter of 628.4 million, consisting of 416.2 million from box office revenues, 164.7 million from concession revenues and just under 48 million of other operating revenues. Our total revenues increased this quarter approximately 2.8% over the prior comparable period, and that was primarily as a result of the acquisition, which resulted in a net increase of approximately 574 screens, and that more than offset a weak box office. And just for clarity, as a result of the timing of the acquisition this year and last year, all of our per screen comparisons we highlight today are based on average screen count for the quarter and exclude the 279 screens that were acquired from Signature on the last day of the fiscal Q3 2004 period. Our admissions revenue this quarter increased approximately 1.4%, primarily as a result of the acquisition, coupled with an average ticket price increase of 4.2%, which more than offset an attendance per screen decline of 9.7%. We obviously outperformed the industry box office results due to the additional acquired screens. Our admission revenues on a same screen basis declined approximately 5.6% and approximated the range of industry results for the quarter. Concession revenues this quarter increased 6.5% to 164.7 million. On a per screen basis concession revenues decreased 0.9% and on a per cap basis concession revenues increased 9.7. As Mike previously stated, we implemented changes in pricing and product mix of our Regal Combo program, as well as eliminated certain smaller size items from our concession product menu. These changes, coupled with the concession's friendly film mixture in the quarter produced the strong growth in the concession per cats. Other revenues during the third fiscal quarter of '05 increased 2.6% over the comparable quarter of 2004 to 47.5 million. The increase in other revenues is related to increase in our vendor marketing programs. While NCM exceeded its internal revenue targets and grew advertising revenues over the prior third-quarter comparison, approximately 5.3 million of advertising revenues is recorded in our income statement on a net basis this quarter. I will provide additional information with respect to NCM revenues and operating results later in my remarks. Looking briefly at some of the expense line items for the fiscal period, film and advertising as a percentage of box office for the current quarter represented 52.5% of admissions revenue. Film rental and advertising expense decreased by 70 points, 70 basis points, over the prior comparable quarter primarily as a result of the film product during the quarter and to a lesser extent of the softness in the overall industry box office environment. Before our vendor marketing programs our concessions produced a gross margin of 85.4% this quarter, which represents an 80 basis point increase over the comparable quarter of 2004. We obviously benefited during the quarter from the strong growth in per caps. Total rent expense increased 7.3 million or 10% due primarily to the inclusion of the additional theaters and screens during the past year, and on a per screen basis rent increased approximately 2.6 compared to the same quarter of 2004. Due to the accounting for the National CineMedia joint venture you need to combine other operating expenses with G&A to make sure you have consistency between the quarters. Once combined, other operating expenses and general and administrative expenses increased approximately 5.2% for the quarter, primarily as a result of the additional screens added during the year. On a per screen basis, the two line items together decreased 2.1%. The per screen decline was primarily due to a decline in controllable labor costs, somewhat offset by an increase in occupancy and utility costs for the quarter. The third quarter produced adjusted EBITDA of 120.9 million, which was roughly 4 to 5 million better than the consensus estimates. Also we were pleased to report significant free cash flow in our quarterly results. A portion of the growth in the free cash flow is due to a decline in net CapEx, coupled with an improvement in working capital and this was due to certain of our bank principal and interest payment being front loaded in the fiscal year. Adjusted diluted earnings per share totaled $0.13 for the quarter, and would have been in line with the consensus estimate had we not experienced the loss on disposal and impairment of operating assets of 7.6 million. Looking briefly at our balance sheet and asset base, we ended the quarter with 80.3 million in cash, and that was after we spent approximately 125 million in cash for the Eastern Federal acquisition and a total debt balance of just under 2 billion. Which resulted in a net debt to adjusted EBITDA ratio of approximately 3.7 times pro forma for the acquisition. We were also successful in amending certain financial covenants in our bank facility during the third quarter to provide the Company additional financial flexibility over the next couple of years. Also with respect to our debt agreement during September we did enter into an interest rate swap for an additional 300 million of variable-rate debt and the term of that swap is 4 years. Our goal was to fix a higher percentage of our variable-rate debt at a time when the difference between the swap rate and the current variable-rate was minimal. After given effect to our new interest rate swap agreement approximately 75% of our debt is fixed and 25% is variable. Looking briefly at our CapEx, our capital expenditures during the quarter totaled 28 million. And during the quarter we also recorded proceeds from asset sales of approximately 19.6. And as such, the net CapEx was 8.4 million. During the third fiscal quarter of '05 we opened one theater with 16 screens. We acquired 21 theaters with 230 screens, and we closed 12 theaters with 84 screens, bringing our totals to 568 theaters and 6,537 screens. As we continue to aggressively monitor our asset base, we plan on closing an additional 20 theaters with 150 screens in the fourth quarter, and that includes the recently announced sale of five United Artists Theatres with 37 screens. And these closures should be offset by expected openings of four theaters with 64 screens. We now expect our full year CapEx to total approximately 130 to 140 million, of which 35 to 45 million will be funded by asset sales. Now with respect to the financial highlights for National CineMedia for the quarter, calendar third quarter represents the second quarter of operations for National CineMedia or NCM. While Cinemark has joined NCM as a founding member during the third Q, they are currently working on installing the digital network and as such will not have any significant impact on NCM's results until the second quarter of 2006. During the remainder of the '05 period, Regal will continue to receive distributions of approximately 63% of National CineMedia EBITDA with AMC receiving the remaining 37. Total revenues related to Regal Entertainment portion of the NCM and other advertising contracts were 26.7 million for the quarter, third quarter, of which 26.4 million is included in other revenues, and the balance is included in our admissions revenue. And just to clarify, as previously mentioned a portion of the third quarter NCM revenue has not been recorded on a consistent basis with that of the Q3 of 2004 as approximately 5.3 million of advertising revenues have been recorded on a net versus a gross basis. During the fourth quarter of '05 an even larger percentage of the advertising revenues will be recorded on a net basis. And as we have previously disclosed, substantially all of the NCM revenues will be met in our 2006 financial statement. The NCM advertising revenues, once you adjust for the accounting differences between the gross and the net, grew approximately 10% quarter-over-quarter. Due primarily to the incremental screens supplementing the revenue growth, increased utilization due primarily to the incremental 30- second advertising spot added to the program at the beginning of the fiscal year and CPM growth of approximately 1%. Total adjusted EBITDA related to our National CineMedia investment, and we adjusted for certain intercompany costs, totaled 18.4 million compared to 16.3 million for the same period last year. So this 10% growth in revenue produced a 12% growth in adjusted EBITDA and our margins obviously remain very high and continue to include the benefits of synergy associated with a larger network. As Mike previously stated, we remain excited about the NCM business and the free cash flow it contributes to Regal. We continue to believe that the NCM has solid growth potential, and when coupled with the high margin characteristics, NCM should continue to provide free cash flow growth for Regal and its shareholders. In closing, we were pleased to report growth in revenues and adjusted EBITDA ahead of consensus and in a period of declining national box revenues. We're pleased with the integration of the Eastern Federal acquisition and to again return value to our shareholders with our $0.30 dividend. We also look forward to continued growth from our NCM investment as well as a solid 2006 film plate. Michael Savner, Banc of America Securities - Analyst Two quick questions. First, one on the pricing increases, they seem to have been very strong over the first nine months of the year and maybe part of that benefits from the film mix. But it is certainly counterintuitive to the view of some people that the theater business is on the long road to decline here. So Mike, can you talk a little about your pricing strategy going forward? Can you continue to push through increases at these similar levels or would you consider moderating increases to maybe spur attendance growth? That is the first question. Second, on your announcement in the last couple of weeks about REAL D digital cinema and the rollout you're doing right now maybe you can talk a little about the costs associated with that, the strategy and kind of how you are going to measure, how viable that is going to be in terms of rolling out additional screens and theaters. Thank you. Mike Campbell, Regal Entertainment Group - CEOThanks, Mike. Regarding pricing, we have long maintained that the 3 to 4% in average ticket price in the U.S. over a period of time is sustainable. And in the field we get very little pushback on the price increases that we've putting through over the years. You may hear different things in the press because anytime there is a downturn in the box office I think people out there sifting through everything and anything that could be a potential factor. But we believe that the historical increases in ticket prices are sustainable. Concession is a little bit different. I think there is a little more pushback in concession. But if you look at what has happened this year most of that increase has not come as a result of price increases. It has come as a result of changing sizes and product mix, as well as elimination of certain items that we sell. We've been very pleased with the results there; we've done that with a minimal amount of price increases, and we've actually improved our margins during that process. As far as the REAL D is concerned, we've seen the technology. It does require a digital projector to do that. Those projectors are being installed in our theaters at no cost to us. Clearly we have some capital investment, minimal investment in the 3-D servers themselves, but we are anxious to see the results in the marketplace with the release of Chicken Little. (technical difficulty) technology is great, we've seen it, and we're rolling out 17 of these units across the country out of a total that we hear is around 85 units. So that is dead on 20% of the total. And here again it is an experiment, but we believe that it is something that if it works and people respond to it the way we did when we saw it over time it could increase attendance. It's an enhanced experience in the theater, and it is also an experience that I do believe that people would be willing to pay a bit of a premium for once they see it. Gordon Hodge, Thomas Weisel Partners - Analyst You had a $7.6 million charge. I assumed that related to the theater in Biloxi, but if you could maybe clarify that. And then on the National CineMedia business, I think you were going to book revenues -- maybe this is what you were talking about in 2006, just your share of the EBITDA in your revenue line. I wasn't quite clear on the 5.3 million net and the difference between gross and net. Is that net of agents, ad agency costs, or is that the difference between the EBITDA and the revenue recognition? Amy Miles, Regal Entertainment Group - CFO Let me take your first question with respect to National CineMedia. Remember, we maintained all of our contracts here at Regal when the venture was formed. So that is why you see the gross accounting in our financial statements. We record the revenue and expenses associated with servicing all those contracts. As we are getting closer to the '06 period, and to your point, what you will see in our financials going forward is essentially our portion of NCM's revenue, our EBITDA -- I am sorry -- in our other revenue line. And that is net of all expenses. That will be the fee that that they pay us to use the theaters. But what you saw in third quarter was about 5.3 million of the revenue, was contracts by NCM on Regal Entertainment Group's behalf. So as we are migrating closer to the '06 period all of our unsold inventory will be contracts generated by National CineMedia. It is migrating to that net presentation. The difference this quarter had the 5.3 been gross instead of net, we would have had an incremental 2.6 or roughly of revenue and about 2.6 million more of costs, because once you get to the EBITDA line it evens out. Amy Miles, Regal Entertainment Group - CFO So when you think about our EBITDA of 18.4 million you can gross that up by 63%, and there is a couple of costs that we still charge to those revenues related to certain assets that we maintain here, that you get within about one million or so dollars of NCM's EBITDA for the quarter. Gordon Hodge, Thomas Weisel Partners - Analyst Great. And then on the charge? Amy Miles, Regal Entertainment Group - CFO With respect to -- it wasn't the Biloxi Theatre. We had an impairment charge this quarter that is included in there, and that was about 6 million. And what you see there is just if you have seen some negative box office trends, certain of the marginal theaters are more suspect for impairment charges and again, that is non-cash. And then the balance of that was just related to -- as we continue to generate asset sales and close some of the theaters. Glen Reid, Bear Stearns - Analyst First the acquisition environment, would love to get your thoughts on sort of whether or not valuations are looking attractive or if there is any sort of change in the landscape from your point of view. Secondly, on CPM's for CineMedia, you mentioned they were up about 1%. I wondered if you could actually tell us what the average CPM was in the quarter and sort of what you think the growth rate might be there, sort of long-term. Thanks. Mike Campbell, Regal Entertainment Group - CEOI will take the acquisition question. We did complete the Eastern Federal transaction in the third quarter. As we said before, we continue to have dialogue on a constant basis with potential sellers. But I think in this particular environment it is a little bit difficult sometimes to bring buyers and sellers together, because if you are selling assets in a year cyclical business when admissions are down, as a seller you believe you may be leaving money on the table. And then contrarily as a buyer, in that same environment you believe that you might be overpaying a bit. So I think in this environment it is a little bit tougher to get these dialogue going. But we have a long history of acquisition and we're going to continue focusing on acquiring good assets at reasonable prices. Amy Miles, Regal Entertainment Group - CFO When you're thinking about the NCM CPM growth for the quarter, I think the best way to think about it is on -- you saw less of an increase this quarter at 1%, and that was primarily due to the fact that there is a lot of incremental inventory in NCM today as you expand to AMC and as you continue to expand to Cinemark. So we at National CineMedia's goal will be to continue to maximize inventory utilization, create scarcity and once that scarcity is created, to continue -- that should create an environment where you will have favorable CPM growth. So we continue to believe that that is going to happen over the long-term, and you're going to see a premium in that marketplace. And that part as you continue to see is being benefit where traditional advertising is migrating to cinema advertising. And so over the long-term we continue to believe that Regal CineMedia will produce the growth that is expected. And it is also important to note I think during the second quarter and third quarter of our fiscal year, which were periods where attendance was down, NCM generated substantial revenue growth during both of those periods. CPM. I know Kurt Hall in the past has said something in the low 30s is roughly where you had been. I mean, can we expect that to sort of move up into the high 30s, into the '40s, if you could maybe give us some sort of relative perspective. Amy Miles, Regal Entertainment Group - CFO I think you will continue to see increases and over what time period, that takes to grow from the low 30s to the 40s I think that remains to be seen. But we are confident that once you create the scarcity in inventory and the long-term dynamics with respect to this type of medium are very favorable. So to give you some timeframe I think its harder to do today, but we continue to believe that is going to happen. Walter Winnitzki, - Analyst I wanted to follow-up on an earlier question. There seems to be a lot of discussion in the press of these days about digital cinema and a fair amount even from the folks at NATO. Two questions; maybe you can share with us your thoughts on where we are with the technology and how important it is to you. And second is is National CineMedia in any way a part of digital cinema in your eyes or not? Mike Campbell, Regal Entertainment Group - CEORegarding the state of digital cinema, I mean clearly there has been a lot of progress made over the last couple of years and certainly the last few months. The technical standards have been established through the studio DCI consortium. There are manufacturers out there now that are prepared to manufacture to this consistent DCI standard. We have seen a number of third party financing plans out there, which all envision the studios providing the bulk of the capital necessary for the rollout through the payment of virtual print fees, which would approximate the cost of an existing film print. So I believe that is moving forward. We are continuing to look at the different options, and we continue to be cautious in this respect. We believe that the digital systems that are available out there today that are 2K resolution are arguably as good as film. However, there is another technology that is advancing very quickly, which is a 4K or 4000 lines of resolution technology, which is by Sony and others. And we have seen demonstrations of that. It is clearly superior in virtually all respects to something of lower resolution. And I think for us and the industry one of the questions is when do you begin the rollout, and with what technology, and that is what we are continuing to sort through. But the good news is, in my opinion the technical standards are established and I think there is a business model in place out there that will work for exhibitors. Walter Winnitzki, - Analyst Second part of that? Mike Campbell, Regal Entertainment Group - CEOI think clearly they could be a factor. And certainly if we used the National CineMedia, even though we own the distribution network today, it was certainly built by the predecessor to National CineMedia. And it is a potential delivery system for digital cinema. So certainly there would be some collaboration between NCM and its member companies, particularly if we end up distributing digital films through the satellite network. Operator Meredith Fisher with Jefferies & Company. Meredith Fisher, Jefferies & Company - Analyst Just wondering if you can provide us with some early expectations for CapEx in '06? And then again just if you can reiterate again your comfort level in terms of leverage as you start to look into '06, if you still are maintaining that sort of comfort level to bump up maybe another 0.5 or so on the ratio. CapEx number for the company. But anywhere between 135, 150-ish. So I would expect that as we are finalizing our budget for '06 that the CapEx is going to come right in that range. And with respect to leverage, the leverage is obviously a little bit higher this quarter as it was last quarter, primarily due to your (indiscernible) environment where box office attendance is down. As that rebounds that would and EBITDA grows that will improve our leverage and yes, we would still be comfortable. We're not at a ceiling by any means with respect to our leverage ratio. Matthew Harrigan, Janco Partners - Analyst Can you comment on the further projects that are in the Q for the REAL D format? Given I think Disney and Sony both mentioned that they had projects for next year. And could you comment on the quality of the 3-D resolution relative to what was in Polar Express and how heavily are you planning to accentuate the 3-D element in those areas where you have that capability? On the marketing side? Mike Campbell, Regal Entertainment Group - CEOI don't have the specific film titles with me, but my understanding is there are another four or five films among several distributors that will be available at a minimum for this REAL D system. And as I said before, and I just want to reiterate again this is an experiment and the capital cost of doing what we've done so far as a company and the balance of the industry has been fairly minimal. We want to see the results. The comparisons I think to Polar Express I think are favorable. That was presented in an IMAX format, and the IMAX has a great technology and that was a great looking film. But REAL D is a slightly different technology, and I think its at least as good as what I have seen with the Polar Express 3-D in the past. What is particularly intriguing about the REAL D system is that for relatively modest costs or certainly an affordable cost, virtually any film can be converted into a 3-D format. It is not limited to any specific film, and we've seen footage on older films, newer films, animated films that have all been converted to 3-D in this process. And that has been quite spectacular at this point in time. So the intriguing part is if this technology does appeal to the public and catches on with the rollout of digital cinema overall, I think you could certainly see hundreds or even thousands of 3-D equipped screens across the country as part of this rollout over time, which gives the studios a much broader platform to rollout this type of product. Matthew Harrigan, Janco Partners - Analyst Does that particular company have a leg in the home as well as the home theater advances or is that going to be strictly a cinema technology over the next five years or so by your understanding? Mike Campbell, Regal Entertainment Group - CEOI think it is strictly a cinema technology; I think at this point in time it would be almost impossible to duplicate it within the home. And particularly with the type of systems that are necessary to produce the 3-D image. So I think this is a thing that the -- will be strictly cinema for the foreseeable future if not long-term. And I think it could create some new excitement in our marketplace. Matthew Harrigan, Janco Partners - Analyst So we can all go to the premiere of the Wizard of Oz? Mike Campbell, Regal Entertainment Group - CEOCould be; that could easily be converted to a 3-D format based on what I've seen, and it does give you a whole new appreciation of the film. Matthew Harrigan, Janco Partners - Analyst Great. Thank you. Unidentified Speaker I have two questions. One, just financial. When you consider acquisitions, do you adjust the reported cash flows to average out amortization for refurbishing of the auditoriums over time? So that you actually pay for an averaged out cash flow? And secondly, with respect to the National CineMedia have you actually tested audience response to this? I've been in one theater where I saw an entire audience stand up and face away from the screen while being forced to watch these commercials. And I'm wondering if while you're adding revenue and hopefully EBITDA at that line you're not losing it ultimately at the top line by reducing people's willingness to come to the theater. Amy Miles, Regal Entertainment Group - CFO With respect to your first question on acquisitions, when we are talking about -- we pay X dollars and X multiple, that disclosure is typically a trailing multiple, and it is not adjusted for CapEx. When the -- because typically the CapEx that you are seeing in the theaters that we are buying would be maintenance type CapEx, it is not deferred purchase price. The last two asset acquisitions were new theaters that were over 85% stadium. But when the company evaluates its internal target what IRR do we expect from this asset acquisition and we are looking forward five to seven years with cash flows that are expected, that is adjusted by maintenance CapEx. When we figure out what return we are going to generate. And so far those have been in excess of 20% each time we've executed an asset acquisition. Mike Campbell, Regal Entertainment Group - CEORegarding the advertising question, we take very seriously as a Company our patrons point of view. And we have online surveys, comment cards as well as in theater comment cards and statistically less than 1% of our comments that come in, and certainly negative comments about the experience have anything to do with advertising at all. So we get very, very little negative feedback there. Also, advertising -- people are seeming -- some people are seeming to view this as something new and novel. It's been around for many years. Theater advertising has been around for as long as I can remember. I think what we are doing today though is doing it in a better form, it is more entertaining. And Regal is somewhat different even within that particular group. And that is that we do not show advertising after our advertised start of show time. And one of the reasons we don't do that is because of our digital network and the technology that we have. Our program starts approximately 20 minutes before advertised show time. And the only thing that you see after the advertised show time with our circuit is movie previews, which is part of the movie experience and then the feature film. And a lot of the negative reaction in the marketplace over the last year or two regarding advertising in general I think had been related to patrons who believe that they are forced to view advertising after the announced show time, sometimes running 5, 6, 7 minutes. And many of the theaters that do that do not have digital networks in order to separate their 35mm presentations from digital presentations. Robert Tracy, - Analyst I noticed your book value keeps coming down. Could you comment a little bit about how do the credit rating agencies kind of look at that type, the leverage in that metric? And could you talk a little bit about in terms of what are you hearing from the credit providers in terms of book value? Amy Miles, Regal Entertainment Group - CFO Reality is with respect to book value, I have not had a conversation and we stay in constant contact with the rating agencies just because we thought that is a very important relationship. And I have not had a conversation with respect to book value with either the rating agencies nor our credit providers. And a lot of -- you can see with respect to maybe how they are considering the business is if we continue to have depreciation each year that obviously lowers the book value and also our continued asset closure programs. Robert Tracy, - Analyst Could you talk a little bit about what is your debt capacity like? And kind of related to that, have you given any thoughts about another special dividend? Amy Miles, Regal Entertainment Group - CFO With respect to our debt capacity, what we've said before is the Company's target leverage is often right at that -- right around the 3.5 times, that is net debt to EBITDA, we are slightly over that today. Going forward for various opportunities would we consider an increase in leverage over half a turn or so -- acquisition, special dividend, whatever that opportunity may be. As long as we felt like we could quickly repay or grow EBITDA to delever those would all be various opportunities that we would consider at various points in time. Amy Miles, Regal Entertainment Group - CFO At this point in time I have no reason to believe that we have issues with respect to the rating agencies and/or the debt providers with our various ratios. Dennis McAlpine, McAlpine & Associates - Analyst To follow on this REAL D situation as they put in those 17 units, does that conflict with what you're doing with NCM? And if you went let's say with the Christie system or some other regular digital system, does that necessitate the replacement of NCM or can NCM use the equipment that can go into that sort of a scenario? Mike Campbell, Regal Entertainment Group - CEOIt is all compatible, Dennis. And going forward NCM we already have the small projectors in use. And we have the option going forward to either maintain the existence of those smaller projectors or to transfer anything that we are running through those projectors into larger digital projectors. One of the things just as a side item, one of the things to consider would be just the power usage and the bulb cost for the larger projectors. We may decide at some point in the future to continue using the NCM smaller projectors for advertising just as a cost savings mechanism. But we have the flexibility and the ability to do both. Dennis McAlpine, McAlpine & Associates - Analyst And as you put in the units with the REAL D, what does that do to your desire or willingness to put in IMAX systems? Mike Campbell, Regal Entertainment Group - CEOI think we are still the largest Operator of IMAX units across the country; we have 13 or 14 of those units. And we haven't chosen to put any more units in the last couple of years. We're happy where we are today. But we're going to let this play out and see where it ends up. But IMAX bottom line is still a very expensive rollout proposition for us. It requires a lot of capital to do that. And we're just comfortable where we are today. Operator We have reached our allotted of time for questions. I want to now turn the conference back over to Mr. Mike Campbell for any closing or additional remarks. Mike Campbell, Regal Entertainment Group - CEOWe appreciate everybody calling in and look forward to talking to you again after the first of the year regarding what we hope to be a good fourth quarter. Thanks a lot.

EarningCall_233948

Good day, my name is Jack and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Check Point Software Technology’s Fourth Quarter 2005 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question and answer period. If you would like to ask a question during that time please press “*” then the “1” on you telephone keypad. If you would like to withdraw your question press the “#”. Thank you. It is now my pleasure to turn the floor over to Anne Marie McCauley. Ma’am you may begin your conference. Thank you, Jackie. Good morning and afternoon. I am Anne Marie McCauley, Director of Investor Relations for Checkpoint Software. Thank you for joining us to discuss the fourth quarter and annual 2005 results. As a reminder, this call is being webcast live from our website and is being recorded. To access the live webcast and replay information, please visit the company’s website at checkpoint.com/ir. The replay will be available till February 13. If you would like to reach us after the call, please contact the Investor Relations department at 650-628-2050. On the call with me today is Gil Shwed, Chairman and CEO, Jerry Ungerman, Vice Chairman and Eyal Desheh, Executive Vice President and CFO. Before we start our management presentation, I would like to read the following disclaimer. During the course of this call, the company will make certain forward-looking statements regarding our expectations for the revenue and EPS in the future, specifically as pertained for Q1 of 2006 and in general as the pertain for 2006, and our continued specific success as a provider of security position. Other statements which maybe made in response to questions, which refer to our beliefs, plans, expectations or intensions are also forward-looking statements with the Safe Harbor provided by the Securities Litigation Reform Act. Because such statement deals future events, actual results could differ materially from the company’s current expectations. Factors that could cause or contribute such differences include but are not limited to, the impact on revenues of economic and critical uncertainties, the impact of critical changes and weaknesses in various regions of the world, including the commencement or escalation of our facilities or acts of terrorism. The inclusion of network security functionality in third-party hardware or system software; any unforeseen developmental or technological difficulties with regard to Check Point’s products, changes in the competitive landscape, including new competitors or the impact of competitive pricing and products. A shift in demand for products such as Check Point’s and then factors affecting third parties with which Check Point has formed business alliances, timely availability and customer acceptance of Check Point’s new and existing products including NGX safe products. The parties’ ability to consummate the Sourcefire transaction, including the ability of the parties to secure the CFIUS approval required for the transaction on the terms expected or on the anticipated schedule, if at all. Unanticipated expenses associated with the Sourcefire acquisition; the possibility that Check Point may be unable to achieve all of the benefits of the acquisition within the expected timeframes or at all and to successfully integrate Sourcefire’s operations and technology into those of Check Point. Operating costs, customer loss and business disruption, including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers may be greater than expected following the Sourcefire acquisition; and other factors and risks discussed in Check Point’s Report on Form 20-F for the year ended December 31, 2004, which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update information concerning its expectations. Thank you, Anne Marie. Good morning and afternoon everyone. Let me share with you the results of the quarter end of year and provide some more details on the finance. The fourth quarter of March was sound finish to good 2005. We have posted a number of record results during the first quarter including the highest quarterly revenue, highest net income and earnings per share, cash and investment balance and differed revenues balance and growth. The key drivers for our fourth quarter performance was strong sales of subscription and services, nice growth in our product and solution specially small defense, work security products and VPN-1 Edge for more size protection, where an impressive number of orders larger than $0.5 million most of them combining product subscription and support. Let me share with you the financial highlights for those the fourth quarter and 2005. Revenues fort the fourth quarter were $156 million compared to $143 million in the fourth quarter of 2004, an increase of 9%. Fourth quarter revenues represent an increase of 11% over third quarter revenues, with product and license revenue of increasing 20% sequentially. Net income for the fourth quarter of 2005 was $89 million an increase of 17% compared to $76 million in Q4 last year. Net income excluding acquisition related charges were $91 million and increase of 15% compared to 79 million in the fourth quarter of 2004. Earning per diluted share for the fourth quarter of 2005 was $0.36 an increase of 21% compared to $0.30 last year. Excluding acquisition related charges, EPS were $0.37, an increase of 20% compared $0.31 in the first quarter of 2004. Deferred revenue this quarter were $169 million an increase of 25 million or 17% over the third quarter of 2004. This is the result of many annuity-based deals for subscription support and consumer products. All these drivers are also the highest in our history. Operating expenses excluding acquisition related charge include sequentially by $3 million to 61 million for the quarter similar to Q4 last year. Several operating income excluding acquisition related charges increased to $95 million from $83 million in the first quarter of 2004. As a result, operating margin increased to 61% from 58% last year. Our effective income tax rate was stable at 17%. Cash collection continued to be good for the first quarter our day sales DSO were 63 days compared to 54 days in the first quarter of last year as the quarter was backend loaded. We again generated strong cash flow from operating activities of $81 million. Also, our cash and investment balance at the end of the quarter was over $1.7 billion. During the fourth quarter, we purchased 1.25 million shares for total cost of roughly $28 million as part of our share repurchase program. This brought the share purchased in 2005 to 10.6 million shares for total cost of $237 million. Our fourth quarter revenue was well diversified; with the America leading away contributed 47% of revenue. EMEA contributed 41% and Asia Pacific and Japan region contributed 12% to our revenues this quarter. In the fourth quarter our large orders which are greater than $50,000 accounted to roughly 29% of our orders. We also had good growth in our install base bringing certain to total to over 460,000 security gateways. Now let’s go to 2005 annual financial highlights. For the year ended December 31, 2005 revenues were $579 million compared to $515 million for the year ended December 31, 2004 an increase of 12%. Net income for 2005 were $320 million, an increase of 29% compared to $248 million for the year ended 2004. Net income excluding acquisition related charges were $327 million, an increase of 17% compared to $279 million for 2004. We delivered 21% increase in our annual earnings per share, which excluding acquisition related charges totaled $1.30. Including acquisition related charges earnings per share was $1.27, an increase of 33% over 2004. In summary, the fourth quarter results kept a strong finish to good 2005, with record quarterly revenues, differed revenues, profit and cash and investment balances. Now Jerry and Gil will speak more about the business and our strategy. Jerry, please go ahead. Thank you, Eyal and hello everyone. It’s good to be with you again today, to discuss Check Point’s business results this past quarter and highlight our achievements in 2005. During the fourth quarter, we again introduced new products and technologies across the various security segments we addressed, to our expanding portfolio of security solutions. A few highlights include we strengthened our internal security offering with InterSpect, NGX and look forward to further benefit through our proposed agreement to acquire Sourcefire. We enhanced our enterprise endpoint solutions Integrity, with the addition of Anti-Spyware capability and we advanced our Unified Threat Management Solutions, with small business market, with new Safe@Office 500 appliance. We have received very positive feedback from both our partners and customers, as they look at the newly combined technologies and realized the resulting level of security we can provide them. They proceed this combination to give them the level of security they need to protect their network infrastructure, and something not available from any other hardware or software security company. Now our customers are able to approximately deploy a multilayer security architecture, that’s easy to manage and provide the highest level of security. This is also valid to our partners, as it improves their solution set and capability, to meet the needs of their customers. In Q4, our emerging products again contributed 30%of new business, Connectra had nice Q4 growth and sales for the full year 2005 increased by over 250%. VPN-1 Edge was a notable emerging products contributed in the fourth quarter. And we had another quarter of strong demand for our smart defense services. We have realized except across the all geographies quarter, with both current customers, as well as new customers. Most are realizing the power having single security architecture with centralized management, affecting the most important elements for network, and doing so as an independent security layer, but they can acquire software and deploy in open servers, OS part of the integrated hardware solution. In 2005, we made major strides to transform our vision of the unified security architecture into a reality. A corner stone in this transmission came with the launch of the NGX platform. With this major upgrade to our core technology, our security solutions are integrating and can be easily extended to adapt to new and evolving security threats. This is unique in our market and not a capability being provided by others. Let me share with you a few common themes that arise in my mind, with partners and customers. The security threat environment is comprised of known threats and unknown and unpredictable threats. And this ever changing and evolving environment, it is mandatory that security solutions are dynamic that successfully combat threats. The importance of having independent security layer is recognized by our customers and partners and what they tell us and more importantly in their purchasing decisions. The value of an integrated security solution that could be managed across a unified architecture from a simple console is resonating with our customers. And this customer acceptance of our strategic vision is feeling the growth in our subscription revenues and deferred revenues. The second business driver we saw emerging our successful Q4 results an increase in number of customers who purchased the entire product portfolio or a broadest set of our security solutions was to just buying a primitive firewall and VPN. We view this is a commitment to Check Point and our newest technologies. In summary, we continued our focus this quarter meeting the needs of our customers by providing them with the most of secure solutions at the best Total Cost of Ownership, and by giving them choice on how and where to deploy the technology, and to ensure this is a network infrastructure they have which may contain the down security capability is truly secured. Thank you Jerry and good morning everyone. Q4 was a strong quarter and a good finish for the year 2005. When the IT environment remains challenging, I am very pleased with the result to report it today. We are generating healthy business, as you can see for record quarterly results in revenue, deferred revenues and profit. As Jerry mentioned earlier, even more important or the biggest driver behind our results, these drivers includes customer acceptance across strategic region in the growth reduction of our product portfolio, both of which gives us confidence, as we are gaining traction within the market for security solutions as we head into 2006. 2005 was the year of both solid financial performance and expensive product and technology advancement in our security solutions. The result is as we go to market today, with the most comprehensive and integrated set of security solutions designed to help our customers addressed both the known and constantly changing security threat environment. 2 years ago we embarked in implementing our vision of the unified security architecture. Phase I was all about expansion in 2004, we expanded beyond the enterprise service market adding solutions to meet internal web and endpoint security needs. Its one of software ends which expand from the very high end all the way for the consumer market. Phase II focused on unification, I just mentioned 2005 revolved around creating the unified security architecture, with the introduction of the NGX platform and the corresponding Integrity product version. All of which come together for a unique centralized management solutions. Phase III which we call universal applicability will focus on providing refined solution for the latest known and unknown security front. So they viewed capability, existing our small defense service, and now that we focus in 2006 is to extend re-capability across our solutions portfolio. We are probably also interested in our forecast for 2006, so I’d like to share some of our target thinking and projection for the year. We organized the general market condition, our internal phase projection and additional factor like our up coming Sourcefire provision. Of course, you do have to remember that predicting the future always results high level of uncertainty. Based on all these analysis, we arrive to an anticipated midpoint revenue growth rate of approximately 14% for 2006. This translates to our target revenue of approximately $661 million. The actual range can vary by plus or minus 5% for this number, depending on business conditions. Obviously, with the changes in the marketplace and expectations can also well work and we divide market climate and execution; it can be always higher. Based on historical trends in recent years, the first quarter has contributed between, 21% to 24% of our annual sales target, we believe that the good range for this year would be 22% to23.5% of our, of the annual target. This translates to a range of a $145 million to $155 million in revenues which we believe gives the reasonable target for the first quarter. Our earnings per share projection for the year 2006 excluding the acquisition related charges and stock-based compensation is expected to be in the range of $1.40 to $1.47 per share. For the first quarter, it is expected to be in the range of $0.32 to $0.34. With the stock-based compensation charges and acquisition related charges from half acquisition, EPS is expected to be $0.05+ for the quarter, and approximately $0.22 lower for the full year, we don’t have the, here the impacts of over their acquisition related charges from the pending Sourcefire acquisition, all the other Sourcefire numbers are factored in the range we gave and then especially with regard to the first quarter they provide the small contribution and high variance because of the unknown a closer disclose rate of pending acquisition. To summarize my part, we had very good result in 2005, we set record level in most financial measurement and we are focused on continuing to provide good and healthy business results in 2006. With that, I’d like to thank you again for joining us on the call today and open it up for questions. At this time I’d like to remind everyone if you would like to ask a question press “*” then the “1” on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Early in the second quarter, okay. Just, I would like to see if you could get some more color on subscription revenues, I know the growth was quite healthy, but you have seen some decelerating growth over the few quarters in 2005, is that reflect of it or it sort of, just marked take your comment, suggested it is at least try to get a feel. Why that it would be so rational, what we should expect in 2006? I think we saw both very healthy and smart defense, turning out to be one of our better innovations and very good revenue sources and that right now does appear mostly in the subscription line, it also means that customers are in subscribing more and more and they won’t power upgrade, they won’t update, keep in mind that we did finish the transition that we saw in about 2 years ago from a old programs to a new programs and most customers are now paid their upgrade fees and update fees and they are now more and more in full software subscription which helps driving the software subscription line. Great. Looking at the growth in the December quarter do you think that’s a type of growth we should expect in 2006? Very high to say and again I don’t know that we have all the modeling assumptions here but I think if we are looking for a, as far as healthy growth in many business factors across 2006. Thanks good morning everyone. Just going back to the question on subscription did you see any more last longer term deals than usual? Not really. Mostly, most of our subscription is 1 year, where a few customers do out for 2 year, 3 year subscription but they doesn’t have substantial or significant impact there deferred revenue or any offers they mentioned. Yeah, we do have other options but the majority of our customers are buying the subscription and the maintenance plans for 12 months. That’s the majority; we do have two year and three year plan. But most people go for 12 months. Okay one final question, the sales and marketing line considerable leverage, Eyal is that leverage sustainable how should we think about that going forward? Well, in 2006, part of our plan is to invest more money in marketing and sales. But we continue our leverage model. We will leverage our channel we have over 2000channel partners with 1000 of sales. Our people carrying our products and that’s the major leverage that our business model provide. I think its still all of that is related I mean our channel sales subscription we also sell new product, and our challenge is to grow as they look though. But I think some more and more subscription means that a little bit more stability we will think in excess for little bit more long-term but still for our business comes from new deal sales every quarter. And we still have to do more of a new deal sale; keep in mind the channel does that as well. Hi guys just have a collections, first just Eyal, if you could give us a sense maybe just sort of what your expectations are for the conventional Sourcefire for ’06? Is that changed at all from our, recovery effect and couple of months ago when you all acquired them? Yeah, as we said as just earlier it depends on the acquisition, on the acquisition date and of course from that date on, there is a very long future, so the timing, was determined how much this is going to contribute we five member currently when we did the announcement was that its above 6% of our gross per year will be contributed by Sourcefire deal. But that accounted that we’ll close the deals very early in January, it might be a little less than that and that is where we gave such range, because we can’t really expect of these exactly and precisely. Most probably when we close the deal or announce a deal it will be smarter in terms of how to measure this. Great, and then also when you look at the current quarter, Gil, I was wondering if you just give us some kind of just a competitive environment Eyal said and just sort of, from macro perspective, maybe are you saying a thing changing just a perimeter market? I’ll tried to answer a bit and then we’ll also give Jerry a chance to give his views, first from the competitive environments, we are in the market that there is a lot of competitor, I think very competitive but we actually see a strength in our relative competitive positioning some old competitor is that we are seeing less and less, it doesn’t mean that they won’t try, doesn’t mean that they won’t compete but, but we are seeing less and lesser impact of large competitors and we aren’t seeing, bit many or many or even at all major new competitors emerging. Actually, we don’t want to look around or not many small or mid-size company that’s all becoming a bigger factors that they were before in the marketplace. So overall we are very pleased with there competitive environment even anecdotally a new space better than I do, results of the other companies in security space from the last week show that we are doing as well or even better than others. As well as the overall IT environment, I don’t think this have good environment when people are buying and they are willing spend but I don’t see an environment that right now in any kind of rush to spend their money or anything like that. Customer have recalled us, they have the long-term plans but there is no way rush from customers to over invest or to invest even more than from my standpoint the second half 2005 and I think I’d share it to be for enough thing here, with the change of the new beyond the factors we had very strong industry better than I expected but the second half ’05 it didn’t show the signs of growth as I was expecting for in the overall IT environment as I said our yearend was pretty good and better than was I expected in Q4. Jerry, I would like you want to comment more from your discussions with partners and customers on different competitive environment. No, you are very consistent in it. What I hear from customers all the time, I spend a lot of time with them, is a really value and independent security layer, it really value with the proposition with Check Point brings a unified security architecture, a single management console. And we saw many large transactions and significant transactions that were competitors where they are in the process now that they consider Firewall VPN brand are now, they are starting to display other installed all the technology to take advantage of our broader security solution set all managed centrally. And I can see it in the results of other companies; I can see it in the activities and I can see it in that close rate. But I think we did very well on the competitive front across all these different security segments we’re in, so I’m pleased with where we are and I think the customers really value the proposition that we are bringing to them, the choice we given and the level of security they get, through this single management console on the unified security architecture. So I think we are very well positioned going forward. Yeah, guys you mentioned that you sold a broader set of solutions during the quarters any metrics that you can share or back that up? Well I think Jerry said, one metric was I mean, Jerry shared is that our emerging products categories now 40% of new product sales. And which is pretty good but then the other factor that we have mainly on console, we on the like large deals, we are on the like advertise of deal and we saw more and more deals when customers not just buying the emerging products that they buy a multi-products deal. We had several multimillion dollar deals and some of them are even multi-year contract throughout the year and towards yearend which revolves around and higher Check Point architecture another interesting deal that we had restored end of December 3, I mean was actually beginning this December, but was the year deal which wasn’t even forecasted this was over a $1 million of product, the same customer actually at the beginning of January this would have another million dollar for another completely different set of products from us, to began a good indication of customers buying into that region. From in wither just anecdote and the metric that shows that. Okay, was there any average deal size metric that you can share that you have that will compare it to previous quarter? Not just we can quarter, I didn’t but its reality is pretty hard to talk about average deal size because most of our orders are relatively small $2,000 involved renewal of subscription or a single addition of product, some deals like the 29% of deals over $50,000 are which we called large deals or I think deals which involves not just a single or a two or three products update or two or three product subscription that involved more complicated scenario and we also add many, many deals with over $0.5 million, we did underline all deals and nicely they were most of them, the vast majority of them involve different products and multiple products. Okay and also just on the again contribution from Sourcefire point with that a little bit in ’06. You didn’t mention I think in the October the numbers were something like $40 million to $50 million, in revenue in ’06 I know there has been fresh with deals been delayed a little bit as for as the closing of it but, we just see a run-rate of that $40 million to $50million as we go through ’06? I think in the future, the answer is, the sort answer is, yes, but I think first in the future and alternative for going to breakout Sourcefire. The contribution for ’06 we deal over most because of the translation of the run rate and booking into revenues which maybe slightly difference than previous numbers or previous number again I don’t know which financial metric they were quoted. But the run rate of Sourcefire is pretty healthy and I think that we are, so far we are very happy with the decision which we made when we are announced that in October. Contribution in ’06 is going to be much less than the $40 million number both because of the number of quarter and the timing of that and also again I don’t know when we see them fully on the light as once we close the deal and we have all the detail number but how would there booking run-rate or sales run-rate would get translated into revenues. Thanks this is actually Priya Parasuraman for Bill. I was wondering if you could talk a little bit about your partnership with D-Link and also how the products of that partnership would differ from your, I mean other UTM offering is that safest offer? We’ve announced earlier this month the new and what we hope is important sign for new types of deals for small business as D-Link. And this seems for the clients that D-Link will deal but does involves our technology and that many difference options this effect is similar in many aspects well our Safe@Office products. But D-Link is obviously a leader and important company in the small business market and had the lot of channels there and a lot of access to small business. So we hope that such partnership with hardware vendor than we’ve partnered we’ve reached the channel we have positive impacts, its too early to say, we’ve just launch the deal as I said few weeks ago, and as I said that is very similar our Safe@Office appliance and, there is not I don’t know specifically technically what are the different sets and speeds and so on. But it is on the same basic architecture and the same basic concepts base which was reflected in to the market. Yes, hi good morning good afternoon. Regarding some of the emerging products you mentioned I think Connectra was up250%, what about InterSpect, how does that doing, how that doing in the quarter? InterSpect is doing okay, not showing the same percentage we also say Connectra this year, with InterSpect we have the every quarter we have few breakthroughs in terms of the which channels which countries which places as we sell into. We’ve also to keep in mind, that because of the acquisition of Sourcefire that as people are now reviewing and actually raising their clients to do business with us. But the lot of the Sourcefire deal is expected to affect the InterSpect business. Hopefully in a very positive way, because I think these are products they compliment each other, but that’s one of the elements that occur straightening right now with the Sourcefire deal. Okay Gil, and related to that I mean I know the deal has not yet closed but wondering if, either at the Analysts Day Conference or at some point in the near term Check Point is going to sort of announce its product road map and strategy for the Sourcefire integration, other words were Sourcefire displace InterSpect, do you think or Sourcefire become a technology that’s embedded within the NGX platform or because of the standalone IDP clients. I thin almost all of the above I don’t think the Sourcefire will replace InterSpect but we are going to integrate the products we are going to create different sets of functions and features based on the and based on the different set strength of the different product and we are going to integrate some of the Sourcefire technology in the general carrying methods of security products from Check Point. And we will announce integration plan in the roadmap but it will be get done only after we close the deal and when we fully ready to give customers they are right to answer the, with the right work to integration. Okay, okay great. And finally just the 40 to 50 million run-rate for Sourcefire you mention though that the revenue that you recognize would be substantially below $40 million. Again that’s influence by the timing of when the deal closed but also revenue recognition issues and they would how much for that below 40 million. Could it be something like 20 or 30 million, just trying to get, I get a sense for how much Sourcefire is contributing to that, $661 million number, that you talked about the in the other call? I don’t know, I don’t know if I have this number but, and again once we close the deal, we do better. The range of 20 to 40 probably the right range. As for as the large companies following the more in the middle of that range, but inside the area is good as we though. Thanks I just wonder you did the Sourcefire for the March quarter, when you gave the guidance for the March quarter; have you included the idea that you are close and what kind of revenue are you expecting, because you did leave open the IT of that, maybe it closes on the June quarter? Yeah Sterling, there is all low revenue assumption in Q1, on the Sourcefire deal and as we said before, its very much depended on the timing on the closing and on the type of bookings that we will have laid back and, so now allow this factor into Q1 right now. We will see when we close and that will be smarter about the numbers. Okay, so it’s similarly like when you acquire Zone where you had just a couple of million in the quarters, what you are saying? Yeah I hope so, I already able to close this as soon as possible and, get on that is all, our plan. But right now we’re waiting. Okay and then just one last one. You know you mentioned that the quarter is backend loaded I think we all know October and November sluggish had a big up-tick here in December, but as you started into the beginning of 2006, what’s kind of the momentum or what’s the discussion are you hearing out of the channel in terms of, appetite in demand for the type of solutions that Check Point has now? Continuing on serving I think the channel is very busy, very active there is a lot going on I think there is momentum out there. I think as Gil said, we haven’t got back to a free spending environment, its still challenging everybody has been question on the need, the requirement but the activity is there. It’s very pleasing we got a very enthusiastic positive channel right now. Its busy it has ever been. On that as surpass to it broader security set I think it’s a very good, I know most of these channels expert they like having those broader solutions that after the single, Security Council that resonating very well with the customers. So they think they are activities hurry up and they are giving into new areas and different areas when they really ever sold before. Integrity is new area, selling to the best out of them and giving into the new SSL VPN are connected that very well just last year, we see a lot of activity in that particular market we are doing well. So I think we are going to see a good 2006. Maybe I would I can add one story to the one flavor to that. Could you finish our sales people for our sales force well wide we did one for Europe, one for the Americas and the positive with regard from our sales people was extremely positive as I did strength and potential for both Integrity and Connectra, and many, many other things that like these two but these are two which they pointed out promising product I think overall that seem its regard from our sales force and their enthusiasm was very high. And it’s not like less every year. I mean sometimes the sales force is much more controversy than have a lots of question and lots of challenges right now and we did this whole this year, many, many workgroup meetings and one-on-one meetings to assess the field perspective in the field and the field feeling about the year. Because at the end of the day that’s the best recover we have to, to understand what we needs to better into predict the results and their feedback was very, very positive from the soft side, we are feeling, of the feel under product and product traction was where you see. Hi, good morning and afternoon guys, couple of questions for you, one with regards to Integrity which Jerry mentioned. We have also picked up high level of interest, build around this product. But had some questions around whether the lack of standards from Cisco and Microsoft agreement around network initiative would fall in that. Are likely delays, adoption of Integrity this year? I think with the Integrity of the permanent cycle and same cycle tend to be very long, very, very long year even, and one of the reason is that we implement dedicate this growth to all desktops in the company, it’s a very long size and very long decisions for large companies when the main, as the main set of customers are ready large account. And now about the decent through Microsoft and Cisco well setting the big difference between the Check Point is willing and 6 for an hour. Many of these vendors sales about future standards, future sanctions future things that don’t exist, we sell the leasing product but the sale today and work today invested very big difference so I don’t think that these products have launching box in our deployment cycle but I do know that our deployment cycle and sales cycle were pretty long, well Jerry if you want to add to that anything. So I guess based on what you’re hearing, or what you’re saying eventually you get some benefit from the longer time, Cisco and Check Point, I’m sorry Cisco and Microsoft, like to pull out. Well I feel that Chris, based worry about what those 2 companies are doing. I don’t think they would in factor in from their capability pulling our technology and protecting out desktops but 1000s of customers are doing it already. They are waiting for any, Microsoft and Cisco are talking about that, so that’s how we already for the most part that’s not going to give anybody from deploying an endpoint security solution that’s fully integrated and operational within their environment. All right and thanks and the second question just from a vertical industry perspective any particular verticals we see spending out with regards to demand as a metric issue? Not really. No I think it was still doing well across all of them, I know we’ve been very, very broad in our approach and very successful in demands over the government with manufacturing retail, et cetera and there’s still very wide spread. Yes. Hi, thank you guys. Two questions, one if you can just comment on the SSL VPN environment, couple of your competitors has quite a challenging resource and second is that Jerry if you can just give us some more color in the numbers of the channels that you added 2005 versus last year, thank you. Yeah now, we can generally to grow and to the channel as usually by geographies or market segments or supplies segment but I’m very pleased with the strength and the growth in our channel and a coverage that we’re getting as we approach new market, for new market segment, there is some consolidation going in the channel we see that all the time, we’ve seen it for years now. And I think it’s our strength so that we continue to add more product to them but more pleased on the more successful there with abilities that generate revenue on margin and serves our customers in a broader stance from ad with their service revenue with the value that they bring with the table. So that was a good strength to share, I missed the first part of the question now, we got off… Yeah, we have I think we’ve discussed in particular this quarter that we’re undergoing a change there and improvements that are beefing up of our full management structure in the Asia-Pacific region, we created two regions out of one with our two Vice Presidents in place, accretive to North Asia, South Asia and we’re seeing very good traction build up for the early stages right now trying to really get the right management structure, infrastructure and partnerships in place in both North Asia and South Asia. The answer about SSL VPN buy, we’ve mentioned before that the product line to Web-security product line is growing to 150% this year so as this a nice growing area still not achieved by the thing we’re doing probably, growing probably among the fastest in the industry if not the fastest. Look Ehud, we will be taking share with the month of growth between us compared to what we hear from others, I do think with this market, say, 2 years ago people saw this effect running to be a user market, it sounds out to be a good healthy markets but the overall market it doesn’t show, it doesn’t extrapolate review which will be safe. Now what are you very well in the marketplace with some and again its with our independent security layer and with unified security architecture or biggest end our remote access capability list us all under the existing infrastructure and improving to be far of us and not only we’re winning ads up, or we’re seeing a lot replacement of existing infrastructure that people may have filed or referred but I think we’ll continue to see that. Could you guys elaborate on some of the transitioning in the consumer security mark businesses, Zone Labs is in some of the OEMs and I think maybe some ISPs and what kind of competitive environment we’re seeing there is actually pricing and just comments. Yeah, we’re on a very good year in the consumer business with very nice growth, the most of our sales are online but we’re increasing our presence both in the retail stores and our view and one of those large chains recently we can see a lot of Zone Alarm products displayed on the shelf there and we are selling very well. OEM relationship is going okay. But its also there would be part of our business and the MST channels something that we sort a few to penetrate in 2005 and I hope we’d be able to do more in 2006. On Microsoft we can’t, we never underestimate Microsoft, I mean, its they’d made a lot of statements I don’t know if that we still see a lot of them right now selling in the market but the President is there and the Shwed is there and I think the impact is more of other players that are not at this point. But yeah, leaving the claim the impact is more for us but just giving some insight of our lifting so far. If the vital ship product is mainly targeted to the most simple task, a very simple to use whereas our products are usually serving the power user so, it doesn’t means that Microsoft one-type exhibits small parts of regions that’s about consumers but it doesn’t mean that we have a lots room to expand and to maneuver using that large market that we are small player. And it does means that the main focus are of Microsoft at least the way it looks for us right now is not on where our core success and core strength is. Hi, good morning and good afternoon. Could you talk a little bit about Sourcefire in the sense when you first announced the deal, it sounded like its going to be a pretty quick flows and that’s obviously extended out. Can you talk about use of the issues or maybe regulatory problems are running into, that’s causing the D-Link in that a little? First of all, lets straighten our constraint, when we now discuss, we said we expect to close by the end of Q1, or we’re just at the beginning of Q1 so that’s why the collective memory. We’re going to regular preview of US Government and we’re gone to this before and we’re answering questions and waiting for them to come back to us. We just find out through them and this takes time because of the dialog we delivered. Are you finding anything in particular that timing would be elaborate just as a general slow down and the approval process? We are finding strategic issues that are dealing with the Government but I unfortunately, we can’t share those again we are, we think that there is no reason to expect many issues but like everything working with the Government it takes time and whereas we’ve seen all I don’t want to underestimate what is the difference. Can you talk about the in terms of the Sourcefire guidance how the closure of the deal might impact the amount in the numbers that since do you expect the Sourcefire year itself to be backend loaded because people are now considering your solution in addition to Sourcefire and basically maybe waiting for the deal to close to part this product? No I don’t think it’s, no I don’t think its, its most of the resolution that we can look at that and we don’t see much slowdown in Sourcefire but it don’t think it given the impact of Sourcefire in Check Point and it’s the resolution that you can see and shift that R&D changes that we can predict right now. Hi everyone, I’m wondering you could make a general comment about what you are seeing in terms of spending throughout the year, I had some sense that for a view of 2005 Q4 was by far the best quarter, if you’re chasing kind of a similar pattern in ’06? Okay. Probably there is something we clearly see the factor in to be, every year we see the Q4 is the strongest quarter but we do see now that first we all working with many large projects and we’re in more of these large products are more backend loaded we did see generally within quarters and within years more shifting to be backend loaded so that now reflects or as displayed. And I think we’ve the growth of the markets that we are seeing its something we’ve said customers are not rushing today to spend, we are planning, we are, we do have the budgets, we do have the projects but its not, like Jerry said a very free spending environments when customers where just rushing through, to purchase more and more, starting with all translates to more and more backend loaded quarters and years. Okay and then another question, as you integrate Sourcefire are you having some increase your direct sales fact offer at Sourcefire products themselves as well as to, for the integrated products to sell solution as you hire up your observation. Not really, I mean with Sourcefire we do get to nice sales force within the tend lot of direct sell-through customers and we will does work with challenges as well so that’s a great answer to that once we complete the transaction we’ll also get into Check Point and we see people also help in selling additional technologies to the same accounts in the same region. We do intend to continue to invest in our sales organization and field organization some of which will come to the channel part and some of which will come to the named account part. Remember all the named account part was also work through the channel. So, in our case its very, we’ve avail a direct presence, we all work with the channel and mainly in most of our sales people also work with customers so the net effect is we are going to increase our investment in sales and we are going to add sales in the grounding overall even there in most location. Hi guys how are you? A Question on, do you find your 14% revenue growth in new Sourcefire and 10% EPS growth, at that point. Are you still expect Sourcefire to be flat, a few cents excluding and what are the other factors that you’re working in EPS calculations, tax rate share count and margins given. I think we will be happy to share more details when we all know our Investor Day and we expect that to happen in Q2 and I think the net of everything you’ve seen is the number we’ve written, there’s many factors that end factor in so, again its $1.40 to $1.47, its very hard to say where you, wherever you gain or move $0.02 from that and you’re gaining and moved another $0.02 from something else and so on. That means there’s a lot of difference moving far and I think it will be pretty hard to break it up in a call like this with all the individual elements. Yeah, Michael just please remember that we are in Sourcefire business at the Check Point Sourcefire is not making, just moving into profitability so we’ll be adding partly similar amount of revenues, similar amount of expenses, so that they’ve got to offer, on the earnings per share its going to be negligible, over the, for we had an impact on the top line, because that’s why our target is big higher gross in top line then in our earnings per share. So excluding this, excluding this acquisition cost pretty much its going to flatter, in longer terms the EPS impact of Sourcefire? First of all again, the resolution of one of 270 has an impact of the interest that we generate on the cash flow conceded for Sourcefire I mean, it has an impact but on the other hand the values in terms of how would the Sourcefire results will be, and wherever, we tend to be flat, we turn into a great profit because the combined company can generate much more business together, its pretty high to predict this resolution. You dubbed the met force we, of course we seen…. Well share count is probably similar to where we are now and maybe a little lower and we face to continue our buyback program. Tax rates more or less the same, I don’t expect any changes. Thank you, hi, good afternoon guys. Couple of quick questions, Eyal the sell-through the Nokia channels, what would a, while the quarter from a percentage standpoint? As far as we don’t sell any products through the Nokia as a channel, so we can’t prove the Nokia channel was zero. Right, I think Nokia has a decent quarter, but remember that we, they are not selling our product, they sell the platform, we saw software it makes them the channel, what we’ve seen recently in terms of proportion is that there are more Check Point, a few platforms and limit space solution. So there’s proportionally the fee has a little lower than it used to be, is quite of Check Point gateway, deployed there on their platforms. But, I think the business is okay as the relationship with them is great, I think they are enthusiastic they have new products, new platform and they are enthusiastic to with us, all of us, Nokia and prior to the company, and number of parts of the company. Got it, and just can you, really maybe macro question form, do you kind of in rest of it, do you foresee ’05 in being some sort of an, an investment year, kind of where to be the rewards being relocated in ’06, ’07, is that the view or, I know that Check Point has been in the forefront of technology development. What’s your common view there? I think every year we invest and every year we hope to see the result in future years, and so far if you’ve seen the trends, it looks very, very clear that ’03 and ’04 were investment years, and in ’05 we are clearly seen substantial results of our investment in ’03 and ’04, and wherever the growth accelerates much more in ’06, ’07 and ’08, that’s a good question and its very, very hard to answer I think we are building the different portfolio in building their customers stories and building the customer adoption and we hope that certain points, their market conditions then other trends we’ll call it the growth rates to be than higher its, but its very, but you should not see this is predictable rolls exact reflection points in the marketplace, upwards or downwards. All right, well thank you very much everyone for your participation in our conference call, hope to see all of you at our Investor’s Day which we expect to hold in the second quarter, if you want to speak to management or to our Investor Relations following this call, please call our Investor Relation department, at phone numbers 650-628-2050 or we are happy to take your calls and return them. Thank you very much and we’ll talk to you soon.

EarningCall_233949

Here’s the entire text of the prepared remarks from Viacom’s (ticker: VIAB) 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. Executives: Marty Shea, Senior Vice President of Investor Relations Sumner Redstone, Chairman and Chief Executive Officer Michael Dolan, Executive Vice President and Chief Financial Officer Tom Freston, Co-President and Co-Chief Operational Officer Les Moonves, Co-President and Co-Chief Operational Officer Gordon Hodge, Thomas Weisel Partners Spencer Wang, JPMorgan Jessica Reif Cohen, Merrill Lynch Victor Miller, Bear Stearns Doug Mitchelson, Deutsche Bank Doug Shapiro, Banc of America Securities Kathy Styponias, Prudential Michael Nathanson, Sanford Bernstein Lowell Singer, Cowen Investment Bank Anthony Noto, Goldman Sachs Good morning, everyone. Thank you for taking the time to join us for our third quarter 2005 earnings call. Joining me for today’s discussion are Sumner Redstone, Chairman and CEO; Tom Freston, Co-President and Co-COO; Leslie Moonves, Co-President and Co-COO; Michael Dolan, Executive Vice President and CFO; and Fred Reynolds, soon-to-be CFO of the new CBS Corporation. Sumner will have opening remarks and then we will turn the call over to Mike for some specific financial issues. We’ll then hear from Tom and Les for a discussion of strategy and operations and then open the call up to questions. A summary of Viacom’s third quarter 2005 results should have been sent to all of you. If you did not receive yours, please contact Maureen Kenney at 212-846-7536 and she will get it to you. A webcast of this call, the earnings release, and other information related to the presentation can be found on Viacom’s corporate website on the Internet under the address of viacom.com. Now I will turn the call over to Sumner. Thanks, Marty. Good morning, everyone and thanks for being here. By now you’ve seen our results and know that Viacom has once more another more than a solid quarter and is on track to deliver its growth projections for the year. As most of you know, we filed our Form S-4 with the SEC on October 5, and updated the anticipated timing for completing the separation. We are now looking at the end of this year as opposed to the first quarter of 2006 as initially projected. Now Mike Dolan, will give you an update on where we are in the process in a few moments. But let me just say that as someone who has seen his share of corporate reorganization, corporate consolidation, and now some for computation, I couldn’t be more excited about where we are headed with our Company’s realignment. The new Viacom is well on its way to becoming a great growth story. Best-in-class brands, multiplatform content in the right businesses, a proven track record of creative innovation and growth, an impressive international foothold from which to expand around and encompass the world, a new Viacom’s singular and powerful vision is clear; to be the global multiplatform leader based on the power of its brand and its connection with the key demographic it serves. CBS Corporation has an equally compelling story, although with a different plot. Led by its powerful mass media brands, CBS Corporation plans to continue to reinvest in its businesses to further financial growth, deliver strong operating results, generate significant cash flow, pay an attractive dividend, and most importantly provide stockholders with a consistent return on their investment. Tom and Les will provide some color on strategy, strength, and structures momentarily. I don’t want to steal their thunder, but let me tell you these guys are ready to rock. In short, we will unleash these pure play powers on the opportunities that exist in this rapidly changing competitive environment. Now, let’s look at the third quarter numbers. On a consolidated basis, revenues increased 10% to $5.9 billion from $5.4 billion for the same quarter which was last year led by growth of 54% in entertainment; 50% in cable networks as well as increases in outdoor and radio, revenues from advertising climbed 9% led by gains of 70% in the cable networks and 7% in television. The Company’s operating income for the third quarter rose 5% to 1.4 billion, paced by increases in nearly every segment including double-digit gains in cable networks, entertainment and outdoor. It is important to note that we delivered these numbers despite some significant onetime items in the quarter. In addition to the 17 million of separation expenses, damage from Hurricanes Katrina and Rita cost us about 22 million in revenue and expenses principally in the outdoor television and cable networks. In the quarter we also recorded a onetime charge of $90 million related to the sale of two TV stations. Overall, we continue to generate significant per-share growth for shareholders. Net earnings per diluted share for continuing operations in the third quarter increased 12% to $0.47 per diluted share compared with $0.42 per diluted share in the prior year. This reflected a 2% increase in net earnings from continuing operations to 735 million from 722 million for the same quarter last year. Our free cash flow was $879 million, compared with $543 million for the same prior-year period and we used that cash to fuel our continuing buyback program. We have stepped up our program because we see great value in our shares during this period. Our shareholders pause to evaluate what we thoroughly understand, namely the separation you can count on. And you can count on us being extremely aggressive with our repurchase program. For the third quarter 2005, we purchased 35 million shares of Class B Common Stock and the additional 14.9 million shares we purchased in the period from October 1 to October 20, 2005; we have acquired a total of $6 billion under the $8 billion program authorized last fall. Likewise Viacom returned approximately $110 million to shareholders in the form of dividends on October 1. Looking ahead to the rest of 2005, we remain on track with our guidance of mid single digit growth in revenues and operating income and high, high single digit growth in earnings per share. This is an exciting and an extraordinary time for the Company as we embark upon this bold venture. These two companies will maximize our business performance and in turn their returns to shareholders. Both will have individually compelling stories; exciting stories that will unfold over time as these companies pursue their promising destinies. But there will always be one place where the plots of Viacom and CBS Corporation overlap and that is in their unwavering commitment to creating value for shareholders. As I used to say at Viacom, we have an unwavering commitment to excellence and we understand that for these two companies, nothing is impossible. Thanks, Sumner. Tom and Leslie will be covering the quarterly highlights, but before they do I would like to provide a quick update on the split transaction itself. First, as Sumner mentioned, we are in a great place as far as this spin-off is concerned. At this point we anticipate closing by the end of the year. Between now and then, though, there are several key steps in the process I would like to walk you through. First, we are on track to update our SEC filings for third quarter results and mail the documents to shareholders by early December. Then at the discretion of the New York Stock Exchange, the stock for the new companies will trade on a when issued basis. As we said in our last call, CBS will absorb the current Viacom dividend and majority of the debt. New Viacom as a result will be significantly underleveraged. It is our intent to increase the leverage of new Viacom to a range of 2.75 to 3.0 times EBITDA. This capacity will be used for continuing substantial share repurchase program that Sumner mentioned and selective tuck-in acquisitions that Tom has talked about in the past. In preparation, new Viacom in December will request Board authorization for share repurchase program. On the last call, I mentioned several cost reduction initiatives that we have underway and I’d like to briefly update you on these. We are finalizing at this moment the results of our overhead study and as you remember during the last call, I said that the overhead study that we are looking at includes not just the overheads at corporate Viacom but the overheads in the divisions as well. So it is the total overhead nut that we are looking at. And we are confirmed in our view that the total cost of the overheads of these companies will be less than the current consolidated costs. We are also making good progress on a new corporate purchasing initiative and we’re now implementing the tax strategies that I referenced on the last call. All in all, steady progress and we look forward to seeing you in December. Thanks, Mike, and good morning everyone. This is an exciting time for Viacom. I am happy to have this opportunity to talk you about our plans and our progress. Today I am going to walk you through the third quarter operational highlights for the businesses I oversee, the cable networks and the entertainment segment, which next year will be the new Viacom. The third quarter is not only indicative of the strength of our businesses but it also provides a glimpse of our prospects as a public company. We are already working towards the strategic imperatives we outlined for the new Viacom and are making progress. From the beginning we intend to be a leaner and more focused Company with a strategic operational and financial flexibility to build on our positions of strength. The overarching strategic priority for the new Viacom is to be the best-in-class, consumer focused, branded global content Company. Knowing and understanding our audiences and in turn developing innovative content to meet their ever-changing pace and needs have been the key strategies for the double-digit top and bottom line growth our cable networks have experienced for over the last two decades; an ability to evolve with our audiences and to connect with them on every platform. Our results validate this strategy. If you look at the new Viacom in the third quarter we grew revenues 26% and operating income 28%. Year-to-date new Viacom grew revenues 22% and operating income 18%. This is all on a segment basis. For cable networks, revenues increased 15% for the quarter, driven by double-digit growth in all three principal revenue streams. Advertising increased 17% with gains across all MTV channels and at BET. Affiliate fees increased 10%, reflecting both rate and subscriber increases at the networks. Ancillary revenues were up 20% over the same prior-year period, which primarily reflect licensing and syndication fees for Comedy Central and consumer products at MTV International. Operating income for cable increased 11%, reflecting the strong topline growth as well as the continued investment in programming and the new digital business initiatives to enhance our long-term growth prospects. Programming investment translated into rating success across our portfolio of networks. MTV scored its highest rated third quarter in its history in its key 12 to 34 year old demographic and maintained its leadership position for the 34th consecutive quarter as the number one rated 24 hour basic cable network among 12 to 24s. Third quarter ‘05 was the number one quarter in BET history with viewership up 26% versus year ago. It was Nick at Nite’s most watched quarter ever among total viewers, finishing number one in adults 18 to 49, women 18 to 49, and women 18 to 34. Spike also saw its highest ratings in adults and in males 18 to 49 in prime time. Nickelodeon remained the number one cable network for the tenth year in a row among total viewers and across all kid demos. And in addition to all of this, CMT, Comedy Central, TV Land and VH1 are all experiencing record quarterly or year-to-date ratings. I want you to know we will never be complacent with the success of our cable networks. We have a desire to continually innovate and improve. That is the mindset we are now applying to our other high-profile business, Paramount Pictures. We are in the process of evolving Paramount Pictures into a new motion picture model that recognizes the changing realities of the film business, captures all the strengths of the studio, and leverages the unique capabilities of our worldwide cable networks. Our performance in the third quarter at the studio was excellent. And looking at the entertainment segment overall, which includes Paramount Pictures and Famous Music, revenues increased 54% to $845 million from 549 million in the third quarter primarily due to increased worldwide theatrical revenues including continuing contributions from the War of the Worlds and the third quarter releases of Four Brothers and Bad News Bears, as well as higher domestic home entertainment and worldwide pay TV revenues. Operating income increased to 109 million from 5 million in the third quarter last year. We also made good progress in the quarter against our multiplatform strategy. On last quarter’s call we outlined our twofold approach to the strategy. First, to extend our existing brand through every relevant digital platform; and second, to develop or acquire new businesses through targeted acquisitions to augment our current capabilities as needed. By expanding our reach into new markets and onto new media platforms we will build an even deeper relationship with our audiences. In the last six months, we have built and launched innovative broadband networks for almost all are major cable brands. We launched MTV Overdrive on MTV.com, which gives viewers on demand access to short form video programming on a streaming and download basis. Nickelodeon launched Turbo Nick. VH1 launched V Spot. MTV launched mtvU Uber. And Comedy Central is launching their broadband channel, the Mother Lode today. All these broadband networks will be great businesses for us going forward as the web continues to move from text to video. They are high CPM businesses and they allow us to really leverage our video production skills and our libraries on line. Back in June, we acquired Neopets and we added another online acquisition this month when we acquired iFilm, a leading online independent video network. iFilm is the leading aggregator and distributor of user generated video content on line and has one of the largest libraries of short form entertainment on the web. It is a perfect fit for our Company. In September we announced a global licensing agreement with the Warner Music Group for the use of their music videos and original mobile programming developed by MTV Networks. We expect to have 50 wireless deals worldwide internationally by year end and be in front of 750 million users worldwide with carriers from Verizon to China Mobil to DoCoMo. Looking more specifically at our broadband networks, we see a three-part success story. First the products have gotten great reviews from our consumers, our competitors and the editorial community. Second, the product has been a home run with the advertising community where we are doing business at three times our TV CPMs and have seen the client list grow quickly to include a range of blue-chip advertisers. And finally, even without a significant promotional commitment to date, we have seen consistent and growing usage. We are really excited about our performance this year and for the prospects of the new Viacom going forward. That said, I want you to know that we understand that separating ourselves into two companies is not the silver bullet that will guarantee new Viacom’s success. We know we need to both meet both our strategic and financial promises in order to earn your confidence and we are committed to doing that. With that in mind, we’ve put together a world class team at the top of our Company, a mix of insiders and outsiders including Judy McGrath’s announcement today naming Michael Wolf, the new COO of MTV Networks. Many of you know Michael as the leading entertainment industry strategist from McKenzie. We’re thrilled that he will be with us now to ensure that we execute and operate with excellence. We’ve also been spending time on the composition of our new Board and are looking for people who are world class and who bring strong expertise and points of view. I’m looking forward to seeing all of you on the road in December. Thanks for listening and I’m going to turn now over to my partner, Les Moonves. Thank you, Tom. Unfortunately in a couple of months we won’t be partners but we will still be friends. Week 2, at CBS; I have exciting third quarter highlights that clearly demonstrate our operating strength of our steady progress. Under the CBS Corporation umbrella we have powerful mass media businesses with exceptional cash generation abilities which is a very important component in how shareholders will value CBS. We are extremely excited about the future of the new CBS Corporation, but first let’s talk about our businesses. Let me start with television, where despite some tough comps on the syndication sales side due to last year’s record-setting sale of CSI, we continued to post study advertising revenue gains driven by 11% ad sales growth at the CBS and UPN Networks. So far in the new television season, CBS has been dominant. This season is only six weeks old. We have won each of the first six weeks in households and viewers by a large margin, a first for any network since 1988. We have won the most recent four weeks in adults 25 to 54 and CBS has finished first in each of the past three weeks in 18 to 49. Season-to-date, CBS has five of the top 10 shows, as many as all the other networks combined. And we are number one on five nights of the week in regularly scheduled programming. We are also cleaning up in key demos. We are number one in adults 25 to 54. And at 18 to 49, we’re ahead of NBC and Fox and trail NBC by .01 of a rating point and obviously over the last three weeks, we’re gaining momentum, having been first for the last three weeks. And for the first time in 20 years, CBS is dominating Thursday night, the most important and by far the most lucrative night in television. We are number one in each of the three hours in all categories including 18 to 49. There are huge dollars up for grabs on Thursday, the night advertisers love most, and we are now getting the lion’s share of that money. And that is going to continue. Between CBS and now UPN at 8:00 with what is considered one of the hottest and certainly the most talked about new show on television this fall, Everybody Hates Chris, we reign on Thursday nights. Before I shift to UPN, I do want to address a recent development at CBS I couldn’t be more excited about. Last week’s announcement that Sean McManus will head our news division in addition to the sports division he currently overseas. Sean is a superb broadcaster whose success in our sports division is exactly what we hope to see with our news department. His ability to spot and get good talent and bring big events and great production values to the screen every single week have taken CBS Sports to the number one position in its field, which is exactly where we know our news organization has the potential to be. It is a big job, but Sean is the perfect person for the position. He is a fierce competitor who like me is never satisfied with being in third place. Now getting back quickly to UPN, which also continues to climb this season in key demos, we had a strong up front with significant year-to-year gains and growth in our target demos, which is adults, 18 to 34. I already mentioned the success of Everybody Hates Chris, which is up 50% in adults 18 to 49 and 60% in adults 18 to 34 versus the same time period last year. Meanwhile America’s Next Top Model, UPN’s number one program, continues to grow, up 9% in 18 to 49 and 15% in adults 18 to 34, season-to-date. Moving on to syndication, where we have King World and Paramount, the two best brands in the world of syndication. While television license revenue decreased, this was due to pure titles available for syndication compared to the same quarter last year when we brought our juggernaut hit CSI to the syndication market for the first time. Lapping a hit like CSI is the kind of high-class problem we don’t mind having. CSI is a phenomenal franchise for us. For example this brand alone of CSI, the profits may total more than $1 billion from network, syndication, DVD, games, Internet, and publishing sales. In syndication, we currently have seven of the top 10 shows including the top two talk shows, Oprah and Dr. Phil; the top two game shows, Wheel and Jeopardy; and let’s not forget our top entertainment shows, Entertainment Tonight and The Insider. We expect these shows to be around for a long time and to continue to produce solid revenues for us. In addition we have lucrative off network deals with Everybody Loves Raymond, and as I said, CSI. Over at Paramount Television, we’re producing many of our hit shows including CSI and the potential game changer Everybody Hates Chris. But we’re not only producing shows for CBS and UPN but also for NBC, HBO, and USA. And we have ownership interests in almost all the CBS and UPN primetime hours with back-end debt benefits that will clearly pay off in a variety of ways. But, more about that later. We’re also excited about Showtime, which as part of CBS will be in a better position to bolster its strategic plans built around original programming franchises such as Weeds and the upcoming Sleeper Cell. We believe that Showtime has the ability to generate incremental revenue. Moving onto the television station group which outpaced the industry in the quarter, while the market was down 8.5% for the quarter, we were up by 0.6 and for September the industry was down by 4.3 while we were up 6% for the month. The rating success of CBS and UPN have in turn translated into huge success for our stations. For example in the October sweep, 13 of our 16 stations were number one in primetime. Our local newscasts are also reaping the rewards of our primetime success as we saw the combined ratings of our late local newscasts increase 9% over the same period last year. The station group outperformed despite some significant onetime items in the quarter that Sumner mentioned including approximately a $19 million impact from the sale of two television stations. The good news is that is behind us and 2006 is looking even better for our station group. Historically, even numbered non-presidential election years are our best performing and we are already seeing the benefits of ‘05 political dollars pouring into the third and fourth quarter. Between the New York Mayor election, the New Jersey governors race, and the upcoming ballot initiatives in California where we happen to own a sixth stations, we are seeing significant increases in political ads in the fourth quarter, where pacing is up in November over last year. The flow of political dollars will continue into ‘06 and we have the momentum to realize significant gains next year. Turning to radio, this is the third consecutive quarter of revenue growth for Infinity as revenues increased 2% to 542 million from 529 million, reflecting both local and national advertising gains, a sign of building momentum in the radio ad market. Not only that but we’re outperforming the market this year. In Infinity’s 40 markets, spot sales are up 3.6 versus the industry’s 1.6. In the top 10 markets, Infinity is up 4.7 compared to the industry’s 2.8. We’re also continuing to see our investments in programming and marketing pay off. For example we have now launched 11 Jack stations including Sacramento just last week. Out of the first 10 Jack stations launched, nine have had tremendous ratings gains and we continue to innovate. Last week we announced the launch of Free FM, a bold new format. When Howard Stern goes to pay radio, we will wish him goodbye. We will offer 10 different shows including rock legend, David Lee Roth and media personality Adam Carolla. We’re excited about this next generation of FM stations and about the other innovations we are embracing, including streaming, podcasting, wireless, and HD. Like radio, outdoor continues to convert significant revenues into solid operating income contributions. During the third quarter we saw operating income gains of 14% in the segment on 3% revenue growth, led by growth in our North American market. As we exit from onerous transit contracts, our margins will continue to improve. Again, the outdoor number includes about $12 million of onetime charges related to Hurricanes Katrina and Rita. We continue to pursue a global strategy for outdoor. We just announced our acquisition of Magic Media, a Beijing based company that has the primary rights for advertising on the city’s bus system. Beijing happens to also be the 2008 Olympic host city, giving our outdoor division a tremendous boost with a valuable region. Asia-Pacific, especially China has been the world’s fastest-growing region for outdoor advertising revenue. As well we continue to expand our presence in Europe. As an example, we recently signed key contracts in Italy that strategically position us as the leading provider of advertising throughout the Italian railway system. Outdoor is also exploiting emerging digital platforms specifically by experimenting with digital signage and changeable messaging. These new technologies give us tremendous potential for organic growth in this business. Our goal is to take the content and use it any way we can. Turning to parks and publishing, operating income for the quarter increased 6% overall, driven by higher revenues at the parks division. For the new CBS Corporation, our job is twofold. First, we will focus on making these best-in-class mass media businesses perform better and better quarter after quarter, year after year. And second, we will grow our brands and extract even more value from them, multiplying and expanding the revenue streams that flow from the valuable content we have. We’ll keep our eye on delivering the kind of business development that will keep our investors excited about more than just our dividend. This is a big part of our digital strategy. Our ability to continue to ad revenue streams is a significant and underappreciated opportunity for us. CBS News.com is a perfect example. By using our existing news staff; to manage our online news flow and minimizing additional costs while maximizing new dollars. CBS Sports Line is another model we want to replicate, creating new revenue streams by dominating emerging categories. In this case the increasing popular paid fantasies sports category where we have seen healthy growth in sales and profits over last year. We are tapping every single new area of revenue potential for our brands. From blogging to Apple’s iTunes on CBS pop pod-casting platform to the burgeoning world of ring tones and of course DVD sales. It is all about content. Like we said at the start, CBS’s content is the #1 in the broadcast business and that means we reach more people and now more young adults than anybody. Our programming will move across platforms and help us grow. You can look forward also to important deals in these areas in the near future. And of course we are looking for new ways to generate cash in more traditional areas. A few years ago, we paid hundreds of millions of dollars in affiliate compensation. Today that expense is disappearing and the business model in the network business is drastically altered as a result. The same is true for retransmission. The fact is, we have not been paid for what our signal is worth, but that will change soon. We will be paid for our signal and once again the business model will shift and revenue will flow our way. It is fair. It is common sense and it is on the way. That said, our strategic priority will be to continually return money to our shareholders while maintaining a solid investment-grade balance sheet. As we have announced, going forward we expect to pay a dividend in the range of $450 million annually, no less than what Viacom will pay in 2005. That is just the starting point; with our cash generation ability you can expect us to increase our dividend over time. Our team is great. We’re ready for the future. Thanks again, for joining us today and now we will be happy to take your questions.

EarningCall_233950

Here’s the entire text of the prepared remarks from eBay’s (ticker: EBAY) 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 eBay's Third Quarter 2005 Earnings Results Conference Call. This call is being recorded. With us today from the company is the President and Chief Executive officer Ms. Meg Whitman and the Chief Financial Officer Mr. Rajiv Dutta. At this time I would like to turn the call over to Ms. Lydia Ventura Senior Director of Investor Relations. Lydia Ventura Senior Director of Investor Relations Good afternoon. Thank you and welcome to the eBay’s earnings release conference call for the 2005 third quarter. I'm Lydia Ventura and I am the new Senior Director of Investor Relations for eBay. While new to Investor Relations I've been with eBay for seven years in various finance roles. Most recently as head financial planning and analysis. I look forward to working with all of you. Joining me today are Meg Whitman our President and CEO and Rajiv Dutta our Chief Financial Officer. This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the eBay web site. Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, we may discuss some non-GAAP measures while talking about our company's performance. You can find the reconciliation of those measures to GAAP measures in the tables of our earnings release. In addition, management may make forward-looking statements regarding matters that involve risks and uncertainties including those relating to the company's ability to grow its businesses, user base and user activity. Our actual financial results could differ materially from those discussed during this conference call. Factors that could cause or contribute to such differences include but are not limited to the company's need to manage an increasingly large company with a broad range of businesses of varying degrees of maturity, the company's need to increasingly achieve growth from its existing users as well as from new users in its more established markets, the company's ability to deal with the increasingly competitive e-commerce environment, including competition for it’s sellers from other trading sites and other means of selling and competition for its buyers from other merchants online and offline. The need to integrate, manage and profitably expand the newly acquired Skype business, the regulatory and competitive risks specific to Skype, the litigation regulatory credit card association and other risks specific to PayPal as it continues to expand geographically. The company's need to manage other regulatory tax and litigation risks, even as its product offerings expand and its services are offered in more jurisdictions. The company's ability to update and develop its systems infrastructure and customer service capabilities to accommodate growth at a reasonable cost, the company's ability to maintain site stability and performance on all of its sites while adding new products and futures in a timely fashion, fluctuations and foreign exchange rates, the company's ability to profitably expand its model to new types of merchandising sellers and the company's ability to profitability integrate and manage recent in future acquisitions and other transactions. More information about factors that could affect our operating results is included under the captions "risk factors that may affect results of operations and financial condition" and "management's discussion and analysis of financial discussion and results of operations" which are in our annual report on form 10-K, and quarterly reports on form 10-Q. Copies of which may be obtained by visiting the Investor Relations section of our Web site. Now, over to Meg. Meg Whitman, Chief Executive Officer Thank you, Lydia. And welcome, everyone, to today's conference call. On the heels of a great Q2, the company delivered excellent results in Q3. The strategies we put in place at the beginning of the year delivered handsomely building on the momentum from our very strong 2Q. As a result we saw strong growth across every part of the business around the world in what is typically a slower period for our business. The company generated record net revenues of 1.1 billion in Q3, a jump of 37% year-over-year. And pro forma net operating income grew 44% year-over-year, with a pro forma operating margin of 36%. While we saw growth in each of our markets, it was especially strong in our two largest eBay marketplaces, U.S. and Germany which both showed accelerating growth in Q3. Globally, eBay added 11 million new users and generated gross merchandise volume of $10.8 billion. PayPal continued its strong trajectory in Q3, with accelerating growth from merchant services in addition to continued expansion on the eBay platform. In Q3, PayPal added 8 million new accounts and delivered nearly $6.7 billion in total payment volume. And our newer venture, Skype, shopping.com, rent .com, GG and our other classified web sites also showed strong traction across the board. Our performance in Q3 validates the strength of our business model, our short-term strategies for growth, and our long-term plans for investment. eBay and PayPal remain the most powerful e-commerce franchises in the world and the cornerstone of our growing portfolio of online businesses. As a result, we are well positioned for future both in the Q4 holiday shopping season and beyond. Rajiv Dutta will discuss our financial outlook for Q4 and for the full year 2006 in a few moments but now let me spend a few minutes talking about our achievements in Q3. At our analyst day conference in February, we laid out our strategy for driving growth in the eBay business. We have consistently focused on increasing the value of the eBay market place for our users by investing in highly efficient marketing initiatives, and product innovation and reaching out to connect with our community of users. These efforts fueled the continuing momentum we saw in Q3. In the U.S., we deployed smart marketing tactics to bring buyers to our web site and further optimize seller's listings for natural search. These and other marketing efforts helped spur demand on the site and our sellers saw more bid, higher ASP’s and strong conversion rates in Q3. GNV across categories remained strong especially in collectibles, home and garden and business and industrial which all exhibited accelerating GMV growth year-over-year for the second consecutive quarter. And the growth of eBay stores also contributed to increased trade on the site. We exited Q3 with a record 193,000 stores in the U.S., a 35% increase from a year ago quarter. We now have 336,000 stores worldwide. This same focus on higher return activities also benefited eBay's international business. eBay Germany maintained the momentum it build in Q2 and delivered strong results across the board, despite typical summer seasonality. Like the U.S., the German team has been concentrating on increasing trade through efficient marketing, natural search optimization, increasing buyer protection, and community outreach. Which has driven an increase in listings and bidding activity and contributed to accelerating GMV growth. With its renewed growth eBay Germany is well positioned to take advantage of the coming holiday shopping season. Our other international markets also delivered strong growth across a variety of measures. eBay UK demonstrated impressive growth in GMV and transaction revenues. eBay France and eBay Italy again delivered triple digit year-over-year GMV growth for the seventh consecutive quarter. Our business in Korea which now has more than 14 million users continued to generate strong GMV growth and eBay Australia surpassed the 3 million user milestone. And now, one in five Australian adults is a registered eBay user. EBay's business in China also had an excellent Q3 delivering accelerating GMV and transaction revenues. Our Chinese marketplace is more vibrant than ever, providing sellers with strong ASPs and conversion rates. And we added nearly 2 million new users in Q3, bringing the total to 15.1 million, by far, the largest online trading community in China. A power seller on eBay recently told me that eBay is the only marketplace in China on which Chinese sellers can build a serious long-term business. I'm extremely pleased by the progress we've made in China and by the thriving ecommerce environment we are creating for a whole new generation of Internet users. As a result of our growth around the world, eBay international delivered remarkable year-over-year GMV growth of 40%. EBay's international business now accounts for 53% of eBay's user base and 50% of its global GMV. Our newer ventures are also demonstrating strong growth. Rents.com ended the quarter with more than 20,000 apartment properties listed on its site, making it the number one Internet rental listing service on the web. Shopping.com remains the number one shopping comparison site covering all kinds of products from shoes and iPods to hotels and mortgages. And G-GG continues to gain traction, now serving more than 150 cities and regions around the world. PayPal also had an excellent quarter, growing its business on eBay and expanding its merchant services business. In Q3 PayPal reached a record 87 million accounts, processed more than $6.7 billion in total payment volume and generated revenues of 247 million, an impressive 44% jump from the year-ago quarter. PayPal was also growing around the world. PayPal's penetration of addressable GMV in Canada, for example, is now greater than that of the U.S. And after only a year, PayPal is used to settle nearly one quarter of the addressable GMV on eBay France. PayPal launched its newest international service in China in July, which is already seeing healthy adoption among online consumers. Our merchant services business continues to deliver accelerating growth as well. In Q3, a number of popular web sites began offering PayPal as a payment option you willing pet smart.com, petco.com, cooking.com, starbucksstores.com, esurance, Equifax and hot wire. And web site payments pro our product suite for small businesses off the eBay platform, was launched in June is gaining traction. As a result, TPV from merchant services showed accelerating year-over-year growth of 49%. And as we announced last week, we are extending the merchant services business with our acquisition of Verisign payment gateway business. With the gateway business, which processed more than $40 billion in total payment volume in 2004, we can expand our customer base by tens of thousands of new small and medium sized business customers. And combining the gateway with our existing services will allow us to provide merchants with multiple processing choices from a single trusted provider. In addition to growing our core businesses, we've also completed some strategic acquisitions this year. Our portfolio of businesses has become much broader but there is a common thread that runs through these businesses. Each of these Web sites brings communities of people together to meet, talk, buy, and sell. And each empowers people in ways that were inconceivable just a few years ago. As the Internet evolves our vision of e-commerce has also evolved and at the same time we have expanded our addressable market and our opportunity for future growth. Investing for the future is a key part of our long-term strategy. In the early days, we expanded the eBay platform by introducing new trading formats such as fixed price and eBay stores. We also made key acquisitions such as the purchase of PayPal in 2002. This was a watershed moment in our history, because with PayPal we were able to remove friction from the online payment process, which led to a large and successful new business for the company. Last week, we completed another acquisition that we believe will be just as transformational to our business as PayPal was. And that's the acquisition of Skype, the global online communications company. Much like the eBay and PayPal businesses, Skype takes unique advantage of the Internet to deliver a powerful new way for people to communicate online. And while the Skype of today is largely focused on communications, we see incredible potential for its use in e-commerce. Combining Skype with eBay and PayPal will create an unparalleled e-commerce engine for merchants and consumers around the world. Integrating Skype into the eBay marketplace, as well as into shopping.com, rent.com and GG will reduce communications friction between buyers and sellers and increase the velocity of trade. Skype could also help expand eBay and PayPal internationally, especially in emerging markets where a more personal way to communicate online can make e-commerce more familiar. And creating a PayPal wallet associated with each Skype account can make it even easier for users to pay for Skype's eBay based services while at the same time increasing PayPal’s payment volume. The acquisition allows eBay and Skype to pursue on to new lines of business say some lead generation through paper call, services, travel, new cars, and real estate are just a few of the categories that we believe can benefit from Skype. And on its own, Skype is a powerful business model. Skype ended Q3 with more than 57 million registered users and as we have said, is expected to generate an estimated 60 million in revenues in 2005, and more than 200 million in 2006. With eBay behind it, Skype can advance its leadership and Internet voice communications and offer people worldwide new ways to connect online. We're incredibly excited about the acquisition of Skype and the other acquisitions we've made over the past year. They allow us to expand our vision of e-commerce and compliment our existing growth businesses of eBay and PayPal. In short, we are evolving the company and broadening our definition of future growth and success. These ambitious steps towards our future would not be possible without the powerful combination of our core businesses. eBay and PayPal are unparalleled growth engines that speed the ongoing development of their own platforms while allowing the company to expand in new strategic directions. And as you can see from this quarter's results, these are young, very responsive businesses, with considerable room to grow. Now, before Rajiv Dutta presents the financial, I would like to take a moment to announce a future change in our management team. I have asked Rajiv Dutta to take on the newly created role of president of Skype. He will augment the already strong management team we have there, working closely with Skype's CEO Nicholas (14:16) Sentrom and with me. He will also remain on eBay's Executive Management Team. Skype is a huge opportunity for the company and I'm thrilled that he can become more deeply involved with this exciting new part of our business. Rajiv Dutta will remain fully engaged as CFO working with me to find the right replacement and make a smooth transition before he moves to London. Rajiv Dutta has made tremendous contributions to eBay as CFO over the past five years and I'm personally very interested to see what he will accomplish with the team at Skype. Now I will turn it over to Rajiv for a closer look at our financials. Thanks, Meg. Before I get into the financials let me just say that I'm delighted to have the opportunity to help build an exciting new business for eBay, working closely with Meg and Skype management team. However, I would also like to make certain that my transition out of the CFO role and is a smooth and orderly one. As such I will continue as CFO until we find a replacement. In the meantime, it is great to be able to announce yet another great quarter. As Meg described, Q3 was an outstanding quarter that positions the company for continued success. First, the strong business trends that we saw in Q2 have continued into Q3. Q3 revenues exceeded the high end of our guidance by approximately $35 million, which includes $10 million from shopping.com for the first time. These strong top line results were driven by acceleration in the U.S. and Germany, as well as continued momentum in PayPal and the rest of our international markets. Second, the strong revenue performance together with continuing efficiency gains resulted in pro forma operating income which is more than $40 million higher than our guidance implied. Pro forma EPS of $.20 was one cent higher than our guidance notwithstanding with $17 million one-time tax-related charge, which impacted EPS by $.01. And finally, the business momentum remains strong across the board. As a result, we are raising our guidance for Q4, and looking forward to another year of strong growth in 2006. So let's discuss each with ease in a bit more detail starting with the top line. Q3 reflected very strong volume metrics across all of our key metrics. eBay confirmed registered users grew to more than 168 million worldwide, PayPal added record new accounts bringing our total to more than 86 million worldwide, and active eBay users reached a record 68 million in Q3. This user growth drove a record 459 million eBay listings representing 32% year-over-year growth consistent with Q2. We are particularly pleased with store's inventory format listings, which have more than doubled in the past 12 months and continue to grow at triple digit rates. The strong volume metrics translate into eBay GMV of $10.8 billion representing 30% year-over-year growth. Once again, this growth was very broad-based both geographically and across product categories. GMV per active user increased $5 quarter over quarter to $575, reflecting significant increases across all of our major markets. At PayPal, excellent account growth, combined with very strong addressable GMV growth, continuing penetration gains in key markets, and accelerating growth in license service, led to total payment volume of $6.7 billion, up 44% year-over-year. And collectively, these trends powered consolidated net revenues for eBay of $1.106 billion, up 37% year-over-year. Excluding revenues from acquisitions in the past 12 months the company's organic revenue growth year-over-year in Q3 was 33% and further excluding acquisitions and the impact of foreign currency translation(18:06), year-over-year growth was 32%. So let's take a closer look at the business units. In the U.S. marketplace, average daily unique visitors in Q3 to eBay .com grew 27% year-over-year versus 14% in Q2. And when these visitors reach the site, they were very active. Bits for Q3 also boasted accelerating year-over-year growth rates resulting in strong conversion rates and a $16 sequential increase in GMV per active user. In addition, accelerating listings growth combined with strong average sales price increases and robust conversion rates led to a 21% year-over-year GMV growth, resulting in record U.S. transaction revenue of 435 million. Even excluding the impact of shopping .com, transaction revenues accelerated to 29% year-over-year, growth in what is historically been one of our seasonally slowest quarters. From a category perspective, we experienced accelerating growth rates in collectible, home and garden, book, movies, music and business and industrial. Motor vehicles also saw accelerating growth in Q3. Benefiting from industry-wide new car discounts and it is now on a $6 billion annualized GMV run rate. In our newer businesses, rent .com had a strong quarter, boasting more than a 90% year-over-year increase in unique visitors in September and further extending its lead over its nearest competitor. Shopping.com, which we acquired in August 30, had revenues of $29 million, 10 million of which is included in our Q3 results. And also accelerated its year-over-year growth of unique visitors in September. In our international marketplace, notwithstanding the negative impact of foreign currency fluctuations, we continue to see impressive rates of growth. In total, eBay international ended Q3 with over 89 million registered users who had generated GMV growth of 40% year-over-year, which in turn drove transaction revenues of $402 million, up 42% over Q3 of last year. Germany in particular continues the outstanding trends that we saw in Q2. On a U.S. dollar basis, growth was strong and on a local currency basis, both transaction revenue and GMV growth accelerated in Q3. Listings growth accelerated and ASPs and conversion rates remained very strong, driving accelerating GMV growth in most major categories, including business and industrial, computers, consumer electronic, and entertainment. In motors, mobile posted an outstanding quarter with accelerating year-over-year of transaction revenue growth driven by both strong volume from both the dealer and for sale by owner channels. In all of our other European marketplace businesses continues to deliver strong performance notwithstanding our typical Q3 seasonality. eBay U.K. continues to deliver impressive results with strong GMV growth rates driving record levels of GMV for active users and eBay France and eBay Italy once again posted triple digit GMV and revenue growth in this quarter. And turning to Asia, in an adoption company in Korea, once again produced great results recording 62% year-over-year transaction revenue growth, and in China, strong listings growth and increasing conversion rates drove acceleration in year-over-year growth rates for both GMV and revenue. Our efforts to drive continuing strong user acquisition and activation as well as to fortify our position as the most trusted place to trade with other Chinese users have led to outstanding local growth metrics. With both its thriving local business and a rapidly growing export business, we are excited about our position in China. Next, let's turn to the payments business. Q3 was an outstanding quarter. Better than expected addressable GMV, combined with strong penetration gains in North America and Europe led to record eBay generated total payment volume. Penetration rates reached 77% in the U.S., 81% in Canada, and 66% in the U.K. And in the U.K., we reached another key milestone in Q3, PayPal acquired its 10 millionth account. PayPal’s global merchant services business also had a very good quarter, generating $2.1 billion in TPV, up 49% year-over-year, reflecting the second consecutive quarter of accelerating growth. This growth was fueled by an expansion of our merchant acquisition effort, as well as the launch of web sites, payments grow at the end of Q2. To further build on this business, just last week, we announced the planned acquisition of Verisign's payment gateway business and as Meg told you earlier, this is a key part of our strategy, to expand our portfolio of small and medium-sized business customers. Accelerating growth in merchant services, combined with strong growth in eBay volume drove record PayPal PBV in Q3 of $6.7 billion, a 44% year on year growth rate. And PayPal is now on track to finish 2005 with over $1 billion of revenue. Representing a 62% compounded annual growth rate since our acquisition in 2002. Now, let's look at how these revenues translated to profits and cash flows. Revenues that were $35 million above the high end of our guidance, together with continued operational efficiencies, led to more than $40 million performance on the pro forma operating income line versus our previous guidance. Taking a walk down the P&L in a little more detail, eBay's gross margin was sequentially flat at 82%. We continued to be very pleased with the cost reduction initiatives and payment processing, and favorable funding mix trends. Sales and marketing expense in Q3 was 26.5% of net revenues, about even with Q2. In the U.S., marketing programs spend was 17% in Q3, compared with 19.4% in Q2, reflecting continued marketing efficiency. This sequential decline in U.S. marketing was upset by the inclusion of shopping .com, and increased investment in our developing international markets. Product development spending in Q3 represented 7% of revenues, up slightly from Q2, primarily reflecting the ramp in our product capacity at PayPal, as we grow our merchant services business and condition continue our geographic expansion. Looking forward, we will remain committed to investing in product innovation on eBay's sites around the world. General and administrative expenses in Q3 represented 13% of revenues up from 12% in Q2 but in line with the 13% in Q3 of last year. The sequential increase was primarily driven by increasing purchase protection expenses at PayPal, as we expanded our protection coverage globally. As a result of the strong revenue growth and operational efficiencies, pro forma operating income grew 44% year-over-year to $394 million, representing a pro forma operating margin of 36%. Consolidated pro forma net income in Q3 totaled $280 million, or $.20 per diluted share, one cent above our guidance. The strong pro forma operating income results were offset on the bottom line by a $17 million one-time tax-related charge, which impacted our EPS by $.01. This one-time charge related to the final application of tax regulations, requiring the inclusion of stock option expense in inter-company cost-sharing arrangements. These regulations will not have a material impact on future taxes. Operating cash flows of $492 million, and net capital expenditures of $42 million drove record free cash flow to $450 million in the quarter, representing a 123% year-over-year growth. eBay exited Q3 with almost $10 billion in total assets, including nearly $4 billion in cash and investments. Also last week, we announced the completion of our acquisition of Skype. We are very excited about the current trajectory of Skype's business. Skype is adding new users at record pace at more than 166,000 per day and finished Q3 with more than 57 million users. And just today Skype reached another milestone when the service peaked with more than 4 million concurrent online users. Driven by these new users and strong growth in active users Skype is on its way to delivering an estimated $60 million of revenue in 2005. In sum, we could not be more pleased with our Q3 performance, and the momentum in all of our businesses. Growth in our two largest marketplaces, the U.S. and Germany, accelerated. Our other international businesses continued their momentum, and PayPal delivered another outstanding quarter. In addition, a new initiatives rent .com, shopping .com, PayPal merchant services and now Skype had impressive results this quarter and are on a strong trajectory. With that, let's turn our guidance. First discussing the remainder of 2005, and then providing you with an outlook for 2006. Before we get into the details of our expectations, let me briefly mention a few factors that today's guidance takes into account. First, this guidance assumes the U.S. dollar Euro exchange rate of $20.0 for the remainder of the year as well as the full year 2006. Second the GAAP guidance we provided does not take into account the impact of the new stock option expensing rules which take effect January 1, 2006. And finally, this guidance includes the effect of Skype, which closed on October 14, and the assumed impact of the announced acquisition of Verisign's payment gateway, which is expected to close in Q4 2005. Considering these factors, we now expect full-year 2005 net revenues to approximate $4.5 billion, including approximately $45 million from shopping .com, and up to $20 million from Skype. On an apples-to-apples basis, that is excluding the revenue from shopping and Skype, this guidance represents a $10 million increase to our previous Q4 '05 guidance. On the bottom line, pro forma EPS could be as high as $0.83, reflecting $0.84 from our core marketplaces and payments business, and one-cent dilution from Skype. On a GAAP basis total company GAAP EPS including Skype could be as high as $0.74, which includes a $0.4 dilution from Skype. This guidance implies that we are well on track to achieve a 35% pro forma operating margin in 2005. With that, let me turn to 2006. We are very excited about the future, and expect the current momentum to continue. We have a young and responsive company, and believe that our portfolio of businesses positions us well for the opportunities before us. In the coming year, we will work hard on integrating our new acquisitions, while continuing to drive innovation in our core marketplace, and PayPal businesses. We will also continue to make the required investments to insure that we realize the full opportunity before us. These include first continued investment against opportunities in our core eBay and PayPal businesses, including development of our marketplace businesses in China and India, as well as PayPal's geographic expansion. Second, a big focus on our new initiatives including PayPal merchant services, development of our new marketplace sites, and other product innovations and third, integration of the newest member of the eBay family Skype, and in particular, build out of the PayPal business. As a result we expect 2006 consolidated net revenue could be as high as $5.7 billion to $5.9 billion, which includes approximately $200 million for Skype. This implies a revenue growth rate of 26% to 32% over where we expect to end 2005. On the bottom line, we expect consolidated 2006 pro forma diluted EPS to range from $.96 to $1.01, including a $.0.4 dilution for Skype. We expect consolidated GAAP diluted EPS to approximate $0.81 to $0.86 which includes a $0.12 dilution for Skype. Excluding the impact of Skype, the guidance provided today implies that eBay's consolidated pro forma operating margin in 2006 will be roughly flat with 2005 at 35%, implying expansion of our core marketplace's operating margin to offset the structurally lower margins in PayPal and shopping.com, and the investment in our new initiative. In summary, as we head toward the close of the year, I could not be more pleased with the overall health of the business and the opportunities ahead. A strong Q1 was followed by an outstanding Q2 and Q3 with powerful momentum heading into Q4. Looking forward, eBay is positioned for years of strong growth with a clear leadership position in worldwide ecommerce, global online payments and now communications on the net. We are committed to executing against these opportunities with focus and consistency, creating value for both our shareholders and our community of users and now, we would be pleased to answer 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_233951

Good day, ladies and gentlemen, and welcome to the first quarter 2006 earnings conference call. My name is Jackie 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 assistance, please press star, followed by zero, and an operator will be happy to assist you. I would now like to turn the presentation over to your host for today’s conference, Mr. JP Gan. You may proceed, sir. Thank you, Jackie. Welcome to KongZhong Corporation’s First Quarter 2006 Earnings Conference Call. You can find our Q1 earnings press release at our website, ir.kongzhong.com. I am JP Gan, Chief Financial Officer of the company. We also have Yunfan Zhou, our Chairman and CEO, and Nick Yang, our President, on the line. I will go through our first quarter financial highlights first. After my discussion, I will turn it over to Yunfan. He will review our operations and talk about our outlook and new business initiatives. We had a great first quarter. Our total revenue increased 64% year over year and 26% quarter over quarter, to reach a new record of almost $28 million. Both MMS and SMS were the main gross drivers of our revenue growth. MMS revenue was almost $8 million, an increase of 60% quarter over quarter. This is about the same level as MMS revenue in Q4, 2004. SMS revenue was about $8 million this quarter, which is also very strong, and grew by 46% from last quarter. Many customers used our SMS and MMS digital greeting card during the Chinese New Year. It is evidence of increasing adoption of mobile entertainment applications in China. The strong growth is also the result of our increased promotion through handset manufacturers and traditional media. Now we have partnerships with 28 cell-phone manufacturers in China, including Nokia, which was a big win for us. Our gross margin also improved to 58% this quarter. The improvement in gross margins is primarily due to lower transmission costs paid to telecom operators. In Q1, it was about 7% of total revenue, lower than 10% of the total revenue in Q4 2005. Revenue sharing payments to telecom operators was about 16% of the revenue. Payments to the handset manufacturers were about 12% of total revenue. Fees paid to content providers accounted for about 5%. All these three items. as a percentage of total revenue, were about the same as the previous quarter. Total operating expense in the first quarter of 2006 was $9.23 million, an increase of 73% year over year, and a 48% increase quarter over quarter. We began to adopt FAS 123R to account for share-based compensation. The total share-based compensation costs in the first quarter was about $350,000. Our U.S. GAAP net income was $8.6 million, an increase of 37% from Q4 ’05. Dilution of U.S. GAAP earnings per ADS was $0.24 for the first quarter, up from $0.17 in the previous quarter. Because of several one-time items in the past year, and adoption of FAS 123R, we begin to present you with non-GAAP income starting this quarter. We think this will give you an apple-to-apple comparison to analyze our target growth trends. First quarter non-GAAP income was $7.9 million, a 24% increase from the previous quarter. Dilution of non-GAAP income per ADS was $0.22, up from $0.18 in the previous quarter. Thank you, JP. First of all, we are very pleased with our record-breaking first quarter 2006 results. Our revenue growth momentum continued, and we were able to grow our earnings substantially in the first quarter. We believe we have surpassed some of our industry peers, and become the clear number 2 player in terms of in terms of revenue in the Chinese WVAS industry. We are very proud of achieving this milestone. In addition to having sustained our leadership position in the 2.5G space, with our acquisition of Sharp Edge, we have gained a significant market share in the overall WVAS market and have become a top player at China Telecom and China Netcom. Our Q1 revenue grew 26% sequentially to a new record of $27.91 million, exceeding our forecast. We are also proud to report our U.S. GAAP net income grew 37% sequentially to a new record of $8.6 million. Excluding share-based compensation costs, diluted earnings per ADS was $0.25, exceeding the high-end of our first quarter guidance of $0.22. We expect our Q2 revenue to be between $29.5 million and $30.5 million. We expect our U.S. GAAP diluted earnings per ADS to be between $0.21 and $0.22. Our non-GAAP income per ADS is estimated to be between $0.23 and $0.24. In terms of 2.5G services, we achieved 21% revenue growth in Q1 over Q4. We expect our 2.5G revenue may decline about 10% in Q2. In terms of 2G services, we achieved 36% revenue growth in Q1 over Q4. We expect to see continuous high growth in 2G revenue in Q2, driven by the growth of SMS IVR color, ring-back tone, and the revenues consolidated from Sharp Edge. In terms of revenue breakdown from different outfitters, our revenue from Unicom, Telecom, and NetCom accounted for about 9% of the total revenue in Q1. With the completion of the acquisition of Sharp Edge, we believe this ratio may be over 15% in Q2. The diversified operator relationships will give us more advantages in preparing for the upcoming 3G services. To summarize, we are very confident about the overall WVAS industry in China. We believe KongZhong will continue to execute well and gain market share in the future. As we have reorganized our business in two major business lines, WVAS and the Wireless Internet Portal, I would now like to talk about the KongZhong Kong.net wireless Internet portal. We believe wireless Internet is now at a very early stage of development in China Only a very small part of China’s 400 million mobile phone users are using wireless internet today. We believe the consumers’ increasing familiarity of the wireless media and entertainment applications offered by the WVAS providers currently, and with China’s adoption of 3G technology, wireless internet portals will gain popularity fast and become an important channel for consumers to gain information and entertainment applications. We think wireless internet will wow them, and it is critical for us to make the investment to establish an early leadership position. Our vision is for Kong.net to be the largest wireless internet portal in China in terms of traffic, user base, as well as advertising revenue, eventually. In Q1, we launched our new domain name, Kong.net, for the wireless internet portal. We now have an over 130-people team working on it. Although we have not launched any marketing campaigns for Kong.net yet, we believe Kong.net is already among the top 5 wireless internet portals in China in terms of traffic. In Q2, we will launch our first national marketing campaign for Kong.net, with a focus on the brand and the wireless internet concept. We believe Kong.net is the first, so-called free WAP wireless internet portal in China to launch such a grand campaign. We recently hired a very experienced marketing Vice President from Motorola to lead this campaign. We plan to spend about $1.5 million in this marketing campaign in Q2. We will put ads on TV, LCD, on buildings, radio, billboards, buses, subways in Beijing, Shanghai, Quangdong and other major cities in China. So if you have a chance to come to China, I believe you will see our ads. The main business model of our wireless internet portal is an advertising model. Although wireless advertising is very small today, we believe it will take a very similar path as internet advertising markets. It will first take some time for customers to understand the wireless advertising while they start to use wireless internet themselves. Then they will spend money buying ads. The key to success is to become the top 2 player in the market. As the top 2 player, you will take more than 50% of the market share, which is now happening in the Chinese internet market. Thus, we believe it is worth investing early in the wireless internet. One dollar spent today may be equivalent to $5 spent a year from now. Although spending marketing dollars will hurt P&L, KongZhong’s management firmly believes that we have the right strategy to achieve our vision, and the investment in our brand now is the right choice. We are making our best effort to balance achieving good EPS and making such investments in our brand. This is definitely a challenge we will face in the next few years. However, we are confident that we will be able to handle this challenge well. To summarize, the two strategic business lines we have, WVAS and the wireless internet portal, are equally important and very complementary. We believe we have become the clear number 2 player in the overall WVAS industry, and will continue to grow our WVAS business and gain market share in the future. Wireless internet portal is currently in the investment stage, but it will be our important revenue and profit growth driver in the next one to two years times. The Kong.net brand will become our core asset, which will have long-lasting value. Thank you. Good evening, Yunfan, Nick, and JP. Congratulations on the great quarter and becoming the number 2 player in the market. Just a few quick questions. The first is about the Sharp Edge integration. How did it go, and how much revenue did it bring into the quarter? Thank you, Michael. We completed the acquisition of Sharp Edge in late January. Right now, Sharp Edge still operates as a semi-independent entity. In the first quarter, it contributed about $1.3 million in revenue, and about $300,000 in net income. In the next two quarters, we will gradually integrate Sharp Edge into our KongZhong family. We hope that we can achieve both revenue and profit synergies with this acquisition. Thank you. You mentioned right now you have 28 cell-phone manufacturers as partners. What percentage of your total revenue is from various channels, including the manufacturers? We do not specifically break out the revenue from different channels. Roughly about 20% of our total revenue in the most recent quarter comes from handset manufacturing partners. Okay. As the alternative channel contributes more and more to your total revenue, where do you see your margin trend say toward the end of this year? I think we have always talked about our gross margins. We expect in the second quarter our gross margin to be 1% to 2% lower than first quarter. Toward the end of the year, we hope that we can maintain our gross margins at about the 55% level. My last question is about your guidance. Based on Q1, with what you achieved, and Q2 guidance, it implies a flat second half. What caused you to be so conservative, and do you have any update on the profitability, which right now stands at $25 million to $30 million? I think that is a great question. I think we also said tentatively that our guidance is assumed, absent of any significant changes in the policies and regulations of telecommunication operators, as well as the Government regulator. We think our first quarter revenue growth is definitely partially because of the Chinese New Year holiday that allows users start to use our SMS and MMS products as digital greeting cards. Also, partially because we had spent quite a bit of money in terms of promoting and also marketing our various products. In the second half, we will have to look at the environment, as well as how we are going to spend our marketing dollars. So we think our revenue guidance is prudent at this time. Okay, on the Q1 conference call, you mentioned the net income should be between $25 million and $30 million. Do you have any update on the bottom line at this moment? I think based on the information available at the current time, and also our performance in the first quarter, we think we probably can raise our 2006 net income estimate by $2 million, so we think our net income will be between $27 million and $32 million. Good evening, this is Paul Beaver for Safa Rashaiki. Congratulations on a good quarter. My first question relates to music. I was hoping you could tell us what percentage of your revenue is music-related, and whether the costs there are rising. Also, what are your thoughts on China mobile’s potential music initiative? Secondly, just on the operating expenses, the G&A line was higher than we had estimated. What is going on in the G&A line this quarter? Thank you. To answer your first question, in terms of music revenue, roughly about 30% of our total revenue comes from music-related services. As you probably know, we often buy music and lyrics and compose our own ringtones. I think impossible comparing to our industry peers. Actually, our music portion is actually smaller than some of our industry peers. I think China Mobile is considering partnering directly with the music label to provide music onto their mobile network. But you have to understand that it is a matter of content and distribution, because what KongZhong provides is KongZhong provides a great distribution channel for these musical content. So when these labels try to sell their music to the customers, they will soon find that selling directly to the customer will be very, very difficult without a big customer base. So partnering directly with China Mobile, they still have a very long way to go before they can have a critical mass of users to buy music directly from the label. So then the labels, I believe, once they sign these agreements with China Mobile, they will still work with us, with service providers, to distribute the music, otherwise they will have a very small revenue from music, because they will only sell directly to the customer. This is sort of like Coca Cola selling directly to the customers themselves, without going to stores like Wal-Mart or Target. Okay, well, there are a couple of things. First of all, we increased our company-wide salary level by 10%. We also accrued a significantly larger bonus in the first quarter because of our excellent performance. Secondly, we start to adopt share-based compensation expense based on FAS 123R. About half of that, roughly $180,000, is actually reported in G&A, so that will give us higher G&A expense. Thank you. Let me just stand back and ask a more general question. I will drill down. There is 400 million cell phones, and we know the advertising business in China is booming, and that advertisers are in some ways actively searching for new alternative ways to reach customers with the success of Focus Media. Focus Media clearly believes in online advertising with their Dotad acquisition. What is your view about how big wireless internet can potentially be in terms of advertising? Is it as large as kind of the pure internet size? Is it 50% as big? Just help us understand what the potential is you guys are going after. I think the number, 400 million, is actually a very big number, however, right now, as I said, only a very small part of users are using wireless internet, which implies that currently, they probably do not understand this market well. However, we believe that it will take the similar path as the internet, but I think this is a faster trek because when the internet came, nobody knew what the internet was like, and it took advertisers a long time to actually learn about this market. However, wireless advertising is actually similar to advertising on the internet, but there is a different screen on the mobile phone. So we believe that advertisers who do advertising on the internet, they will soon understand about the wireless advertising. What we see today in the Chinese market is that it is at the very beginning stage. There are some advertisers, for example, Nokia, Motorola and other SMPG companies, well, some of their competitors also have these kind of trial advertising that is probably a very small amount. One reason is that the user base is still small. The other reason is that they do not understand what kind of phone and what kind of metrics that wireless advertising can go in. So we believe that it will take probably a few years for the wireless advertising to really get into the mainstream. But eventually, in five to ten years time, I believe that wireless advertising may become a bigger market than the internet advertising, because of the three to four times user base of mobile phones than the internet users. So right now, our strategy is to become the leading brand and the leading player in this wireless internet market, while gradually accumulating wireless advertising dollars. So we believe, as I said, in the next one to two years, wireless advertising will become one of our important revenues and a profit growth driver. That is a great answer. If you will, let me just drill down two questions. Will you guys, and if you already have this, forgive me, but is there an opportunity or a need for you to maybe partner with one of the search companies that can provide search as people are using WAP and using wireless internet? One of the things that makes a lot of sense is to be able to have search capabilities. Is that something that you have done or that you are in the works of, to partner with one of the major players there? The way we think about this wireless internet market is that it is going to take a similar path of the development of the PC internet. In the beginning of the PC internet, I do not know if you guys still remember, there is not many sites. So the search companies do not really have a big need, a big demand. So at first, when the PC internet first got developed, it first brought out many of these destination sites. These sites where a customer with e-mail, with news, with sports, with the entertainment, with communities, these guys sprout up first because there was a lack of sites. There is not enough sites. So that is what we are building. We are building a portal first. We are building the Kong.net brand and the Kong.net portal because we believe it should be the thing we do now. But we also have a team which is working on search in our company, because we believe search is the next step. When there is a proliferation of WAP sites all over the world that the search companies, the WAP search, will definitely play a very much bigger role in terms of user behavior. Then the next step, of course, everybody saw it, is the blogging and the 2.0 stuff, which comes after the search age. So we believe this mobile internet, or the WAP internet, will probably take a similar path. Just to add one point, right now, we actually discussed a few days ago that we partner with two of the leading Chinese vertical internet companies, [Hoshi] and [E-Net] to provide cooperatively the financial channel and the IT products channel. Both of them are exclusive. We are also signing a few other leading verticals in the near future, and we are also exploring the possibility of doing the search ourselves and also seeing the partners, because there are many people out there that are plain search, but as Nick said, it is probably too early to explore this opportunity. We are right now still watching the patterns of what users on the wireless internet. Right now, our first step is to focus on the portal stuff. Great. My last question is about the marketing campaign. It strikes me that you clearly have almost a greenfield opportunity to go out, especially in terms of establishing the Kong.net brand as the, or one of the maybe two, as you said, the key is to become one of the two players, but it also strikes me on the other hand from what you have said is that the opportunities, say whether the handset penetration or what have you, is maybe a little bit elongated out a year or two. Should we just be thinking conceptually that this is maybe the first of a couple of campaigns that you will do as you kind of exploit this opportunity? Or is it once you have established the power of the brand, say with the basis of this campaign, your ability to maybe promote through the other part of your business, through your wireless services provider, allows you to maybe take the brand and extend it once it is there? Thank you. That is a good question. I think one reason only a small part of the 400 million Chinese mobile phone users use the wireless internet is that -- actually, a lot of people, there are 2.5G enabled phones, and probably half of the 400 million people have 2.5G enabled phones, or a little bit less, perhaps. However, only a part of them, only a small percentage of them are using wireless internet. Others are probably using [Passaman] or [Othermas] or other kind of WVAS. Our first marketing campaign is actually on the Kong.net brand, so we educate wireless internet users with a 2.5G phone, they can immediately use our Kong.net wireless internet portal. Probably a bigger part of the users are the users who do not have the 2.5G phones, who do not know how to use the 2.5G. Right now, for them to get into our brand, which is the leading brand in the wireless internet portal, it is very similar to what Sima and Sohoo, the Chinese leading internet companies, what they did in 1998. I remember Nick and I, we started China.net in late 1999, and let me put out that in the year 2000, we were one year later than Sina and Sohu. Although we did great, we could not catch up with them, because the first early adopters, they actually have a lot of impact to the later user, and the users who did not use internet in 1999, they remember Sima and Sohoo, and when they first use the internet, they still go for Sima and Sohoo. So that is the similar pattern we believe will happen on the wireless internet. That is why we are the very first company to put out this national campaign on the wireless internet, so we believe this is critical for our future development. Let me just add a comment, just to quantify Yunfan’s remarks. We, as mentioned previously, plan to spend about $10 million on this wireless internet portal in 2006. About $3 million to $4 million will be on daily operational expenses, and the remaining $6 million to $7 million will be spent on marketing and in promotions. While spending this $10 million, we still believe that we can potentially grow our net income by, as mentioned earlier, somewhere between 10% to 25%. Good evening, and congratulations for a really good quarter. I actually have two questions. One is on your guidance for your 2.5G service. Why do you expect such a big drop in the revenue from WAP and MMS in the second quarter? I think when I said our 2.5G revenue will go down 10% on Q1 levels. There are a few reasons for that. One is that we grew our 2.5G revenue by 21% in Q1 over Q4. A lot of it was because of the Chinese New Year holiday effect and our promotions in the New Year. So we have this pretty high growth, and a lot of users may unsubscribe after the Chinese New Year, so that is one reason that probably will keep our 2.5G revenue. Another reason is that our last revenue probably will decline because we actually are facing more intensified competition in WAP, in mainly two fronts. One is the free WAP, the wireless internet area. As I mentioned earlier, the free WAP growth in China is very high. There are right now probably over 10,000 wireless internet free sites, and the number is still growing fast. So these number of users probably taking part of the pie from the paid ramp from monster.net. And another competition comes from the intensified competition for the placements. So we believe that in Q2, our WAP and also java facing more intensified competition, so the revenue may go down, so that is why we projected a 10% decline in Q2. Sue, you asked about Sharp Edge and its revenue contribution, right? In the first quarter 2006, Sharp Edge contributed about $1.3 million in revenue. We expect Sharp Edge to contribute a multiple of that in the second quarter. Thank you. Good evening, guys. Congratulations on a good quarter. First question is about your performance in Q1. Can you give us some color on what you did differently on the SMS segment and the ringback tone segment? The growth is very robust. In terms of SMS and MMS, there are a few things. First of all, as Yunfan mentioned, the Chinese New Year holiday effect has played an important role in MMS revenue. We allowed the consumer to actually send digital greeting cards, whether it is the SMS or MMS, to their friends and family. Secondly, we have always relied on the handset manufacturers as a very important promotional partner or channel for our SMS and MMS product. I think during Chinese New Year some of the handset manufacturers had sold more handsets than the other time. The mobile phone makers kind of tried to dump inventory during the Chinese New Year holiday season when people buy more things, when they get a better bonus and a higher salary increase, so on and so forth. So there are a lot more handsets in the channel in the consumers’ hands. That helped our MMS revenue growth, both SMS and MMS. Thirdly, we spent close to $700,000 in advertising in the traditional media -- TV, newspaper, magazines, so on and so forth. This advertising campaign also helped with our revenue growth. In terms of the ringback tone, I think we just -- ringback tone is a relatively small business, and our base is very small. I think in the quarter, we have established several additional connection points. Also, in the previous quarter, we also added on a few connection points. With more connection points and a better quality product, our ringback tone revenue has also grown. So looking forward, you just mentioned you spent $700,000 on the ad campaign. Would you do more of these media promotions? When we look at Linktone or TOMO, they are doing more channel partnerships, so what is your strategy going forward? I think the ad campaign I mentioned earlier is actually the Kong.net, for the wireless internet portal, which is not related to WVAS, but WVAS, I think the major channels we have, number one is the carrier channel. We partnered closely with four major carriers in China under their local branches. Second, our handset manufacturer relationships -- we have close to 30 handset -- we have almost all the major handset manufacturers partnered with us in China. Third, we have the media stuff, media buy-in. So these three channels are actually our major channels, and we probably will try to increase advertising on all three to grow our revenue in the future. Finally, a question on Kong.net. I note the purpose seems like to do the advertising model in the future, but if we look at the free WAP sites now in China, one of their business models is also to link those fee-based WAP services. So would you predict any increase, or rebound, if you will, in the WAP segment because you will have a more powerful portal, maybe to link some pay WAP services? At the end of last year, China Mobile actually had a new regulation, which actually banned the free WAP sites to promote the paid WAP sites. So after that, I mean, all the free WAP sites, they were not allowed to do this. So I believe that for our Kong.net, the major business model will still be the advertising model. That’s right. I do not think the major revenue source will come from WDF providers, and it is our intention to link the two together. I was wondering if you guys can maybe elaborate the guidance for Q2 a little bit, especially on the 2.5G decline. Maybe JP can talk about this. For the 10% decline, do you see the greater contribution from MMS decline, or is it really coming from WAP? Maybe you could give us a sense of that. It is still too early to tell, I would say. You know, as Yunfan mentioned partially, our MMS experienced explosive growth in the first quarter. So it is inevitable that some users, after the Chinese New Year holiday, they are going to cancel their subscription. On the WAP front, the competition is very intensive. We are seeing a lot of competition from media sites, WAP WBS providers for multiple, many placements. In terms of which segment is going to contribute more, based on the current information, it is probably going to be WAP. However, it is still too early to tell. Right. Maybe within the WAP, maybe JP, you can give more color. You talk about increased competition there, and at the same time, China Mobile continues cleaning out this database. If you just look at the WAP segment, and the potential decline from 1Q to 2Q, which one is a greater contributor? Is it the cleaning of the database or is it really competition from free WAP? I think as we remember, the policy was introduced in April, 2005, and the definition of the inactive user is 8 months. So that impact was pretty much washed out by the end of December. So we are turning a new user acquisition to offset that inactive user cleaning up. Is it fair to say that the SMS going forward, you may see the similar type of pressure as we have seen from 1Q to 2Q for MMS? You say that you did very well with digital cards. What are people using SMS or MMS platform? You expect some subscriber coming off that base heading to Q2, so I kind of expect a similar impact on the SMS side as well. Actually, one of our strategies is to diversify our revenue streams as well as operator relationships. As mentioned previously, we expect the revenue from China Telecom, China NetCom, and China Unicom will increase, proportional revenue from those three operators will increase. As you probably know, those three operators primarily offer 2G services to their users. We believe that our 2G revenue growth will more than offset the decline in 2.5G. Got it. So the SMS growth that is implied in your guidance is not so much from organic growth from China Mobile, rather than diversification into other carriers other than China Mobile. That is correct. Also, in terms of market position, as you probably know, we are, by far, the number one player in WAP, MMS, and Java. Given the larger revenue base, it is getting more difficult to grow those product lines because everybody is looking at us as the guy to beat. On the other hand, SMS, also in 2G, we are still a much smaller player. The market is actually twice as big than 2.5G, so we still have a lot of room to grow. Maybe, JP or Nick, you guys can comment about the prospect for mobile games this year. There has been a lot of talk that this might be -- last year was sort of a transition year, maybe this year is an inflexion year. How do you see that growing? Any plans? Maybe talk about plans a little bit in terms of how many games do you plan to launch? Have you seen anything change in terms of the game life-cycle, consumer demand, and so on and so forth? I think that is a good question. We have recently went to Japan about a month ago to study the Japanese WAP market, the mobile internet market, and we came back with some very clear conclusions. We listened to some very big name game companies in Japan -- the guys who made the PS2 games, X-box games, and what they told us is that making single-player games is not profitable. It is very difficult to make a profit in this area of making single-player games, whether it is for PS2, X-box, or the mobile phone. What we have learned is that many of them are starting to make these network games, or online games as a big part of their development effort. What we found is that in China, this is apparently the same thing as well. Single-player games are not very profitable, but online game with Netease, with Shanda, you can see, or with TheNines, it is a very good business to make PC online games. We believe a similar model will follow on the mobile phone as well. Making single-player games will be very difficult, and making online games will be the way to go, mobile online games will be the way to go in the future. We have seen very good traction in our mobile online games. In the single-player game side, there is a lot of software piracy for the mobile single-player games, so that has been hurting some of the Java downloads, the single-player game downloads. Whether many of the websites are pirating whether it is through the PC internet or on the WAP sites, on the free WAP sites are pirating some of these Java single-player games, but they cannot pirate mobile online games. So we believe in the future, mobile online games will definitely be a good business and a direction we will head into. The China mobile platform, of course, we are still waiting for the China Mobile platform to improve. The platform, we are still talking to them to try to get them to improve the environment for the platform. So hopefully in many of these efforts, these sites, in conclusion the, we believe games, we are still positive on games. We have a big team working on games, but right now, temporarily, games has not taken off as much. It sounds like based on what you said, Nick, there are still some capacity issues with China Mobile on their game portal, that being first, and also the network capacity restriction does not really offer environmental online games, network games -- it sounds like, you know, your view for the mobile games to really take off is after 3G when there is more capacity within the network and obviously more capacity with the game portal. Could you also comment about Kong.net? I know there have been questions that have sort of been asked. I just want to make sure I do not miss it. Do you have a statistic in terms of your traffic, how many unique visitors per month or per day, and at what point do you feel you have the critical mass to really monetize the traffic? I think web statistics we can disclose. Currently we have about 20 million page views a day. In terms of unique users, we actually cannot track very accurately, because China Mobile has a policy of not giving the phone number for the free WAP sites, so the page views we believe right now is the important statistic to disclose. What I believe is that traffic is actually one thing. Monetizing this traffic and making -- advertising sprite ads is another thing -- the key thing is a brand name. There are thousands of different WAP sites out there. We believe that education of the advertisers is also very important. So as I said, maybe in one or two years time, we believe the mobile advertising will definitely become one of the key growth drivers for us. Also, I believe that the traffic and users will also grow very fast in the next one to two years time. So Yunfan, you basically said the only metric that we can sort of gauge on some investment community is the number of page views at this point in time, in terms of tracking progress from quarter to quarter? I think in the future we may disclose other metrics, but right now I think it is probably too early to say that, so we disclose page views right now. I think the wireless internet opportunities are quite attractive and huge. You know, a while, maybe a few months ago, Focus Media bought a firm called Dotad. I just wonder whether you guys benchmarked their business practice, and whether what they are doing can be of any use to you guys? I think Dotad is mostly 2G based advertising, that type of business. For us, we are actually more on the real mobile internet business. So in the mobile internet business, as Yunfan mentioned, this is the very early stages. So that is why we have this marketing campaign and that is why we are putting a lot of effort into our mobile internet business because we want to grab this leadership. Going forward, when the mobile advertising markets do take off, and we believe that being the leader, we will capture the majority of the benefits. As far as Dotad is concerned, I think they are 2G based, because they are more SMS based advertising. This is something different than what we do. If we understand correctly, this company, most of this company’s customers are actually WVAS providers. They help wireless internet service providers to acquire customers or to generate revenue, and we are one of their customers. In the other aspect, in terms of the benefit for wireless internet, one of the benefits, I think you guys mentioned it before, is you can target individual users. Right now, given China Mobile does not give out phone numbers, do you think any of those characteristics have changed? That is a very good question. I think that is part of the reason why Yunfan has said we do not have -- we have estimates on the number of users, but we do not have the exact number of users. It is just like on the internet. Many of the companies share IP’s, many of the users share IP’s. For example, for a company, usually they are allocated one IP and they have another one at their station. So to the website, sometimes they see the number of IP’s, it is actually very small because we actually have more users behind the firewall to use the internet sites. The good thing about the internet is that it supports cookies and support sessions, so a lot of times you can figure out who is using your site. As far as the mobile internet is concerned, only the advanced phones support cookies and support some of these features that you can recognize the user. I think that when the mobile phone gets into developing to a more advanced mobile phone and when all mobile phones become OS-based, operating systems based mobile phones really become advanced, they will support features such as cookies, such as better session supporting. So we will definitely be able to tell users apart, even without the phone number. I think this is the future and we are confident that, although right now we cannot give the exact number of users, but in the future, I believe we should be able to do so. Maybe one clarification for your wireless games. In earlier discussion, it looks like what you are saying is the network games are more profitable, which means are your right now developing network games for mobile applications? Yes, we have several games on our Kong.net portal that, if you have a chance to take out your mobile phone, you can access Kong.net and you can play our mobile network games. They are very popular today. Thanks for your time. This goes to your earlier comments about the expansion of capacity in the network and what kind of services can be offered. When do you think there will be the current music market, which I know is only 20% of your revenue now, may move into downloads of 30 second clips? I mean, in other words, longer portions of music, and what would that mean in terms of your content costs? I think that is a good question. We are very impatiently waiting for the 3G licenses, because we fee that once the 3G network gets rolled out, services such as music, such as video will become a very popular services to the users. Right now, under the 2.5G model, although customers can download music, they can download videos, the experience is not very good, because they have to wait a very long time to download these music, or download the video. So that is why we are building our Kong.net distribution platform, our Kong.net portal, to attract users. Although we say this is a free portal, right now, this is our view of the future of the 3G environment. Some things should be free. Some things will always be paid. What should be free is information-based services, such as news, such as sports, such as entertainment news and financial information -- these should be free. They should be free in the PC internet environment, they should be free on the mobile internet. What should be paid should be the licensed content, licensed copyrighted content, such as music, video, and these licenses copyrighted games. These should be paid for. So I believe in the 3G environment, when the network becomes faster, these services will always be paid -- music, video and games. For us, our business model will be we will build a distribution platform for these licensed materials. The analogy I like to make is that we want to build ourselves into a digital iTunes, a mobile iTunes, rather than Warner Bros. Music. That is our strategy. Thank you. Very good answer. That gets into the question then that it looks like the WAP portal will be a cost centre until 3G comes through? Is that a fair way of looking at it? In other words, if you are looking for licensed content for payment at that point, you are saying that licensed content will not be wildly popular until you reach 3G, which means that the WAP portal will be difficult to derive revenue because the advertising market is not highly developed, and the licensed content is not going to be arriving? Initially, of course, we have to do that to build this portal, right? It is just like when Yahoo got build in 1993, 1994, the first couple of years was investment time. Then, once it reaches a critical mass in terms of number of users, then you can monetize it through advertising, right? In the future, you can have Yahoo Marketplace, you can have Yahoo Music, you can have many of the business models that were derived from having this user base and traffic. I personally believe that the Kong.net model is that it will be advertising driven, and potentially in the future you can distribute digital licensed material. Much of this digital licensed material won’t be distributed in our wireless data services model, so we are very bullish on the wireless data and services, as well as our wireless internet business. We are very bullish on both sides. Earlier you had said that advertising will take a while to take off because of the lack of familiarity, and certainly we did see that with the portals. It took them quite a period of time before there was an understanding of that market. Now you seem to be implying that advertising, you can monetize your traffic of $20 million page views a day fairly soon. I mean, what is your time frame? You think mid ’07? Obviously it is too early to tell. We are just starting to market and promote this wireless internet portal, but I think we do not expect to see any meaningful advertising revenue in 2006. We do think that it is possible that we will generate relatively higher revenue from advertising in 2007. Let me just share some specifics with you that I learned from Japan recently. Understand that in Japan, they launched 3G services in 2002 and 2003, and in 2004, so-called wireless advertising revenue is about $100 million plus. In 2005, it actually doubled to over $250 million. So we think China’s culture and consumer behavior is very similar to Japan and Korea. So we hope China will follow similar pattern as Japan when the 3G is adopted, and when customers are more familiar with wireless internet portal. Good evening, guys, very nice quarter. Just a couple of quickies. First of all, I understand the rationale behind your Q2 guidance regarding 2.5G versus 2G. Just on a full-year basis, can you give us a little bit of your current outlook and by product categories, which ones are stronger product categories versus a little bit less strong? As you probably know, in China, the 2G market is about $600 million to $700 million, and the 2.5G market is about $300 million to $400 million in 2005, so the total market is about $1 billion, which is the single largest market for internet in China. So the 2G - 2.5G ratio is about 2-1. Right now, as you can see from our first quarter earnings release, our ratio is actually the reverse of that. Our 2.5G is twice as much as 2G. On an ongoing basis, we believe our 2G revenue will continue to grow. On a four-year basis, we continue to think both our 2G and 2.5G will continue to grow. I hope that answers your question, but at this point, I think it is very difficult to give you some precise breakdown of our total revenue. That is helpful, thank you. Also, lastly, can you give us a little bit of an update in terms of the progress of China Mobile royal is 2.5G services to prepaid market. If you remember last time we were talking about Shanghai, Beijing and Guangdong. Are there any new markets that you are going into so far? We are actually not aware of any new markets that are opening up to GPI services at the current time. I think we said previously that the prepaid users in general are lower-end customers. I think China Mobile’s ARPU for prepaid users is much lower than postpaid users, and their [inaudible] probably much cheaper or with less features than the postpaid users. With that, we would like to thank everybody for attending our conference call. We look forward to talking to you again in the next quarter. Thank you very much. Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude today’s presentation. You may now disconnect and have a wonderful day.

EarningCall_233952

Here’s the entire text of the prepared remarks from Gateway’s (ticker: GTW) 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. [[ more ]] Executives March 1, 0000 ET Good afternoon ladies and gentlemen, and welcome to your 2005 Gateway, Incorporated Earnings Conference Call. My name is Rob, and I’ll be your operator today. Throughout this conference, all lines will be on a listen-only mode. [Operator Instructions] Thank you, Rob. Good afternoon. Welcome to Gateway’s Third Quarter 2005 Earnings Conference Call. If you have not seen a copy of today’s earning release, please go to the News and Information pages on our Gateway.com website. Joining me today is President and Chief Executive Officer, Wayne Inouye, and Senior Vice President and Chief Financial Officer, John Goldsberry. Before we begin, I’d like to remind the audience that the presentations you are about to hear contain forward-looking statements based on current management expectations that involve risks and uncertainties, as well as assumptions that if they do not materialize or prove incorrect could cause Gateway’s results to differ materially from those expectations. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Information about factors that could cause future results to differ from these expectations can be found in today’s earnings press release and the company’s reports filed with the Securities and Exchange Commission. During this call, we will discuss certain non-GAAP financial measures that management uses as a basis to evaluate the company’s financial performance and forecast future periods. You can find additional information on these non-GAAP measures and a reconciliation of these measures to GAAP measures in today’s earnings release and on the News and Information page of our website. I would now like to turn the meeting over to John Goldsberry who will review Gateway’s third quarter financial results, who will be followed by Wayne Inouye who will provide overall commentary on Q3 developments. Thereafter, as time permits, we will allow questions from the audience. To allow greater participation, please limit your questions to one per person. John. [John Goldsberry, Senior Vice President and CFO] Thanks Marlys. Let me start by quickly summarizing our financial results. We had a good quarter. Revenue came in a $1.019 billion, slightly before analysts’ expectations, and up 17% from Q2. Operating income was $18.8 million, up from $17.6 million in Q2. Due to lower other income and a higher tax provision, net income was $15.1 versus $17.2 million in Q2; EPS came in at $0.04 versus expectations of $0.03 and $0.05 last year. So, now let me walk through our operating results beginning with unit volume. Gateway sold 1,167,000 PC units in Q3, up 16% sequentially, and up 25% from a year ago. The increase in unit sales on a sequential basis reflect seasonal trends, but it also reflects market share gains and direct. The increase in PC unit on a year-over-year basis reflects significant market share gains in U.S. retail. On a year-over-year basis, we were the fastest growing Windows-based PC company in the U.S. among the top five PC vendors. Notebook unit volume, one of our targeted areas for growth, increased to 360,000 units in Q3, up 40% sequentially and more than double a year ago. In terms of segments, retail unit volumes increased to 872,000 units in Q3, up 16% sequentially, and up 44% over a year ago. Retail notebook sales increased to 231,000 units, up 40% sequentially and up 213% from last year. Both direct and professional experienced sequential growth which we believe is evidence that we’re making progress in these businesses. Professional unit volumes increased to 224,000 units in Q3, up 6% sequentially despite being down 7% last year. Whole notebook volumes increased to 70,000 units, up 25% from Q2 and up 17% on a year-over-year basis. Direct unit volumes increased to 71,000 units in Q3, up 48% sequentially despite being down 15% from last year. Direct notebook volumes increased to 35,000 units in Q3, up 86% from Q2 and up 18% from year ago levels. Looking at the income statement, Q3 revenue was $1.019 billion which was above analysts’ expectations and which represents a 17% increase over Q2, and an 11% increase over last year. The sequential increase primarily reflects seasonal trends and market share gains, while the year-over-year increase primarily reflects market share gains in U.S. retail. Gross margin dollars increased to 85 million in Q3 from 87 million in Q2 and 92 million in Q3 of ’04. Gross margin percentage for the third quarter dropped to 8.3%, from 10% in Q2 and 10.1% last year. The sequential and year-over-year declines in gross margin percentage are primarily due to strong growth in the retail business, which has lower margins, as well as competitive pressures in professional, and to a small extent, retail. We continue to drive down SG&A expense. It dropped to 78 million in Q3, or 7.6% of revenue, from 85% or 9.7% of revenue in Q2, and from 154 million or 16.8% of revenue in Q3 of last year. We continue to manage our SG&A expense down in order to maintain a balance between cost levels and the gross margin characteristics of our business. Lastly, we recognized 11.6 million in benefit from our Microsoft agreement, which was down from 15.1 million in Q2 based on lower qualifying spend under the agreement. The net result is that we had operating income of 18.8 million in Q3, up from 17.6 million in Q2 and up from a loss of 61.7 million in Q3 of last year. I should mention that included in the results for Q3 are a number of one-time items netting out to approximately a $1 million gain. After lower other income and a higher tax provision, Q3 net income was $15.1 million, which compares to 17.2 million in Q2 and a loss of 59.3 million a year ago. EPS came in at $0.04, which was above expectations at $0.03, and which compares to $0.05 in Q2 and a 16 cent loss a year ago. Turning to the business units, retail revenue increased to 601,000 in Q3 which was up 23% sequentially, and up 47% from Q3 of ’04. Contribution income from the retail segment was 26.6 million in Q3, which was relatively flat as compared to 26.3 million in Q2, but was up 113% from last year. Based on preliminary MTD estimates, our U.S. retail desktop market share increased 7.2 points year-over-year, from 26.6% in Q3 of ’04 to 33.8% in this quarter. In notebooks, Gateway’s U.S. retail market share more than doubled, from 4.6% in Q3 of ’04 to 10.3% of this quarter. These year-over-year market share gains in U.S. retail reflect strong increases from both our Gateway and eMachines brands. Our desktop market share did decrease sequentially, slightly from 35.9% in desktops, and our notebook market share decreased from 12.5% in Q2. Professional revenue increased to 286 million in Q3, up 5% sequentially, despite being down 12% from last year. Contribution income for the professional segment declined to 7.8 million in Q3 compared to 18.1 in Q2 and 23.8 million in Q3 of last year. The decline in contribution income sequentially as well as on a year-over-year basis was due to margin pressures due in part to a trend in the professional segment towards consolidated purchasing by customers. While the segment remains a competitive business, we are encouraged with the sequential volume and revenue growth, and with our recent success in winning large important contracts which Wayne will review in his discussion. Direct revenue increased to 132 million in Q3, up 19% sequentially despite being down 27% from last year. Contribution income for the direct segment increased to 14.7 million in Q3 from 8.2 million in Q2 and down from 24.5 million in Q3 of ’04. The sequential increase in contribution income is largely attributable to the significant increase in unit volume. Our unit growth outpaced the industry by over three times. We really feel we are turning the corner in this business given the sequential increases in volume, revenue, contribution margin as well as market share. As it concerns our balance sheet, during the quarter we instituted changes to better manage our working capital. As a result, let me draw your attention to the fact that our cash and marketable securities increased by 68 million to 635 million, driven by a 49 million decrease in inventory and an $84 million increase in accounts payable, offset by a $97 million increase in other current assets. This increase in cash and marketable securities represents the largest quarterly increase we’ve seen in ten quarters. Turning to guidance, with respect to the remainder of 2005, we’re comfortable with the annual revenue and earnings guidance we issued at our last conference call. However, as stated in our release, effective in 2006, we will be adopting a policy of not providing revenue or earnings guidance. Let me now turn the conference call over to Wayne who will address our progress in other areas of the business. [Wayne Inouye, President and CEO] Thanks, John, and good afternoon to everyone. First off, I want to thank our employees for all their hard work this quarter. Keep it up. Now, I’d like to focus on other developments that are important to our long term growth. Recently, we announced several exciting new products. These include a new line of PCs targeted at small business; the successful launch of our 21-inch flat panel TFT monitor for professional and consumer; and the rollout of our next generation convertible notebook which targets all our segments. We are rolling out our new convertible PC which features the power and mobility of a notebook combined with the flexibility and creativity of a tablet with a new marketing campaign. Bill Gates introduced this product at the recent Microsoft Business Summit. We are delighted at the support we are getting from Microsoft in launching this product which highlights their tablet operating system. Our advertising campaign, which started last week, is designed to highlight the attractive features of this innovative product, and to show how it can help small businesses and educators as well as consumers. The new campaign is also designed to bolster Gateway’s brand image as a source of innovative products. The new convertible notebook has received rave reviews and it has been launched simultaneously through all our channels. Introducing the product in early October, we have taken orders for nearly 20,000 units to date. This product is on track to becoming the best selling convertible notebook in the world, and we expect to be Microsoft’s largest customer for their tablet operating system. We dedicated special pages of our website to educate consumers on the benefits of a convertible notebook. Please take a look at www.gateway.com/convertible. We also made progress in the international retail. We recently expanded our presence in Japan through the addition of one of Japan’s leading national retailers, Yodobashi Camera. Just a little slight reset here. The product I was talking about, introduction tying with two of our corporate objectives, which have been the gross sales of our notebooks and TFT monitors. We have achieved significant market share gains in notebooks, up 40% sequentially and up more than 100% from a year ago. And our TFT monitor sales are up 26% sequentially and nearly 160% year-over-year. As you can see by the numbers, Gateway retail business remains strong. In the U.S., Gateway sales of notebooks in Q3 outperformed the U.S. retail market on a year-over-year basis by nearly 500 percent. Gateway sales of desktops outperformed the U.S. retail markets by 800 percent. And we don’t have a small base, either. With our recent product introductions, and our understanding of how the retail market operates, we believe we’re very well positioned for Q4, the busiest quarter of the year for retail PC sales. Gateway and eMachine units are now sold in more than 7,000 stores in the U.S. and Canada. We also made progress in international retail. We recently expanded our presence in Japan through the addition of one of Japan’s leading national retailers, Yodobashi Camera. With this addition, Gateway and eMachine brands are now sold through approximately 600 retail stores in Japan. In total, Gateway and eMachines PCs are sold in more than 2,000 retail stores outside the U.S. and Canada. Recently, we announced two new partners in the UK, Staples and Comet. And just this week, we announced the availability of Gateway desktop PCs at Telnor, a subsidiary of Telmex, Mexico’s leading telephone company. And we continue to explore additional expansion plans in Europe. Stay tuned for that. Professional remains a very competitive business, but we are making progress. Overall, unit volume increased 6% on a sequential basis, and notebook volumes increased 25% on a sequential basis. More importantly, we continue to win key contracts that bode well for our future growth. In the past six months alone, we have won a number of key contracts with federal and state government agencies, universities and high profile businesses. These include Department of Interior, a contract for two notebook models; Social Security Administration, a contract for desktops and notebooks; Department of Defense dependent schools, a contract for 1,800 notebooks for students and teachers at schools abroad and in the United States; United States Navy, a contract to provide products and services to personnel worldwide; United States Air Force, a contract to provide nearly 10,000 customized Gateway desktops and services to the U.S. Air Force globally; State of California - Gateway was chosen to provide technology across three major categories, desktops, notebooks and displays; State of New York, a contract to support the PC aggregate purchase for the State of New York; California Highway Patrol, we were selected by the CHP as a vendor for new notebooks for patrol cars. This deal will place more than 1,000 convertible notebooks in squad cars. But remember, if you are caught speeding in California, it’s not my fault. University of Gateway was selected to be the university-wide provider of notebook and tablet computing products for students, faculty and staff. South Dakota State University; the University selected Gateway convertible notebooks to support the University’s innovative curriculum and interactive learning programs. This deal brings Gateway convertible notebook technology to 2,400 students and faculty. University of Arizona. Gateway was selected as campus-wide provider of computing products and services. Churchill Downs. The home of the Kentucky Derby selected Gateway as the exclusive provider for client and enterprise technology improvements to the world-renowned horse racing venue operator. We’ve realized relatively little revenue on most of these contracts to date. However, they do position us to receive significant revenue in the coming quarters. And importantly, these wins demonstrate that Gateway’s government, education and business customers have confidence in our products and services. Professional continues to be a very competitive segment. At Gateway, we continue to lay the groundwork to put plans in place for long term success, including improving our core operational matrix, leveraging a cache of services, software and peripherals, and revamping our supply chain to better serve these customers. We are focused on growing our market share revenues in gross margin. We’re confident we’re on the right track in pro to drive the kind of revenues and margins we and our shareholders expect. And we hope that the results from the coming spring and summer education and government purchasing cycles will demonstrate we have the path to profitability in pro. Our direct business is also making progress. Overall unit volumes increased 48% sequentially and our notebook volumes increased 86 percent. We believe that this business will benefit significantly from our new advertising campaign which is designed to drive business to both our retail partners as well as our website, and our 1-800-GATEWAY telephone number. We also believe that we have opportunities to grow our sales to small businesses, and we recently introduced a new line of desktop products designed for that market. We continue to improve our operations and supply chain in order to support long term growth. This past quarter, we strengthened our management team in this area with the addition of Bruce Riggs, formerly of Dell and Quanta. Bruce has our operations and customer care area. We continue to drive our costs down and we will continue to improve our delivery times, product quality and performance on replacement parts. Our performance in these areas has never been better. In Q3, we also made an important decision to open a new U.S. manufacturing plant sometime in 2006. The new facility is designed to support our professional business. We expect to make further announcements regarding this facility later this quarter. In closing, we remain committed to posting profitable sustainable growth over the long term with a keen focus on keeping our costs among the lowest in the industry. While we continue to face challenges, we are pleased with the progress we’re seeing in our financial results. With that, we’ll 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. 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_233953

Following management’s prepared remarks, we’ll hold a Q&A session. To ask question please press star followed by 1 on your touchtone phone. If anyone has difficulty hearing the conference please press star 0 for an operator assistance. This is (Jody Cain) with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Joining me from AVI BioPharma are Denis Burger, chairman and chief executive officer, Alan Timmins, president and chief operating officer and Mark Webb, chief financial officer. This morning AVI BioPharma released financial results for the third quarter of 2005. If you have not received this new release or if you’d like to be added to the company’s distribution list please call Lippert/Heilshorn in Los Angeles at 310–691–7100 and speak with Cheryl Guertin. This call is also being broadcast live over the Internet at www.avibio.com and a replay of this call will be available on the company’s Web site for the next two weeks. Before we begin I’d like to note that comments made by management during this conference call will include forward–looking statements within the meaning of federal securities laws. These forward–looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the AVI BioPharma Annual Report on Form 10–K and subsequent reports as filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time–sensitive information that is accurate only as of the date of the live broadcast, November 4, 2005. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Thank you, Jody and thank you all for joining us today. The third quarter and recent weeks have been an exceptionally productive time at AVI and we have several developments to discuss in today’s call. I will start with a brief overview of several recent events. Mark Webber will summarize our financial results and Alan Timmins will then highlight several programs in greater detail. I will conclude with a review of key programs and will then take your questions. First, I’m exceptionally pleased to report the initiation of our Phase I/II clinical trial with AVI–4065 in hepatitis C. During the past three years we have compiled a significant amount of data in preparation for this trial and to now be in the clinic is very gratifying. Our goal at AVI is to develop drugs that address life threatening medical needs that affect large numbers of people. HCV certainly meets this profile. The World Health Organization estimates that $170 million worldwide have chronic HCV infection, which causes an inflammation of the liver and can result in the development of cirrhosis, liver cancer or liver failure. The current HCV treatment is 24 to 48 weeks of therapy with a combination of interferon and Ribavirin. It is successful in less than 1/2 of the patients infected with genotype 1 HCV, which is the most common form of the virus in the U.S. This treatment regimen has numerous side effects, some of them severe, which make it difficult for nearly of the initially treated patients to tolerate the recommended doses and duration of treatment. As we have discussed in the past, part of the challenge in treating HCV is the high mutation rate. However as a single–stranded RNA virus, HCV is an attractive candidate for our NeuGene technology which is designed to targeted conserved portions of the viral genetic code that are not likely to mutate over time. This multi–center clinical trial is designed to include up to 80 subjects divided equally between healthy individuals and patients with chronic active HCV. The study is actively enrolling subjects and we expect preliminary data around the end of the year at the earliest. Moving to our cardiovascular program, I’m pleased to report that we are enrolling patients in Germany in a Phase II APPRAISAL clinical study. This trial is designed to evaluate Resten–MP, which is our NeuGene–based AVI–4126 delivered via our patented micro particle delivery system for the prevention of cardiovascular restenosis. In this trial Resten–MP is delivered by IV injection in conjunction with the placement of one or more bare–metal stents. Our NUEGENE compound AVI–4126, which we also refer to as Resten–NG, targets the c–myc gene, which is believed to regulate the many downstream events that produce the pathology of restenosis. Resten–NG was found to prevent restenosis in our Phase II AVAIL study in which it was injected directly into the coronary artery using a special drug delivery catheter at the time of stem placement. In that Phase II study, Resten–NG in a therapeutic dose arm demonstrated statistically significant efficacy in preventing restenosis determined by both quantitative angiography and intravascular ultrasound. The binary restenosis rate was reduced by 75% among patients who received the therapeutic dose. Prior preclinical studies with our micro particle delivery system have proven it effective at delivering high concentrations of Resten–NG to the sites of vascular injury. Clearly with the continuing long–term problems experienced with drug eluting stents there is a growing interest in moving away from the polymers that are associated with this complication. This bodes well for both our drug eluting stent program under development and our micro particle delivery system, which avoids drug eluting stents altogether. These two programs target very large market opportunities. Even today in countries like Germany about 2/3 of stents placed during balloon angioplasty are bare–metal, largely based on concerns of cost effectiveness and long–term complications with drug eluting stents. The APPRAISAL study’s primary therapeutic endpoint is the subsequent reduction in luminal diameter or late loss from the time of intervention to follow up at six months. Reduction in late loss, which will be measured by quantitative angiography, is the standard indicator cardiologists use to gauge long–term stent efficiency. Thanks, Denis. Today I’d like to review our 2005 third quarter results, our cash position and our financial guidance for the year. Our revenues from license, fees, grants and research contracts in the third quarter of 2005 increased to $3.3 million from revenues of approximately $9,000 reported in the third quarter of 2004. This increase reflects the recognition of $3.2 million in research contract revenue and the receipt of $3.4 million in government funding for work on viral disease projects as well as higher grant revenues. We were informed in 2004 that we had been allocated $5 million in government funding for the 2005 fiscal year for work on two viral disease research projects. During the third quarter of 2005 we were further informed that this government funding would total $4.6 million. In September of this year we received $3.4 million of this $4.6 million. The $3.4 million is reflected in this quarter’s financial statement. The remaining funds have not yet been received and are not reflected in our financial statements. Operating expenses of 2005 third quarter increased slightly to $5.2 million, compared with $5.1 million in the comparable 2004 quarter. The increase was due to higher general and administrative costs, which increased to $1.1 million versus the $1 million in the third quarter of 2004. This increase was partially offset by decreases in research and development expenses to $4.1 million in the third quarter of this year from $4.2 million in the third quarter of 2004. Approximately $120,000 of this general and administrative increase in the third quarter of 2005 was due to the hiring of additional clinical staff. Approximately $400,000 of this R&D decrease in the third quarter of 2005 was due to lower contracting costs for the production of G&P subunits. These R&D decreases were offset by increases in lab supplies and employee costs. We reported a net loss for the third quarter of 2005 of $1.7 million or 4 cents per share, which compares to the net loss of $5.1 million or 14 cents per share for the third quarter of 2004. Revenues for the first nine months of 2005 were approximately $3.4 million, compared with revenues of approximately $145,000 reported for the first nine months of 2004. Operating expenses in the first nine months of 2005 decreased to $16 million from $20.3 million for the first nine months of 2004. The decrease in operating expenses was due primarily to a decrease in R&D cost to $12.2 million, compared with $16.9 million in the 2004 period. Approximately $5.5 million of the decrease of R&D expense was due to lower contracting costs for the production of GMP subunits offset by increases in lab supplies, employee costs and clinical trial insurance. Our 2005 year–to–date net loss was $12.1 million or 28 cents per share, which compares to the net loss of $19.8 million or 55 cents per share for the first nine months of 2004. We reported cash, cash equivalents and short–term securities of $31 million as of September 30, 2005, an increase of $11.4 million from December 31, 2004. This increase is attributed primarily to the completion of a direct equity placement with several institutional investors for the purchase of 8 million shares of AVI common stock at $3 per share, resulting in net proceeds to the company of $22.3 million, which we announced in January of this year. This will offset by $9.9 million used in operations and approximately $1.2 million used for the purchase of property and equipment and patent–related costs. We are modifying our financial guidance downward for the full 2005 year. We expect cash burn for the year to be a little less than originally estimated and in the range of $21 to $23 million. Thanks, Mark and let me add my welcome to those of you joining us this morning on the call and on the Internet. Our NeuGene infectious diseases programs include projects that are being conducted through various collaborations with premier scientists and institutions, governmental agencies and pharmaceutical companies. Some of the governmental projects are performed under Cooperative Research and Development Agreements or CRADAs, which we have in place currently with the Walter Reed Army Institute of Research, the Centers for Disease Control and Prevention, or CDC, and the U.S. Army Medical Research Institute of Infectious Diseases, or USAMRIID. Today I want to discuss some highlights from our Department of Defense funded collaborative work with USAMRIID that demonstrated the effectiveness of our NeuGene technologies in combating the Ebola and Marburg viruses and the ricin and anthrax toxins. Let’s start with Ebola. Ebola virus causes hemorrhagic fever, which historically has killed up to 80% of infected humans. There are currently no approved treatments for Ebola. It’s noteworthy that UAMRIID is the only laboratory in the Department of Defense and one of only a few in the U.S. equipped to safely study highly hazardous infectious agents such as Ebola virus. Studies with our NeuGene compounds conducted at USAMRIID have now provided evidence of robust efficacy in multiple experiments with mice, guinea pigs and primates. Previous attempts by USAMRIID with the Ebola virus using other technologies of other companies were not successful in treating multiple species. Using the Ebola virus mouse and guinea pig models we targeted six of the seven Ebola virus genes with single and combination agents in prophylactic and therapeutic protocols. We identified the most effective protocols that resulted in 100% survival at low doses of drug combinations targeting different Ebola genes when administered 24 to 48 hours after virus challenge. Based on the mouse and guinea pig experience, a three–drug combination was used in initial primate studies, which also were successful. We also have announced progress with NeuGene compounds against the Marburg virus. Marburg hemorrhagic fever, although rare, cropped up in a recent outbreak in Africa and demonstrated a very high mortality rate. In tests with guinea pigs challenged with high doses of the virus that were 100% lethal in untreated animals, a high survival rate was observed in single agent protocols targeting distinct Marburg genes. We now have plans to test combination agents in experiments similar to those successfully conducted with Ebola. We also reported positive results from preclinical studies with ricin and with anthrax. Ricin is an enzymatic toxin from the caster bean that inhibits cells from producing proteins, resulting in rapid cell death. Ricin degrades the initiation site on ribosomes, thus blocking protein production from starting. We use antisense to specifically hide the RNA initiation site from the ricin in a reversible manner. Preliminary study results indicate that NeuGene compounds targeting the ricin binding site represent a feasible approach to treatment and proof–of–principle has been established. Anthrax is an acute infectious disease caused by the spore forming bacterium Bacillus anthracis. The key in its pathogenesis is the production of a lethal toxin. This toxin associates with specific cellular proteins to trigger apoptosis. In the past anthrax in humans was due to an occupational exposure to infected animals or to their products. However in terms of bioterrorism inhalation anthrax is of course a great concern. Case fatality rates for inhalation anthrax are high, even with appropriate antibiotics and supportive care. Following the bioterrorist attack in the fall of 2001, the case fatality rate among patients with inhalation disease all of whom received aggressive antibiotic therapy was 45%. Experiments conducted in cell culture indicated that our NeuGene compounds, which had been designed to down regulate the target of the lethal toxin led to increased cell survival without extensive cell death. Preliminary survival experiments in mice showed that almost all mice treated with specific NeuGene compounds survived a lethal challenge with anthrax spores. Together these experiments indicate proof–of–principle of this approach and additional experimentation is ongoing. We believe that our potential to safely and efficaciously treat a broad range of viruses and even apply this technology against toxins is being widely recognized, as evidenced by our inclusion in an initial 2006 defense funding allocation. The U.S. Senate Committee on Appropriations has preliminarily allocated $22 million for our research and development programs as part of the federal government’s next fiscal year defense spending bill. It includes allocations for the Ebola, Marburg — Ebola and Marburg viruses as well as the ricin and anthrax toxins plus a new program targeting dengue virus. I caution that this spending bill must now be approved by the full Senate, and that the total amount awarded to our company is subject to change. Before turning the call back to Denis, I’d like to briefly comment on our introduction of a new application for NeuGene technology we call Exon Skipping Pre–RNA Interference Technology, or ESPRIT. ESPRIT therapeutics are designed either to delete disease causing genetic sequences or to skip functional sequences to redesign proteins that are over expressed or harmful in certain diseases. This is a new approach to solving genetic disorders and diseases caused by over expressed or harmful genes. ESPRIT therapeutics allow for fine genetic surgery at the RNA processing level, providing a new and highly potent tool for altering many disease mechanisms. We’re pursuing a number of genetic disorders as well as diseases with an immunologic component. The first use of this technology was conducted in Duchenne’s muscular dystrophy through a collaboration with Dr. Steve Wilton, an associate professor and head of the experimental molecular medicine group at the Australian Neuromuscular Research Institute in Perth, Australia. Muscular dystrophy is the common name for several progressive hereditary diseases that causes muscles to weaken and to degenerate. It impacts an estimated 50,000 to 250,000 individuals each year. In a mouse model by targeting the defective Duchenne type muscular dystrophy dystrophin gene with an ESPRIT compound, Dr. Wilton was able to force the cell to snip out the disease causing mutation in that region. Using this approach a mostly functional dystrophin protein could be made that would previously only have been a non–functional protein. Thanks, Alan. As we have discussed we believe our NeuGene–based antiviral and antitoxin projects, which we call our “rapid response therapeutics,” have a significant role to play in the future of bioterrorism defense and also we have an important public health impact. Among the health issues currently at the forefront of public awareness is avian flu. Studies with NeuGene compounds in several laboratories have demonstrated the ability to target conserved regions of all significant influenza subtypes. These include avian flu subtype H5N1, which is the cause of the current outbreak in birds and a limited number of humans throughout Asia and in Eastern Europe. Among the targeted subtypes are the three that caused pandemics in the 20th century -- the 1918 Spanish flu or H1N1, the 1957 Asian flu or H2N2 and the 1968 Hong Kong flue or H3N2, and the three subtypes of avian flu that have been reported to cause disease in humans, namely H5N1, H7N7 and H9N2. This means that a single AVI drug could be efficacious against all six flu subtypes that have ever been known to infect humans, including the avian subtypes. It is thought that co–infection of man or certain animals with both H1N1, a common flu virus and H5N1 the avian flu virus, can lead to a recombination of viral particles resulting in the emergence of a virus with new antigens to which the human population does not have immunity and also has the ability to spread from person to person. This is the likely general mechanism that led to the worldwide pandemics of 1918, 1957 and 1968. Our NeuGene technology is well suited to combat this type of viral outbreak as it targets portions of the viral genetic code that are consumed and not likely to mutate. Several of our NeuGene compounds have shown efficacy in early experiments and are now moving forward or in vivo animal evaluation against both H1N1 and H5N1. In closing, our strategy for drug development is to dedicate internal resources to drug candidates that can be developed rather quickly and target large market opportunities while seeking collaborations and partnerships to support smaller market and longer–term opportunities. To that end, we are extremely pleased to have initiated two clinical trials in the past several months and indications that represent large market opportunities. And we also continue to see robust pre–clinical data further validating the antiviral applications of our NeuGene antisense compounds. And finally, we have numerous additional drug opportunities based on our ESPRIT therapeutics. Ladies and gentlemen, if you would wish to register for a question for today’s question and answer session you will need to press star then the number 1 on your telephone. You will hear a prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the star then the number 2. If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. Denis Burger:While waiting for the first question I would like you to note that Alan Timmins will be making the company presentation at the Rodman & Renshaw Techvest conference next week in New York. If you plan to attend this conference, we encourage you to meet us in person. Our presentation time is Tuesday, November 8 at 10:50 a.m. Hi, good morning guys. Congratulations for a great quarter and ongoing governmental progress. Our first question is on the avian flu programs. Can you guys provide us, you know, some priorities on this program in this particular in regarding to the steps required to obtain any potential fundings targeting the avian flu and also steps necessary for the potential participation in the Bioshield 2 programs? Thanks. Thanks for your question. As you know recently some money was allocated at the government level to combat avian flu. I think that in unfortunately typical government fashion I think there’s not a lot of clarity as we sit here today as to how those funds will be distributed, to whom they’ll be distributed and under what circumstances they’ll be distributed. Avian flu has not yet been included under the heading of Project Bioshield and as you know that’s — Bioshield’s been around now for a year or two and similarly has a little bit of an unclear funding path. So I guess our response to that would be that we will continue to expend the effort, the shoe leather, etcetera to make our progress known on Capital Hill and among those that are — will, either are or will become responsible for the purse strings surrounding things like Project Bioshield or like the avian flu budget allocation such that we’ll be in the right place at the right time and hopefully opportunistic when it comes to garnering some of those funds to press our program forward. Thanks. Okay cool. The second question is regarding the cardiovascular program. Can you guys going to spend every time providing us specific regarding the (Cap G) trials? One of our most important programs in development is using our AVI–5126 to treat saphenous veins ex vivo before they’re used in coronary artery bypass grafting. The mechanism by which the saphenous veins undergo occlusion first at one year and then with about 65% 10–year failure involves almost an identical mechanism to that in cardiovascular restenosis. So the key element in the program again is the c–myc gene. And we use AVI–5126, which is a target for c–myc to inhibit the role that c–myc plays in the downstream gene events in (Cab G). We’ve finished a significant amount of our preclinical data and we’ve targeted the first half of 2006 to introduce this program into the clinic. Oh it’s the first half of ’06. All right thanks so much. And the last question I have is regarding the $22 million of (probation) funds from the biodefense program. Can you guys give us clarity regarding to how much of these funds if approved by the Senate will be accessible in 2006 and how much you, you know, well how much are you guys able to access, you know? Thanks. Sure. The way that that works is that once the final allocation is agreed upon we put together a project plan along with, in this case, like the UAMRIID or other governmental entities, we put together a project plan which has certain benchmarks and the accessing of the funds is done basically on a completion of benchmark basis so anywhere from a portion of the $22 million to the whole $22 million would be available to us as we achieve benchmarks over the course of 2006 and, you know, if it goes longer than that then into 2007. Good morning. Maybe I just asked for a little further elaboration on the last question related to the defense funding allocations. Certainly there’s some unknown or let’s call it a risk related to the exact amount that might — you might receive but once that is done or known could you comment on the — let’s say the contractual formula you operate under in these kinds of situations as it — are there potential risks to you related to excess costs from what you might have projected or are there penalties related to — might come as a result of delays in producing results? I don’t mean to necessarily focus on the negative — on the positive. Is there sort of a built–in cost plus situation so that once you get this if you deliver it that you know that what your profit will be? Yeah I think you might be adding a couple of degrees of complexity there that don’t actually exist. It’s really more of a straightaway research contract type of a situation. We agreed to perform certain items within timeframes and much like any other NIH grant or that sort of thing it’s understood that situations arrive that either accelerate the schedule or decelerate the schedule a little bit but it’s less of a risky proposition maybe than your question made it sound like. Specifically we arrive at benchmarks. We develop those in conjunction with our outside collaborators. In the case of this past year USAMRIID their rate eliminating steps on both sides of the equation this year happened to be USAMRIID had some limitation because they were doing some refurbishment of their BSL4 facilities so that, you know, took a couple of weeks extra that initially we hadn’t anticipated. But, you know, basically once we’re on the rails with the allocation process we move down it rather quickly. We hit the benchmarks that we’ve set out and then we’re compensated for them by the government. So it’s — and as far as penalties that’s not an aspect of the contract, though facetiously some would say that working with the government is in itself its own penalty. Thanks. Yeah is there a rule of thumb margin of profit with these — dealing with the government on these types of contracts? Well the word profit and governments those words don’t usually occur in the same sentence. Certainly their overhead fees attributable to each project and those are similar to any other government contract type of situation. But I think I’d caution you using the word profit when you’re talking about anything to do with the government. All right. Two areas of questions — the first I just wanted to focus back in on avian flu and just get a better idea now that this $7 plus billion plan is out there and it seems like there will be as this unfolds the money pointed towards antivirals and drug development. How far do you plan to go in the work that you’re doing right now preclinical to establish AVI’s technology as being effective against H5N1 to put the company in a position to take advantage of the grant money and eventually the stockpiling that seems obvious is going to happen based on the priorities. Can you just give us more detailed timelines on what’s happening in this area? We plan multiple animal models with both H1N1 and H5N1 with multiple investigators and as you probably know it’s a little easier to do H1N1 experimentation because it doesn’t require the (SL4). And H5N1 requires the (SL4). But we are — have in plans multiple models for both organisms and we’re going to try to d that as expeditiously as possible because we feel that that kind of data is the kind of data that will set us up for funding opportunities. We’re initiating some programs before the end of the year and some will carry over into the first half of next year and since their research is on reiterative process we can’t give you any further timeline comments. Might there be any collaborations with any of the government agencies that you’ve been working on with other viruses, be it the NIH or the CDC or USAMRID or has that not been discussed at this point? The second question is just to focus in on Resten–NG to better understand where you’re taking that. It seems like there’s a lot happening in the stent market. Guidant might be an independent company again. A lot of people are wondering bout where that’s going from the polymer stent, polymer–free stent. Can you just give us a little more detail on what’s happening with Resten–NG, the polymer–free stent and give us some insight on where that program is going? Well I’ll slightly evade your question. What we’ve tried to do in our conference calls is to focus on just a couple of areas and we decided on this call we’d focus on our two clinical trials recently initiated. The basis for our “rapid response therapeutics,” which was our programs with the government that lead us to an ideal position to address avian flu. Now that isn’t to mean that we’re not pleased how some of many of or other programs are going but that’s sort of the rationale behind not mentioning every program. What I will say today is that we are pleased with our development of trying to achieve the goal of a polymer–free drug–eluting stent and that program of course is at or cardiovascular division in Colorado under the direction of (Joe Horn). And we will address in our next conference call a more definitive update on that particular topic. My last question would just be you mentioned that we would probably see an endpoint in the hepatitis C trial by year end. Does that mean that would be — there would be announcement of the company of the results by year–end from the company or would that, you know, possibly extend into next year just considering when you look at some of the other companies that are brought through hepatitis C drugs. There’s been, you know, partnerships in pretty early stages after human data. I just wanted to understand, you know, is that the endpoint for an announcement or might that be into next year? We’re trying internally in our company to move as quickly as we can to analyze patient data so that we can meet that objective but we recognize some things re often out of our total control, so it could be into the first quarter but we will — we are committed to evaluate and announce the results as soon as we can. Once again ladies and gentlemen, as a reminder to register for a question please press star then the number 1 on your telephone. Yeah I was really impressed with the — some of the work you’ve been doing in viruses. The estimate you had earlier regarding the cash burn rate of $21 and $23 for next year would $30 — about $30 — between $30 to $31 million in cash currently on hand this — is this still enough to get through the end of next year without having to do any financing? And does that include — I’m assuming that doesn’t include any money from the U.S. government. The current financials that Mark Webber talked about today and the cash burn estimates do not include any consideration of the $22 million preliminary allocation number. To answer your question, based on our financial filings and the third quarter release that we just did, we have the financial resources to operate through the end of 2006. Now classically biotech companies don’t wait until the last dollar is spent to raise money. And our financial resources include money from partnerships, grants and contracts, as you just mentioned and addressing the capital markets. AVI does not currently have plans to address the capital markets but having said that we’re going to be opportunistic in raising capital if situations arise that are beneficial to the company and its shareholders. Yeah which is what you did back in January and February and stocks spiked up and you were smart enough to sell some stock at that time. Thank you very much for that comment. We felt that that was an opportunity we couldn’t miss and I comment today that sort of the proof is in the pudding and we’re in a position today because we did that. So well great guys. You know, it looks like given the amount of cash you have on hand we should have something significant happen soon enough that maybe you won’t need to have a lot of cash soon. Thanks very much. I just wanted to go back to the avian flu for a second, more a question of has there been any consideration or have you been approached by any of the majors in this to do any kind of joint ventures or development agreements with, you know, somebody like (Chiron) for example? Denis Burger We haven’t been approached by any of the major pharmaceutical companies at this point. But I wouldn’t expect that at this stage. I would expect the interest as we develop animal data. Well I’d just like to reiterate that the management at AVI feels we had a very strong quarter, both financially and in terms of research progress and getting two trials into the clinical development. And we want to thank you for the continued support. Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

EarningCall_233954

Here’s the entire text of the Q&A from The9’s (ticker: NCTY) 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. Ladies and Gentlemen, if you would like to ask a question on today’s conference call, you may do so by keying “*” followed by “1” on your touchtone telephone. To withdraw your question from the queue you may do so by keying “*” followed by “2”. Once again ladies and gentlemen, that is “*” “1” for questions. Hi, Mr. Zhu, Hannah and James, congratulations on a very good quarter. I have three questions for you. Question one can you please talk about your, sort of, give us more idea on the latest PCU and ACU trend post Q3? I know that you mentioned something about PCU, but can you also tell us what the ACU was post Q3 because I think we are slightly concerned with the slowing growth in the market after hearing your competitor's latest trends? And the second question is, can you please talk about the introduction of the fatigue system in October and how that will affect your business? And then finally, can you please talk about additional pipeline and then also the timeline of new games? Thank you. Thanks for the question Stephen. I will answer the first question and the Chairman will answer the second question and the third question with respect to fatigue system and the pipeline. The average concurrent user and Peak Concurrent User on an overall basis for quarter three was 476,000 and 240,000 as we just said, but the September numbers I can share with you is Peak Concurrent Users was over 467,000 and the ACCU numbers also over 240,000. There's an upward trend in October of post Q3, and the ACCU level is more than 260,000 and the PCCU level is definitely over 500,000. There is a stabilization of the ARPU numbers and the operating number for Q3 was RMB0.36. Hannah, just now pointed out that for October the PCU for WoW was 500,000 concurrent users. It should be pointed out that during the June open beta testing of WoW the Peak Concurrent User number jumped directly to 450,000. So it quickly surpassed the important thresholds of 100 and 200 and 300,000 to reach the 450,000. So for us to see the Peak Concurrent User number to be at the level of 500,000 in October gives us even more confidence that the concurrent user number of WoW in future will continue to grow. The second question is about the fatigue system. At the moment, it's very difficult to measure the implication of the fatigue system implementation, but we believe that what the Chinese government has on mind is to promote the healthy sound development of this gaming industry. So, and we are also working with the government to achieve this goal. And a lot of attention has recently been placed on the newly proposed anti-addiction framework, actually there have been a lot of regulations in attraction for many years in the past and The9 has been able to prosper within this structured regulated environment ever since it's entry into the online gaming industry several years ago. Significantly, I believe that a stronger military structure will be beneficial to the incumbent leadership. For instance, the government has recently required a higher degree of capitalization for online game operators to prevent less capable game operators from offering poor quality services. As The9 Limited is a leading force in the local industry, I feel confident that we can thrive within all these guidelines and that the government may propose, especially as the government intentions has been and will continue to be focused on promoting a healthy and prosperous online gaming industry. Remember that one year ago I talked about the future outlook of the online gaming industry in China and I said that 3D games will represent the future. And I also said that as the 3D games become the mainstream in this industry in China by then the effort we have made in the past, for example, The9 introduction of such 3D games, our licensing effort will help us to lay a very solid foundation and we will have the first entrance advantage. And our strategy is to launch and operate only the best more successful games. Some of the new products have been in testing our publicized, some have not and then we will according to our original plan step-by-step offer those games to the market. With the success of WoW and the number of users that we now see I believe that the 3D gaming market in China is really kicking off and with this kicking off of the 3D games the old versions, the 2D games, which I compare to as like a black and white TV versus the color TV, will be replaced by the 3D games. Now we believe that R&D is very critical and important for our future long-term success, however, we will not be wasting our money by taking hurried action. We have a lean, strong, very effective R&D, in-house R&D team. Meanwhile, we will be outsourcing a lot of R&D. And then we will continue to play close attention to the local, as well as overseas R&D houses, and to, so that we can make a decision when time is appropriate on which direction we should be pursuing more aggressively. So we believe that with this kind of R&D strategy we will have good opportunity to make a wise decision that is we can decide when to open the window of opportunity rather than break this window and only look at the broken glasses. And we have made some initial progress and achievement with our overseas expansion strategy. We believe that in future, in the long-run the overseas business will help to add on the domestic business and lay a very solid foundation for the sustainable growth. Can I have a follow-up? Is it possible to give us more concretes of timeline regarding to commercial launch of JJW, GE and also the introduction of the World of Warcraft expansion pack? Well for JJW it will be commercialized in the year 2006. That is we will start to charge fees in for JJW in 2006 and for GE it will be commercialized in the second half of 2006. For WoW there is a new version called The Burning Crusades and we will be very interested in launching that new version. And we expected that the Burning Crusades will be available here in China for release in the year 2006 too. Hi, congratulations on a good quarter. This is Lin on behalf of the Lu Sun ph. We have two questions here. The first one is it seems like World of Warcraft is doing very well in Taiwan. When would you expect bottom-line contributions on this new joint venture? Also, can you give a little bit more color on the operation status of WoW in Taiwan? The second question is when World of Warcraft is getting into second-tier and third-tier cities, what is the cost and ARPU implication? Also, can you update a little bit of the progress of this penetration? Thank you. Okay, my first question was like World of Warcraft is doing quite well in Taiwan, Taiwan market. We know that it has started commercialization last week or earlier this week. I just wonder when will The9 expect bottom line contribution from that joint venture and also another operation there? Indeed as you pointed out we have a joint venture in Taiwan operating our WoW in that market and starting from November 8, we will charge fees for the WoW in Taiwan. So it's commercialized, and we will release the financials from the Taiwan market for WoW in Q4, in the Q4 release. Actually I had earlier on a projection that WoW has been very successful in the US market, in Europe and in South Korea, and I was very confident that it will be very successful in the Chinese market too. So I believe that for Taiwan we will see the success story be repeated and I think for the whole Southeast Asia market WoW will be a very successful game. Now your second question is about entering into second-tier, third-tier cities. According to our survey and the research, the user base of WoW our judgment at the moment is that for WoW at the moment we'll continue to be focused on the first-tier cities. However, the inland market for second-tier and third-tier cities offer a great opportunity for the further growth for this game and with the PC updates, the hardware updates in those markets we will gradually work with the targeted marketing partners and it will also cooperate with the hardware vendors to penetrate into those second-tier cities. Hi, good morning everybody. Congratulations on the great quarter. Just a couple smaller questions, I have a small follow-up on the second and third-tier cities. Is there any indication of what percent of your revenues are starting to appear from the second-tier cities and the reason I ask is another company had said that they were kind of surprised by your penetration in some of these second-tier cities. I'm just kind of curious how much of it? Was it like, are we talking like 1% or 5% of your total revenues or what kind of revenue spread have you seen so far? To answer your question, Antonio, the exact distribution between the first and second and third-tier cities, proportionate percentage of revenue, we do not have the information in front of us yet right now. The distribution, of course, is more concentrated on the first-tier cities. The second and third-tier cities penetration is still in progress. It's currently for Q3 in the double-digit figure percentage and we are, as our Chairman and CEO just mentioned, we are doing more targeted marketing on internet café campaign and also working with local partners to speed up the process of the hardware configuration increase at the upgrading the computers over in the second and third-tier cities and that will gradually increase our penetration into the second and third-tier cities. With that, the success that we have achieved for Q3, and the ability to penetrate to the second and third-tier cities is definitively caught our peer company by surprise and is definitely higher than what they expected. Well, let me add a few words. If we look at the development path of the online gaming and online games in the past few years starting from the game Mir. At first it was started off in the first-tier cities and then gradually it penetrated into the second-tier cities and then at the end it had quite a stable user base in a number of second-tier cities. And also these two games also has its more popular cities, that is a number of cities that the game is more popular. And I believe that for WoW, its expansion in the China market, the same thing will happen. This expansion will first start in the first-tier cities and then go into the second-tier cities. In the past six months we have worked with Coca-Cola on a co-branding and marketing campaign and so this campaign now World of Warcraft has got a very strong mind share among the gaming population. Okay thank you. I have one question on your, who you think your competitors in light of this, I don't mean just for World of Warcraft but even your pipeline going forward. Who do you see as your main competitor? Is it going to be I guess the NetEase’s 3D game? Do you see it as, I don't know, some of the Kingsoft games? Is there anybody that you see that you've marked as your biggest competitor or your biggest threat? Let me say that I don't think World of Warcraft this year or for the short-term future will have any significant competitor in the China market. Because when World of Warcraft was developed it took the development team several years and they spent more than hundreds of millions of US dollars, and if you look at our competitors games you rarely see anyone investing so much money and spending so many years time in developing a game. And I said that the new version of World of Warcraft, The Burning Crusade will be commercialized and will be launched in the US market in 2006. We believe that the launch of this new version will just further extend the gap between the competitors in terms of a single game profit. Okay and just one quick last question on your paid accounts, I just wanted to put in perspective. Your release says you have 2.5 million paid accounts activated since launch. I just want to kind of get an idea of like how much of this is done in June just for third quarter and how many you've seen for the month of October? I think the last reported registered pay user number was 2 million. The actual number that we have for paying registered users as of the end of October was actually 2.8 million and we rounded up, rounded down actually to 2.5 million. There is a steady growth of new registered paid users on a daily basis and the trend is steady and is proceeding very well in the quarter in October, and we expect that with the more targeted campaign in the remainder of quarter four and in 2006, the number will remain steady and will go on upward trend hopefully. Hi, good morning. Great, congratulations on a great quarter. A couple of questions, firstly, can you firstly comment on the cost trend in fourth quarter regarding the cost of goods sold and the product development costs marketing. Because I have a couple questions first of all, because do you have to spend more on the CapEx to have new server to support for the new gamers. And also because you have changed I think the kind of equipment slightly that the product development costs is dropped quite dramatically in the third quarter, but you are going to spend more maybe hiring more payroll to develop new games. Do we expect the product development costs to increase in the future? Finally, on the marketing side also like because you have the marketing company should we expect in the fourth quarter you have to spend more on marketing? And finally, you have around 18 million advance payment from renovation of new office. Should we expect that should be coming out in the fourth quarter directly? Thank you. Thanks for the question, Wallace. For your first question about the cost trend, we expect the gross margin that we enjoyed in quarter three, up about 50% will remain on a stable, on a steady basis for quarter four. It will be along the same line as Q3 keeping in mind that it might be a slight increase with respect to depreciation that we have to take into account quarter four for the full quarter because in quarter three, we opened up the fifth server site on September 9, and the depreciation with respect to that particular server, that one server, was only included in quarter three for one month, and is only going to be three months of depreciation for the fifth server site. With respect to what are the significant costs for purchasing additional servers for a new server site, for quarter four we have no plans to increase the number of server sites. Currently we have five server sites and that will support about 700,000 Peak Concurrent Users. For quarter four, we expect that to be sufficient for our needs. But we’re depending on the result of the marketing campaign and the demand from the players and the expectation in 2006. We will consider adding user sites in 2006, but not in Q4 of 2005. With respect to your question about deferred revenue, the deferred revenue most of it for revenue that was sitting on the books at that September 30, 2005, have been taken into revenue in October and November. And there has been steady sales of our prepaid cards so the deferred revenue number will be kept maintained on a steady level or even increase as we sell more cards, through the distribution channels and expanding additional distribution channels and with the demand of more players wanting to play the game in the second and third-tier cities. Okay just one follow-up on the balance sheet, it seems very interesting that the both the advance from customers and deferred revenue going up quite strongly. But on the other hand on cash basis the cash level actually dropped. Maybe I haven't gone through everything in your items. Can you give me some advise why this is so opposite change in terms of the cash level change? Thanks. Yes, there is a reduction of cash from the second quarter balance to the third quarter balance mainly because of the acquisition of the 31.1% of the joint venture company, which operates the World of Warcraft game in China. We have paid out about 10 million of cash in quarter three with respect to that purchase. And in addition to the 10 million another 10 million was offset with the previous loans that we provided to that joint venture partner. And that is the main reason. The cash that we brought in actually for, from the prepaid game cards was about US$28 million. Yeah, RMB155 million acquisition related liability. That is the amount we have to pay that translates into US$20 million. 10 million will be paid and have been paid in quarter four to date and another 10 million is going to be paid in quarter two of 2006. And that will complete the transaction with respect to the payment schedule. Yeah, good morning. I have a few questions. Can you give us some idea regarding your user characteristics like, men-women ratio, and age profile? The demographic character if we are talking about the WoW players well the demographic cut across the entire online gaming population. WoW is truly unique in this sense that it appeals to all gamers according to our survey numbers; basically there are male and female users. And then teens to add out some are seasoned MMORPG players. Some are first time players and our survey suggests that WoW gamers are coming from everywhere, some from other MMORPG games, some from PC offline games and some new gamers. So, WoW is truly special in that sense since that it has been able to expand across the whole online gaming population. Well the ratio of WoW players are between those players who play in Internet cafes and those who play at home. This ratio is quite consistent with the overall ratio of online game players. In the past if we look at the online gaming population, 60% play in Internet cafes, 40% play at home. Nowadays this ratio has turned around. About 60% play at home and 40% play at Internet café and that is quite consistent with the ratio we have observed for WoW players. Okay and for the new expansion pack for WoW could you give us a more specific time? Is it second half of 2006 or first half or which quarter? The timetable, exact timetable, is not released by us yet, but I think a lot of articles on the Internet are saying that it will be first half of 2006. For us to bring in that version update for the China market we need to do localization, which simply involves translating everything from English to Chinese. That would depending on the sound of it, the volume of content. It would take about one or two months to translate everything and then we can bring it out to the Chinese markets, so there will be a one to two month lag from the date it was launched in the States compared to when it will be launched in China. Hi, good morning guys. I have two questions. The first question, can you give us an update on your tax rate in this quarter and 2006? Second question, and maybe I have missed it, can you also give us an update on the marketing costs that we are going to see going forward because you have spent quite a lot of cash on the marketing in last quarter and in Q3. So what's your plan for Q4 and 2006? At some point when it hits the $13 million are you going to continue to spend at the high rate? Thank you. Let me say that this year, for example, this year we launched a coal or marketing campaign in partnership with Coca Cola and the benefit is that the numbers will generate from this campaign far exceeds the direct cost, direct expense The9 Limited spending. So in the next four years we will continue to work with the partners to do marketing for the WoW and our marketing investment will be based on the actual requirement of this version of the game and I can say with a lot of confidence that the output from those marketing campaigns will far exceed the cash input we invest. Hi, Ming. I want to add more concrete numbers to the question with respect to marketing. As I said in our last conference call in Q2, the marketing expense for World of Warcraft was about 2 million and that's mainly because we have close data, open data and also commercial launch all in that one single quarter. The marketing spend has actually decreased slightly in quarter three at about the 1.5 million lot dollar level. We expect that trend to, that level to be maintained for the remainder of 2005 and for 2006 it will be around that level. However, you have to keep in mind that whenever there is going to be significant upgrades to come out, for example, The Burning Crusade we will spend a bit more marketing to increase the awareness of the game and to market the game to make sure that people know that significant update is coming out and that is traditionally how marketing is done. With respect to your question about tax rate, the effective tax rate that we have for quarter three was about 5%. We expect the 5% to be maintained for the remainder of 2005 and for 2006. The entity that operates the World of Warcraft game in China enjoys a tax holiday from two calendar years and that starts in 2005 so i.e. in 2005 and 2006 that particular entity that operates World of Warcraft does not have to pay enterprise income tax, which normally would be 15%. Okay operator thank you very much. That brings to a conclusion of our Q3 2005 results call. Thank you all for attending. Good night. 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_233955

Here’s the entire text of the prepared remarks from China Finance Online’s (ticker: JRJC) 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 holding, and welcome to China Finance Online’s Third Quarter Earnings Release. At this time all participant lines are in listen-only mode. The presentation will be followed by a question and answer session. Any instruction will be informed at that time. I would now like to turn the conference over to your host, Ms. Jing Wu, of China Finance Online. Thank you, Ms. Wu. All right. Thank you, Operator. Welcome everyone to China Finance Online’s Third Quarter 2005 Conference Call. Today, with me in the conference are Mr. Zhao Zhiwei, our CEO, and Mr. Zhongshan Qian, our President and CFO. After the market closed today, the company issued a press release containing the financial results for the third quarter 2005. The purpose of this conference call is to provide its investors (ph) with further detailed information regarding financial results. Following the formal remarks, we’ll be happy to take any questions you might have. Before we begin, it is my duty to remind you that, during today’s conference call, we might be making forward-looking statements. This announcement contains forward-looking statements. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Statements that are not historical fact, including statements about our beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risk and uncertainty. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Potential risks and uncertainties include, but are not limited to, China Finance Online's historical and possible future losses, limited operating history, uncertain regulatory landscape in the People’s Republic of China, fluctuations in quarterly operating results, failure to successfully compete against new and existing competitors, and the company's reliance on China Finance Online's reliance on relationships with Chinese stock exchanges and raw data providers. Further information regarding these and other risks is included in China Finance Online's annual report on Form 20-F for the year ended December 31, 2004, and other filings with the Securities and Exchange Commission. China Finance Online does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Through interpreter: Good morning, and good evening. Thank you for joining us today China Finance Online’s Third Quarter 2005 Conference Call. Compared to similar periods of last year, the Chinese stock market in third quarter is still volatile and weak. However, we have grown our revenue by 8% year-over-year, compared to the previous quarter, our third quarter net revenue are relatively in line. We believe this is because, that of our advertising-related revenues have been growing. Secondly, the third quarter stock market is less volatile compared to second quarter 2005. This last quarter of this year, China Finance Online has started an online marketing campaign, which is set up due to juristics of (ph) cooperation with a number of popular portals in terms of co-branding and accounting. As a result from this campaign, our average daily user sessions for the third quarter has risen 2.3 million, a new record in our history. The total number of new registers for this quarter is over 2.5 million, an increase of 6% from 2.4 million of last quarter. In August of this year, China Finance Online also launched a new service package called Tao of Wealth. As of October 31, 2005, there are already over 160,000 downloads. As part of our company development strategies, we’ll focus on distributing tenants (ph) for Tao of Wealth in the early stage of our marketing campaign. Our goal is to quickly gain market share through customer acquisition such as a partnership with banks, mutual funds and insurance company. Now, I would like to pass the phone to Zhongshan Qian, our company CFO, to give you more details on the third quarter financial and operating results. Thank you. Thanks, Zhiwei. Good morning for those in Asia, and good evening for those in Northern America. In addition to the highlights of our financial and operational results in today’s earnings release, I would like here to discuss a few points in more detail. Our total net revenue for the quarter was $1.81 million, up about 8%, year-over-year and relatively flat compared to the last quarter. Among the net revenues, our advertising-related revenue in Q3 has reached US$449,000, representing 25% of the total net revenue. The advertising growth is 34% quarter-over-quarter and 138% compared to the same quarter a year ago. We believe our advertising growth was due to the increased traffic to our website because of the online marketing campaign and the company’s more efforts dedicated to the advertising-related business division. Our gross margin for the quarter was 94%, which is relatively the same compared to the last quarter. This is because our cost of revenue remains relatively stable. Our operating expense for the quarter totaled $1.01 million for the third quarter, up 139% from $424,000 year-over-year. The quarter-over-quarter comparison is flat. Our year-over-year expense increase is primarily due to the increase of our general and administrative expenses, and our sales and marketing expenses after the IPO. The sales and marketing expenses are related to the marketing campaigns that started in the second quarter of 2005. We have established sponsorship and a co-branding partnership with over 30 high-traffic Chinese websites, such as tfol.com, Mattie (ph), tom.com, China.com and 21cn. The co-branding partnerships will help us to (A) promote our brand name awareness and bringing more traffic to our website, and (B) pre-empt our competitor’s presence in high traffic websites because of the exclusivity, and (C) develop distribution channels for our new products, such as Tao of Wealth. Our net income margin for the quarter increased from 55% of the last quarter to 70%. The main reason for the increase is because we have recorded a net exchange gain of $327,000 for Q3 2005 due to the RMB reevaluation since July 21 of 2005. Excluding the non-recurring FX gains, our net income margin would have been 52%. There might be further RMB reevaluation in the future that may affect our financial performance in the coming quarters, but the company cannot give any predictions with regard to whether or when the RMB reevaluation will happen. The number of new subscribers for the quarter was 2,626, down 35% from 4,069 for the same period in 2004. The repeat subscribers for the quarter were 1,910, down 19% from 2,372 for the same period in 2004. These decreases in number of both new subscribers and repeat subscribers were primarily due to the weak performance in Chinese stock market of the third quarter compared to the same period of last year. The average subscription fee per subscriber, or ASF, for new subscribers was down 24% to $166 from $219 for the same period in 2004, but up 1% from $165 in the previous quarter. ASF for repeat subscribers was down 6% to $253 for the third quarter of 2005 from $268 for the same period in 2004, but up 3% from $246 in the previous quarter. We believe the increased ASF quarter-over-quarter for both the new subscribers and the repeat subscribers may have indicated that the Chinese stock markets were less volatile in the third quarter of 2005 compared to the previous quarter. Next, let’s move to our balance sheet. Our cash and cash equivalents were $63.34 million by the end of Q3 of 2005. The cash position has improved compared to the $61.83 million of last quarter. We believe, the main reason, of the improvement are one, we continued to generate positive cash flow from our operations, and two, RMB was reevaluated on July 21, 2005. 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_233956

Here’s the entire text of the prepared remarks from Research In Motion’s (ticker: RIMM) fiscal Q3 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Good afternoon ladies gentlemen. Thank you for standing by. Welcome to the Research In Motion Limited Third Quarter Fiscal 2006 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties here in the conference, please press “*” “0” for operator assistance at anytime. I would like to remind everyone that this conference call is being recorded on Wednesday, December 21, 2005 at 5.00 PM Eastern Time. Thank you and welcome to RIM’s fiscal 2006 third quarter results conference call. With me is Jim Balsillie, RIM Chairman and Co-CEO. After reading the required forward-looking statements disclaimer, I will begin by providing an overview of third quarter results as well as our guidance for upcoming quarters. I will then turn the call over to Jim who’ll provide a business and strategic update. We will then open up the call for questions. I would like to note that this call is available to general public via call-in number and webcast. A replay of the webcast will also be available on the rim.com website; we plan to wrap up the call at 6.00 PM Eastern this evening. Some of the statements Jim and I will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, CapEx, investment income, earnings, earnings per share and ASPs for Q4 and Q1 and beyond. Our plans and expectations regarding our ongoing litigations with NTP including our intention to move forward with a software workaround solution, if necessary, our expectation regarding RIM’s near and long-term tax rates, our estimates of the number of BlackBerry subscriber accounts, subscriber account additions and other non-financial estimates. Our product development initiatives and timing, developments relating to our carrier partners, new and expanding markets for our products and other statements regarding our plans and objectives. I’ll indicate forward-looking statements by using words such as, “expect”, “anticipate”, “estimate”, “may”, “well”, “should”, “forecast”, “intend”, “believe” and similar expressions. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made. Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements including the outcome of RIM’s litigation with NTP, risks relating to our intellectual property, our ability to enhance our current products and develop and bring to market new products including our software workaround solution, if necessary. Our reliance on others including carrier partners, our reliance on carrier partners and their systems accurately report subscriber account activations and deactivations to RIM on a timely basis. Our reliance on suppliers, our ability to effectively manage our growth, risks relating to possible product defects and product liability, risks relating to competition, general economic conditions, foreign exchange risks, risks associated with our expanding foreign operations and other factors set forth in the risk factors in MD&A sections in RIM’s filings with the SEC in Canadian Securities Regulators. We base our forward-looking statements on information currently available to us and we do not assume any obligation to update them. Now as an overview, Q3 revenue was within our guided range. Gross margin was at the high-end of our guided range and operating expenses were inline with expectations. Adjusted EPS as $0.71 was slightly higher than our previous forecast. Subscriber account additions were approximately 645,000 are inline with the revised forecasts, given in our November 23, press release. I’ll now discuss the third quarter results. Revenue for the third quarter was 561 million. This represented 14% increase over 490 million in the prior quarter and 53% increase from the same quarter last year. Handheld devices represented 392 million or 70% of RIM’s revenue during the quarter, flat from a revenue mix perspective with the prior quarter and up from 343 million in the previous quarter. Total devices that shipped in the quarter of approximately 1.12 million are up from the 960,000 shipped in the prior quarter. This quarter, the difference between devices shipped and net activations was approximately 475,000. Approximately 2/3rd of this difference represented sell-through by a way of upgrades and replacement handsets and approximately 1/3rd went into channel inventory, resulting in overall channel inventory increasing by just over one week. This makes sense, given the shift in the launch schedule of the 8700 and the 7130 handsets until the last few weeks of the quarter for initial stock and carriers. We continued to see strong handset replacements. As expected, average device ASPs decreased approximately $350 versus $360 in the prior quarter. This decrease was related to the mix of product shift in the quarter. As a result of expected shift in product mix toward the newer handsets, we expect ASPs increase slightly in Q4 and Q1. Service revenue was 104 million or 19% of revenue for the quarter, an increase over the 86 million in the prior quarter. RIM added approximately 645,000 BalckBerry subscriber accounts during the quarter, which was within the revised range we announced on November 23. As we discussed in our November press release, the lower than expected additions for the third quarter, were primarily as a result of the shift in launch schedules of the 8700 and 7130 handsets. The total base of BlackBerry subscriber accounts at the end of the quarter was approximately 4.3 million. Software revenue was flat with the prior quarter at 40 million or 7% of revenue. We are forecasting software revenue to increase in Q3, sorry in Q4 and Q1, with the introduction of BES 4.1, in early calendar ’06. Other revenue such as accessories and durable repairs was 25 million or 4% of revenue. Gross margin for the third quarter decreased slightly to 55.8% from the pro forma 56.2% in the prior quarter and this was slightly higher than our forecast. R&D spending was 41.6 million or 7.4% of revenue for the quarter, selling marketing and administrative expenses increased by 16% to 84 million versus 72.3 million in Q2 and were 15% of revenue, slightly lower than we had expected. RIM has updated its accounting for the NTP litigation following the District Court’s ruling on November 30, which found that the March 2005 settlement agreement between NTP and RIM was not binding. Although it is difficult to estimate when any future settlement or cost associated with the litigation maybe, we are maintaining the previously recorded 450 million as the best current estimate. The actual liability maybe significantly higher or lower than this amount, depending on further developments or resolution of this matter and will be booked at that time in accordance with GAAP. At the time of the March 2005 agreement, RIM recorded 20 million of the 450 million litigation accrual as an acquired license on its balance sheet. The District Court’s ruling that the settlement was not binding led to the writedown of this asset which after accumulate depreciation had a net book value of 18.3 million. This writedown and an incremental charge of 7.9 million for NTP related legal and professional fees were offset by related tax recovery of 7.2 million. The tax rate for the quarter was approximately 27.5%. GAAP net income for Q3 was 120.1 million or $0.61 per share diluted. Adjusting for the write down of the 18.3 million intangible assets, the NTP legal expense accrual and the related tax recovery, adjusted EPS was $0.71 which was higher than the expected range for EPS given on our last call. This was due to slightly lower than expected operating expenses and slightly higher than expected gross margin. The GAAP reconciliation of our adjusted EPS was included in the earnings press release in a chart this afternoon. Weighted average diluted shares used in the GAAP EPS calculation for the quarter were 196 million. Actual shares outstanding in November 26 were 185 million. Total options outstanding were 9.9 million. During the quarter, RIM repurchased 6.3 million shares at an average price of just under $62. Under the normal Court’s issue or that announced on October and taking into account repurchases to date, RIM is eligible to repurchase an addition of 3.2 million shares between now and October 2006. RIM’s balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. At the end of the third quarter, RIM had 1.6 billion in cash, cash equivalents and investments. This was down 293 million from the prior quarter. This decrease was due to the repurchase of shares during the quarter and excluding the share buyback, cash would have increased by approximately 100 million. Trade receivables were slightly higher than the prior quarter at 276 million. The DSO is decreased to 41 days compared to 43 days in Q2. Inventory increased to 112 million from 84 million in the prior quarter. This was due to increased raw material, component inventory related to the launch of new products in the quarter. These products did not launch until near the end of the quarter causing inventory level at quarter end to be higher than normal. RIM manufactures on a bill-to-order basis and does not holds significant quantities of finished goods inventory. Net capital assets increased to 297 million up from 270 million in the prior quarter. We expect CapEx to be approximately 50 million to 60 million in both Q4 and Q1 due to spending on increased capacity, BlackBerry infrastructure and campus facilities. At this time I’d like to discuss our outlook for upcoming quarters. Again, a reminder that these forward-looking statements reflect management’s best current estimates and should be taken in the context of the risk factors listed the beginning of the call and outlined in our public filings. On the September conference call, we provided a revenue estimate for the fourth quarter in the range of 590 million to 620 million. This range was also reiterated in the November 23 press release. We are maintaining this range as we expect hardware shipments to be solid due to the high level of demand we are seeing from the new products and as launches of new handsets continue with carriers around the world. In our November 23 press release, we indicated that we expect Q4 subscriber account additions to be in the range of 750, 000 to 800,000. However, as I’ve mentioned early this numbers becoming increasingly difficult to forecast, as everyone is likely seeing over the past several weeks, there have been an overwhelming amount of media coverage, the NTP matter which is played up of the possibility of an injunction against RIM. The impact of this has been to create some uncertainty among customers. The timing of any resolution of the NTP matter and the removal of this uncertainty is difficult to predict. Therefore, taking into account these factors, we believe it’s prudent to lower the Q4 range of subscriber additions to 700,000 to 750,000. We have not adjusted revenue guidance for Q4 despite the subscriber reduction as we are seeing strong upgrades occurring with the launch of the new products and expect this trend to continue. For the first quarter of fiscal 2007, we are currently forecasting revenue to be higher than Q4 in the range of 610 million to 650 million. We previously guided Q4 gross margin to be in the range of 56% to 58% and we are maintaining this range. For Q1, we’re forecasting gross margin from 55% to 57%. We expect an operating expense increase for Q4 of approximately 11% to 13% from Q3 levels, to support the launch of new products, retail programs and new branding and marketing initiatives. In Q1, we expect to have an increase in total OpEx of approximately 9%. We expect R&D to increase by approximately 12% in Q4 and 6% in Q1. We expect sales, marketing and admin to increase to approximately 12% in both Q4 and Q1. Beginning in Q1, RIM will begin recording employee stock option expense in accordance with FAS 123R. We estimate this expense to be in the range of 5 million to 7 million per quarter, next year. We expect depreciation and amortization to be approximately 14 million to 15 million in Q4 and Q1. Investment income is expected to be modestly higher in the range of 18 million to 19 million in Q4, and 19 million to 20 million in Q1. As we’ve discussed previously, we expect RIM’s overall tax-rate to decrease overtime as RIM’s international business activities continue to expand. We are currently expecting the rate to be approximately to 26% to 27% in Q4 and 25% to 26% in Q1. The reminder of fiscal ’07, we expect the rate to be in the range 20% to 25%. We continue to expect Q4 EPS to be in the range $0.76 to $0.81 per share, we just tighten up the bottom or enter the range from $0.74 to $0.81 to the $0.76 to $0.81. For Q1, we are expecting EPS to be higher than Q4, in the range of $0.78 to $0.84 per share. And this Q1 guidance includes approximately $0.03 per share of stock option expense impact. We plan to change the way we give quarterly financial guidance for fiscal 2007. Starting with the Q4 earnings release in April, we plan to give forward guidance for one quarter only similar to many other companies in our industry. Visibility beyond one quarter is a challenge and this has been compounded by the expansion in RIM’s channels, the number of carrier partners we’re relying around the world and a frequency of new product launches as we grow. As well, we’ve returned to our practice of providing specific guidance for net subscriber account additions for one quarter. I’d like to remind everyone that RIM’s fiscal fourth quarter which ends on March 04, has 14 weeks instead of usual 13 similar to many other companies, the rolling 13 week quarterly cycle that RIM employees maintains every five to six years, there’s a 14 week quarter to allow the fiscal yearend to realign with our February calendar month end. So, I’ll now turn the call over to Jim. Thanks so much Denny. Before I provide the usual quarterly business update, I’d like to take a few moments to address the ongoing litigation that has been the focus of so much attention over the past several weeks. Our views are pretty, are summed up pretty well in the op-ed piece in Monday’s Wall Street Journal, which I’m sure many of you have read already. For those of you that who haven’t read it and are interested, it is available in the investor relations section of RIM’s website. From our perspective, we have acted responsibly throughout the process and have tried in good phase to settle with NTP. We have tried to play by the rules throughout and respect the admonitions of Courts and mediators. We believe that RIM has been vindicated by the recent actions of US Patent Office over the past several weeks. In particular, the latest rejections issued this past week which be into NTP’s arguments “unpersuasive” and in which the NTP disclosed, that had setup a special team to act with dispatch in a matter are particularly important. We were also encouraged by the strength of the rejections based on three independent forms of prior work, and the fact that the PTO indicated that these rejections would have been final rejections had it not been for the fact that NTP was negligent in their duty to provide the US Patent Office with the relevant TeleNav prior work, even though they were aware of its existence. We believe that these unusual actions by the PTO and their acknowledgement of the Court’s concerns with respect to the timing of final office actions constitute significant new information that is not previously been considered but should be considered by the Court, with respect to the legal process, the Court has set a briefing schedule for the next stage of litigation, initial briefs from both sides are to be submitted by January 17, and response briefs as well as the justice department’s brief are due on February 1. There has not currently been a date set for hearing; there is a good possibility that there maybe further office action from the PTO prior to the date of any hearing, which the Court may consider. If we do not prevail in convincing the Court to give appropriate weight to the actions of patent office and that the public interest is not served by an injunction, RIM intends to move forward with the software workaround solution we have referenced in the past. Well, this is not a preference; we will deploy the solution if necessary. We have not yet provided details of the workaround but we are very close to making available information, detailed information which will provide the specifics of the workaround solution. In addition, we are continuing to engage in settlement discussions with these systems of a mediator. At the end of the call, I’ll take question and answer as best I can; given the restrictions I have with respect to confidentiality, and mediation privilege. I’ll now provide a brief business update. Product launches in the quarter included the 7105t with T-Mobile in September, 7100i would Sprint Nextel on October, the 8700 with Cingular and Rogers, and the 7100e with Verizon and Bell in November. In addition, we have continued to aggressively launch new BlackBerry carriers around the world and recently launch MDS 4.1, which will make application enablement for BlackBerry even easier than before. With the launch of the 8700 and 7130e occurring later in Q3 than we had anticipated, these products are now available and have received an overwhelmingly positive reception in the market, and have received excellent reviews from numerous publications. As we move into the last quarter of fiscal 2006, we are looking forward to finishing the year on a solid footing and heading into fiscal 2007 with a strong slate of products that were launched this quarter as well launching BES 4.1 launching additional new handheld devices and continuing to expand and grow our carrier relationships around the world. The BlackBerry connects and built-in programs are thoroughly accelerating and we look forward to expanding the presences of existing connect products and introducing new connect products over the coming months. As I mentioned before, the response to the new 8700 platform has been overwhelmingly positive. These much anticipated products are now available throughout both Cingular and Rogers retail and enterprise channel and many retail stores sold out their entire initial allotments within a few hours of receiving them. Cingular has launched the 8700c with very attractive pricing of $299 with a two years contract and data plans ranging between $35 for the basic plan and $6499 for unlimited domestic and international data usage. Rogers has also launch the product with attractive pricing plan and both carriers are aggressively marketing the products through promotional and advertising campaigns. Since launch, there have been an enormous number of favorable reviews in the media through out North America, and the product has already, won a number of awards despite being in the market for less than a month. We expect that heading into next fiscal year, the 8700 platform will lead the way in terms of driving growth and we anticipate that many carriers in North America and around the world will adopt the platform over the next several months. The 7100i, which was launched in October with Sprint Nextel has also been very well received in the market and is driving significant activations in the channel. The 7100i was 64 megabyte of flash memory, 8 megabyte of SRAM, offers a phone-like form factor with a large bright color screen and BlackBerry SureType technology. In addition to features such push-to-talk, walkie-talkie capabilities, the BlackBerry 7100i offers GPS technology for real-time audible and visual turn-by-turn driving instructions. For example, BlackBerry handheld operating on the Nextel national network support GPS enabled navigation with TeleNav in the United States. In addition, MapQuest has an application to take advantage of the GPS capabilities of the 7100i and the 7250 handsets on the Nextel network. “MapQuest Find Me” lets users automatically find their locations, access maps and directions and locate near five points of interest, including Airports, Hotels, Restaurants, Banks and ATMs. It is our belief that location-based services and presence-based applications will continue to grow the importance as GPS enabled handsets become increasingly common. Both Verizon and Bell Mobility launched the 7130e for EVDO networks this past quarter. The phone-like 7130e with 64 megabyte flash memory and a bright color display also offers tethered modem capability. This enables customers to use their BlackBerry 7130e as a modem for downloading large documents to a laptop at high-speed for a small additional fee on top of their BlackBerry service. We launched the 7105t with T-Mobile in the US in September. The 7105t is an update to this 7100t and offers a bright, easy-to-read display, increased memory and integrated access to Yahoo e-mail. This launch was supported by a substantial marketing campaign that consisted of print media magazines and newspapers as well as online advertising. The 7105t was launched to all channels at $199 and was featured on Oprah’s Favorite Things show on November which gained that product increased visibility in a retail channel. With respect to carriers in the Fast100 update, we launched the Fast100 carrier program approximately 1 year ago, and we can confidently say that the program has been a success. So far this year, we’ve added over 80 carriers, 23 in this quarter alone and have well over 100 in backlog. New carriers this quarter include PERSONAL in Argentina, Movilnet in Venezuela, TSTT in Trinidad and Tobago, Mobilink in Pakistan, Tricomm in Norway, Amena in Spain, Vodafone MNC and Vodafone Luxembourg and Telefónica in Argentina, Brazil, Chile, Columbia, Equator, Guatemala, El Salvador, Nicaragua, Panama, Peru, Mexico, Uruguay and Venezuela. While subscriber account additions in North America this quarter has been were lighter than expected due to the delayed launch of the 8700 and 7130e handset, we are seeing strong demand for these products. Now that they are available and expect this trend to continue as channel penetration increases. We are particularly excited to see the launching of the 8700f in Europe with Orange brand this month and expect to see similar strong demand for the product in this market. Our efforts in Latin and South America also beginning to payoff as demonstrated by the new carriers we announced in the past quarter and we are extremely excited about the opportunities in this region. With respect to China, we remain on track to launch nation wide BlackBerry service with China Mobile this fiscal quarter. In addition to the successful corporate Best Trails I spoke about in last quarter call, we have now completed many of the operational aspects of the upcoming launch including training of the technical support personal, feeding up billing systems and deploying infrastructure. We look forward to providing more details to you in the coming weeks. Elsewhere in Asia, we’ve seen activity pickup with a number of carriers including Bharti in India; with a launch of a number of BlackBerry connect handsets, Hutchison in CTM an expanded availability in to Macau. And the launch of the BlackBerry Connect on the Nokia 9300 and 9500 handsets and the launch of integrated Yahoo IM on BlackBerry by SingTel. We expect to see an up tick in subscriber account growth in Europe following the launch of the 8700 platform in the region. Orange brand has announced the 8700f, which is currently available in enterprise channels with retail availability plan for late in January. The 8700f will also be available in other Orange markets across Europe in base rollout during calendar 2006. For BlackBerry Enterprise Server update, this quarter we launched the mobile data service with support for web services. Among the new enhancements is a visual developed tool that tops into the XML based service-oriented architecture, enabling systems integrators, independent software vendors and in-house corporate developers to rapidly create wireless applications. NTS removes complexity from the application development process, reducing the amount of time, cost and specialized skills required to create and deploy wireless applications. BlackBerry MDS was support for web services is now available as an upgrade for the BlackBerry Enterprise Server 4.0. We expect the BES 4.1 to ship in the first quarter of calendar 2006. This is slightly later than previously anticipated as we trying to do further testing and improvement to ensure that the commercial release provides the best possible experience for our customers. The release of BES 4.1 will improve administration scalability, with the addition of group and well based administration. With BES 4.1, RIM is also helping customers respond to tighter regulatory environment for example Sarbanes-Oxley compliance by enhancing ordering capabilities to wireless SMS and pin-to-pin messaging. Customers on the domino platform are looking forward to Lotus notes encryption, same time in DV2 support all of which will be available in BES 4.1. For BES, a BlackBerry Internet service and retail update, BlackBerry continues to progress well in retail channel in the past quarter and retail distribution began with six new carriers this quarter. This quarter RIM also launched its new indirect business unit to support the needs of the non-exclusive indirect channels across all BlackBerry products and services. This team has been running a number of promotions to provide incentives to sales representatives in the indirect channel throughout the holiday season. The integrated Yahoo Instant Messaging on BlackBerry continuing to gain traction with Rogers in Canada, Nextel in the US and O2 in the UK all launching this quarter. The BlackBerry Connect and BlackBerry Built-In program continues to gain momentum with strong growth particularly in Asia and Europe. BlackBerry Connect is now launched with over 60 operators worldwide and customers can choose from over 15 different devices with BlackBerry Connect or BlackBerry Built-In. Q3 saw 2 key milestones for the BlackBerry Connect and BlackBerry Built-In program. The launch by Cingular the first BlackBerry Connect carrier in North America, and the announcement of the attention to provide BlackBerry Connect on the Palm Treo 650 with launches planned with carriers in the United States, Spain Australia and Singapore. This past quarter BlackBerry Connect and Built-In was also launched with several new carriers including O2 Germany, Optus Australia, Vodacom and MTN in South Africa, Airtel Bharti in India, Vodafone Sweden and the UK and SMART in Philippines. At the Symbian smartphone expo in October, RIM announce BlackBerry connect support for Symbian OS version 9. BlackBerry Connect uses the device as native application to connect to BlackBerry services, in this case using, utilizing the enhanced series 60 and UIQ 3.0 application platform. Symbian OS 9 version 9 will see more variety and choice of Symbian OS based handsets in the market. As a result more users will benefit from the advanced capabilities of BlackBerry Connect for the Symbian OS. The first such product to be available will be the Sony Ericsson P990 and the Nokia E-series, devices the E60, E70 and E61. All will be offered in the first half of 2006, and will provide users with robust of BlackBerry services. This development follows the success of the BlackBerry Connect for Symbian OS version 7 which is currently available from carriers worldwide on the Sony Ericsson P910, the Nokia 9300 smartphone and the Nokia 9500 communicator. These devices have represented an unqualified success in expanding the BlackBerry platform to new users and into new market segment. Offered now by over 60 carriers worldwide BlackBerry Connect for Symbian OS has been the center piece of major marketing campaigns with our carriers partners in Europe and Asia Pacific. RIM continues to provide strong BlackBerry Connect support for the Windows mobile platform. Today, we have globally launched over 8 Windows mobile products from partners such as HTC in Taiwan and Motorola and with a broad, wide variety of leading carriers such as T-Mobile, Vodafone, O2 and StarHub. RIM continues to invest in Windows mobile BlackBerry Connect application support for Windows mobile 5 expected early in Q1, I think calendar Q1 2006. In summary, during the third quarter, we launched the new product platforms and initiatives that will form the basis for our growth in the fiscal 2007. Our business remains strong despite the late launches of certain products and the ongoing litigation, which we are currently managing. We look forward to finishing fiscal 2006 in a position that will allow RIM to capitalize on a strong product portfolio and market share that we have built over the past year. This concludes our formal comments, due to the large number of people on the call, we ask let you please limit yourself to one question per person. We plan to end the call today by approximately 6 PM. Would the operator, please come on to handle 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_233957

Here’s the entire text of the prepared remarks from Linear Technology's (ticker: LLTC) 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. Paul Coghlan, Linear Technology – CFO Hello, good morning. Welcome to the Linear Technology Conference Call. I'm here today with Lothar Maier, our CEO, and with Dave Bell, our President. I will give you a brief overview of our recently completed first quarter and then address the current business climate. We will then open up the conference call for questions to be directed at Lothar, Dave or myself. I trust you've all seen copies of our press release, which was published last night. The financial statements for the just completed September quarter contain the effects of FAS 123 R., stock based compensation. This long discussed and anticipated accounting pronouncement is a requirement for companies beginning with those whose new fiscal year commences after June 30, 2005. Linear is one of these companies and consequently is one of the first public companies required to report its financial results employing FAS 123 R under Generally Accepted Accounting Principals, or GAAP. The majority of companies and most of Linear's competitors will not be required to report under FAS 123 R until later in the year. Because of this discrepancy in timing and because the effects of FAS 123 R are not yet well understood most investors have requested that we report pro forma as well as GAAP financial results. Indeed most of the earnings estimates published on Linear estimate proforma and not GAAP earnings. In our press release, we have attempted to demonstrate the differences between our results with stock based compensation included and with it excluded. Essentially the impact on Linear's earnings was $9,270,000 after tax, or 9%, or $0.04 at the EPS level, $0.35 on a proforma basis versus $0.31 on a GAAP basis. As you are aware FAS 123 R requires companies to estimate the value of stock options using the Black-Scholes or other option valuation techniques. These require estimates to be made of stock price volatility, option longevity and employee termination rates. During the past five years the market price of Linear stock options at the Data Grant has varied from a low of $23 to a high of $55. The Black-Scholes valuation of these options granted has range from a low of $10 to a high of $25. These estimated values have been used in determining the charge to our income statement for this quarter. FAS 123 R has also impacted the number of shares used in the determination of diluted shares outstanding. On a GAAP or FAS 123 R basis, we have 2,511,000 more diluted shares included in the calculation of diluted shares outstanding than would have been calculated under prior accounting regulations. In addition FAS 123 R has an impact on our balance sheet and will have an impact on our cash flow statement. The most obvious impact on the balance sheet is an increase in inventory value. To the extent stock based compensation is granted to employees in manufacturing, i.e. cost of goods sold, these costs are required to be first capitalized in inventory and subsequently passed through the income statement when the products are sold. Other balance sheet accounts affected are the deferred tax asset and equity accounts. Each of these accounts will increase as stock based compensation is amortized. Subsequently these amounts will be impacted when estimated deferred tax assets are compared with actual if any realized benefits. This is all great stuff if you are an accounting theoretician. However on a broad scale stock compensation accounting however flawed, does give investor in general since of comparable value between and among companies for the stock distributed to employees. We continue to strongly believe employee ownership is essential to motivate outstanding performance. Managing it to the benefit of both shareholders and employees is our job. As I said earlier, the percentage impact on earnings for the quarter was roughly 9%. Our return on sales with this estimated charge was 39%. Whereas, before the charge our return on sales was 42%. Both are very respectable returns neither of which we believe we would have reached without employee ownership. Aside from stock option accounting, I would now like to focus on how the business performed in the September quarter. For the September quarter sales were essentially flat with the June quarter. GAAP EPS of $0.31 was down $0.03 from the $0.34 reported in June largely due to stock based compensation as I discussed above. The business trends that influence future financial results particularly bookings improved from the previous quarter. For the first time in several quarters we had positive book-to-bill ratio. Gross profit and operating margins decreased modestly. Again, largely due to the effects of stock based compensation. And also due to increases in engineering and sales head counts. These increases were partially offset by an increase in interest income. Finally the tax rate increase from 30% last year to 30.5% for this year. GAAP return on sales was 38.7%. Pro forma return on sales was 42.4%. GAAP earnings per share of $0.31 decreased from the prior quarter and $0.02 from the similar quarter last year. Pro forma EPS of $0.35 increased $0.01 from the prior quarter and $0.02 from the similar quarter last year. Diluted shares outstanding increased 1.86 million. FAS 123 R had an effect of 2,511,000, which means had stock compensation accounting not been implemented, diluted shares actually would have decreased by 651,000. During the quarter the company's cash and short term investments increased by $43.6 million, net of spending $64.5 million to purchase 1,656,000 shares of common stock. The company also declared a cash dividend of $0.10 per share for the quarter. In conclusion business sales and profits were essentially unchanged from the prior quarter. On the other hand, bookings were strong our highest level in a long time. Most in markets improved with particular strength in high-end consumer. Our ending on hand inventory at distributors is lean. Cancellations are still small. And lead times have remained unchanged at four to six weeks. We continue to have an excellent business model and are therefore able to remain both highly profitable and cash flow positive. Accordingly we achieved strong financial performance in various generally regarded financial indices. I have already discussed our return on sales. Our return on equity was 20% and our return on assets was 17%. When you take cash and short-term investments out of these two calculations, our net return on equity was 189% and our return on operating assets was 80%. We have no debt and our current ratio was 9.2 to one. Cash and short-term investments now total 1,835,000,000, an increase of $43.6 million over the previous quarter. Cash and short-term investments represent 90% of stockholders equity. Looking ahead to the December quarter, customers generally continue to be cautious and order to supply the true end demand and not build inventory. However in this environment we are pleased with our bookings momentum. Consequently, we expect sales to increase and to grow in a range more in line with our historical December quarter patterns, roughly 3% to 4% this current quarter. Now I would like to address the quarter’s results on a line-by-line basis. First I would like to start with bookings. As I stated earlier our bookings increased over the previous quarter, cancellations were minor and we had a positive book-to-bill ratio. Geographically bookings increased both domestically and internationally. However, more of the increase was due to business created in the USA. Internationally, bookings were up in Japan and the rest of Asia and down slightly in Europe, which is typical for a summer quarter. At this time every quarter we give you a break down of our bookings percentages by end markets to give you insight into those markets that drive our business. Since this is the first quarter of our new fiscal year, we have taken the opportunity to update our end market categories. We have added certain hand-held electronics devices to our high-end consumer area that were previously reported in computer. As I stated in my opening comments, most end markets improved with particular strength in high-end consumer. Communications continues to be our largest area and represents approximately 32% of our business, down from 33% estimated last quarter but up in absolute dollars. For us the three significant areas within communications are cell phone handsets, cell phone and telecom infrastructure and networking. Cell phone handsets decreased from 9% of sales to 8% of sales. However, it did not change much in absolute dollars. Cell phone and telecom infrastructure at 11% of our business is unchanged from last quarter but up in absolute dollars. Networking remained at roughly 13% of our business, again up in absolute dollars. Our second largest business area is industrial, which was 31% of our business, down from 32% last quarter but again up in absolute dollars. Industrial has a cross section of many customers in many markets. For the September quarter, computer represented 14% of our business, down from 17% last quarter, although two of the three-percentage point decline was due to a re class to high-end consumer. High-end consumer was the strongest area within the quarter growing from a revised 10% last quarter to 14% this quarter. MP3 player activity, satellite radio and hand-held GPS receivers, among other consumer products contributed to the gain in this area. Automotive at 6% of our business and space level products at 3% of our business were similar percentages but up in absolute dollars from last quarter. In summary many products and functions migrate within computer, high-end consumer and cell phones. These three categories encompass 36% of our business, up from 34% in the prior quarter. Moving from bookings to sales, as I said earlier, sales sequentially were similar from quarter to quarter while growing 1% from the similar quarter in the prior year. Geographically sales were basically unchanged between domestic and international in total. Within international, Europe was down, which is typical for a summer quarter and Asia was up due to increased consumer products. In the USA, OEM and distribution were also mostly unchanged quarter to quarter. In summary, the USA was 28% of sales, Europe 16%, down from 18% last quarter, Japan remained at 14%, and rest of world, primarily Asia Pacific, was 42%, up from 39% last quarter. Note that 51% of our sales were created in the USA of which 23% were shipped overseas. Moving to margins. Gross margin. Gross margin was 78.1%. This impressive number validates our strategy of selling unique, high performance analog semi-conductors into a broad customer base. Gross margin decreased eight-tenths of a point from last quarter. Stock option accounting contributed to this change as did slight changes in product mix and factory efficiencies. ASPs increased slightly during the quarter to $1.55 from $1.54 in the previous quarter. R&D. R&D increased as a percent of sales from 12.6% last quarter to 14.8% this quarter, while increasing $5.4 million in absolute dollars. Stock option accounting constituted 4 million of this increase. The remaining 1.4 million increase was largely due to labor increases particularly for headcount additions in the circuit design area. This was a particularly productive quarter for us in hiring in a circuit design area, as the hiring of talented engineers ultimately determines our sales growth. SG&A. Selling, general and administrative costs also increased, going from 10.9% last quarter to 12.2% this quarter, an increase of 3.3 million. Stock option accounting was 3.1 million of this increase. Other increases in labor were largely offset by a decrease in legal costs as certain legal cases settled prior to trial on terms favorable to the Company. Operating income decreased by 8.652 million, of which 7.1 million is due to stock option accounting as discussed above. Nevertheless, operating income is still a very impressive 51.2% f sale. Interest income increased by 1.8 million, largely due to the increase in the average rate of interest earned from 2.16% last quarter to 2.41% this quarter, due to the continuing increases in the Fed funds rate. Our effective income tax rate increased to 30.5% for this fiscal year from 30% last fiscal year. This increase is due to a minor decrease in our offshore tax benefits. Nevertheless major tax savings items continue to be the benefits from our tax holidays overseas, our tax-exempt interest income, our foreign sales tax benefits and our R&D credit. The resulting net income of 99.181 million is a decrease of 6.866 million from the previous quarter. An earnings per share of $0.31 is a decrease of $0.03. The average shares outstanding used in the calculation of EPS increased 1,86 million during the quarter. All of these changes in net income, EPS and shares outstanding were largely due to the accounting for stock based compensation. On a pro forma basis before stock based compensation net income would have been 108.451 million EPS $0.35 per share, and diluted shares outstanding would have decreased by 651,000 shares. Moving to the balance sheet. Cash and short-term investments increased by 43.6 million, net of 64.5 million spent to purchase 1.656 million shares of common stock this quarter. Our cash and short term invest balance is 1.835 billion and represents 79% of total assets and 90% of stockholders equity. Accounts receivable of $120.9 million is a decrease of $5 million from the previous quarter. Our day’s sales in accounts receivable were basically unchanged at 44 days versus 45 days that we reported last quarter. This decrease in receivables is due largely to the increase in sales in Asia and the decrease in sales in Europe that I referred to earlier. Asia generally has shorter payment terms and therefore our accounts receivable balance would be lower. Inventory at $37.181 million increased 2.9 million from $34.328 million reported last quarter. $1.2 million of this increase is due to the implementation of stock option accounting that I referred to above. The other $1.5 million increase is in anticipation of improving sales in the December quarter, particularly in the consumer based products area. Our inventory turns of 6.3 X compares with 6.4 X last quarter. Deferred taxes and other current assets increased 6 million from the June quarter. 4 million of the increase relates to deferred taxes on stock option accounting. The remaining 2 million is primarily an increase in interest receivable on our investments. Our property, plant and equipment increased by 5.504 million. As we had additions of $15.867 million, and depreciation of $10.363 million. Our additions were primarily for our expansion projects at both our fabrication plants and also for tests and assembly equipment to increase back end capacity for growing sales. Other assets totaled $52.1 million, and decreased by $5.8 million. They consist primarily of intangible assets relating to technology agreements, which are amortized over their contractual period primarily ten years using a straight-line method of amortization. There was also a reduction in long-term deferred taxes resulting from the exercise of restricted stock. Moving to the liability side of the balance sheet, accounts payable increased 4.8 million due to payables for capital equipment purchases. Accrued income taxes, payroll and other accrued liabilities increased by 12.3 million. The largest items here are our profit sharing accrual and our income taxes payable. We pay out profit sharing twice a year, so our accrual increases in the second and fourth quarters and decreases in the first and third quarters when payments are made. The decrease in the profit sharing accrual was offset by an increase in income taxes payable since we had no estimated income tax payments due in Q1 and we will have two due in Q2. Deferred income on shipments into distribution decreased by 812,000. We shipped less to distribution this quarter than they shipped out to their end customers and this resulted in the modest decrease in deferred income. Our accounting on shipments to U.S. distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely control our inventory distribution to properly position the inventory without any un-needed build up. Deferred tax and other long-term liabilities remain largely unchanged. Changes in stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid and employee stock activity. In addition this quarter there was an increase in common stock for the quarterly calculation of stock based compensation under FAS 123 R. Looking forward, historically the December quarter shows an improvement over the September quarter, and we expect this trend to repeat this year. There are general macro economic concerns in the marketplace. Continuing high levels of oil pricing and rising interest rates have raised some concerns on the impact these will have on consumer spending. Customers in many end markets are generally cautious and therefore tend to order just the current demand. Nevertheless, our bookings improved last quarter and we had a positive book-to-bill ratio for the first time in several quarters. Our turns requirements, i.e. business that needs to book and ship within the quarter has improved a bit, but at 60% it's still at the high-end of our historical patterns. Our lead times are four to six weeks, which can easily support this level of turns as we have often done in the past. We are well positioned in certain high-end consumer based customers that are leaders in their field and that have positive business opportunities in their December quarter. Consequently we are forecasting the December quarter to be representative of our historical pattern and for sales to grow in the 3 to 5, in the 3 to 4% range. With respect to profits. The impact of stock option accounting will be relatively similar to this quarter. Consequently profits should roughly track sales, and therefore we are also forecasting an increase for profits in the three to 4% range similar to sales. We have told that you we have been adding to our infrastructure. We have basically completed the new building at our Singapore test location and also completing our projects to add capacity to our wafer fabrication plans in Camas, Washington and Milpitas, California. These projects are important as we expect to need the capacity. We sell into many diverse in markets that are rich in analog circuit tree, either to manage power in portable products or to sense real world electronic signals and then convert them from analog to a digital format for easy storage and transmission. We supply high performance analog solutions that are key to the functioning of most electronic systems. Our linear or analog parts have a symbiotic relationship with digital circuits in a world that is becoming more electronic. Our circuits reside in a broad cross section of end products whether they are in industrial applications, communications applications or consumer electronics. In each of these areas we often have circumstances in the latest generation ends products such as computing and communicating devices, cell phones capable of multi-media access and transmission, security monitoring devices, power over ethernet industrial applications, the latest GPS systems in new model cars and high-end consumer products such as digital still cameras and MP3 players. Earlier this week we announced a new family of module projects. These new micro modules represent a significant business opportunity and are expected to bring considerable revenues in the next several years. In summary we are in a strong segment of the electronics marketplace, namely high performance [INAUDIBLE]. We met our projection for the September quarter and our projecting to grow in the September quarter to be in line with our historical patterns. Finally for all of you that are stockholders please read the annual report and proxies prior to our November 2 annual meeting. A key proposal is to add shares to our employee stock option plan that is Proposal Number Two. In light of our performance on the stock option reporting, I believe this proposal needs your support. Please vote accordingly or call us if you have any concerns. I would now like to open up the conference call for questions to be addressed to either Lothar, Dave or myself.

EarningCall_233958

Here’s the entire text of the Q&A from Multimedia Games’ (ticker: MGAM) fiscal Q4 2005 conference call. The prepared remarks are here. Just a quick question, two questions. One is just on New York. Just for clarification, can you give us a sense for when you do break even? My understanding was originally [the break-even point] was [going to be in] mid calendar ’06, once you get Yonkers and Aqueduct [on line]. It sounds like one of those is early ‘07 now, or are other units backfilling it, which may get [you to] break even at the original expected time? Yes, we expect to surpass a run rate of break even with the opening of the facilities that are scheduled to open by midsummer of this [coming] year. And then, it is clearly uncertain exactly when Aqueduct will come on, but we still believe it will come on in the first calendar quarter or slightly thereafter in ‘07. But we will be at a beyond break-even run rate by the time that the facilities that are expanding and opening this coming summer are complete. Okay. Thanks. And then just a follow-up: back on the traditional Class II business in Oklahoma, obviously the units there—can you give us a sense for how many units were removed from that market? I may have—and I apologize if I missed it in the original comments. But despite the North Tulsa facility installations, the installed base was still flat, so I suggest that units are still, as you generally indicated, are coming out of there, but what is kind of the pace? What are the yields? Listen, Bill, a lot of the units that [were removed] came out of one facility in California that has reduced the number of our Class II player stations there in each of the last two quarters, and will probably do so again. As you will recall, one of our facilities asked us to modify the games that are being offered in that particular facility in order to comply with requests from the state. That game has not been popular with slot machine players, and therefore the player stations really are not that profitable to us. So that was a large number of the takeouts that we had. We continue to have machines dribble out that we lose to nonpublic competitors who are primarily playing keno games and predrawn games that we do not offer, and that dribbling we think will come to a halt as soon as we get this new platform out there. But Oklahoma was not the only market where we had the takeouts. In fact, the largest came from California. Bill, the only thing I would add to that is, as I believe you know, we added roughly 650 units and a development agreement right inside Tulsa. And the net position for us in Oklahoma has increased, considering those 650 units. I just had a question on the 1,350 units that you are going to be placing in the first quarter. I just was wondering if that was the sweepstakes games that you had been talking about in your earlier comments, or if that is something that is coming on later? Okay. And can you give us a sense of the terms of those types of games? What you’re going to be getting or your estimates on a win per day type thing? This is not—we are leasing a system [for which] we will be provided fees that are based upon the success of the digital communications center. I’m glad you brought this up. These fees will be shown in the future in “other income” as “fee income” for systems that have been leased. And therefore, we will not be providing typical calculations like hold per day, because our fees are just based on the use of the sweepstakes systems to be the primary promotional vehicle for this digital communication and education center that is being put in, so that it is not possible to do a calculation based upon [the] old metrics that we have had. We think that the contribution could be very meaningful, that the fee income could be very large. We feel that this digital communication and computer literacy center could certainly benefit the citizens and the community with the broad list of activities that the operator is planning to provide. But we are merely leasing a system—we won’t ever touch any revenue in the form that there was [for] traditional gaming revenue. So you will see a big spike in our fee income, but you won’t see—you won’t be able to do your normal calculations like you would on hold per day for one of our other markets. Craig, do you have anything to add to that? No. Thank you for that. I appreciate the question. I understand the question. But we are very excited about this system and application there and in other markets. I’m just looking at the placements you’re talking about through fiscal ‘06, and given sort of the comments you just made with respect to the sweepstakes, frankly, I’m not sure I know exactly how to reflect this. I mean there obviously is a fee stream, and it is meaningful. Can you share any sense about what the best way to go about modeling this is, if it is not a traditional placement? It seems [that] if I understood you correctly, it is not running on the same kinds of metrics that we have been seeing from you thus far. While it is certainly not—the fee structure is not going to be the same, we feel that the earnings potential of this system is probably comparable to any other system that we have in the field. And so I think that this center could be of such benefit to the community, that our earnings should be sort of in line with any other system that we have out there, although it won’t be reported in the same manner. So I think you could back into the fee income pretty simply, but obviously the system is not on, and it depends on what kind of a job the operator does. We are very impressed with the operator and expect that this will be a successful promotional tool for them. But you know, it is all speculative now because the system is not even turned on yet. And is this system in an existing market, and I guess the other part of my question is just looking at—it looks like you have close to 5,000 units you expect to place this year—what color can you give us about which of those are traditionally set up? Or are they all sort of one-offs like the sweepstakes? No, they are not all one-offs, but they fall into about three different classifications. Placements of the lottery products at retail establishments, and then placements in the new markets that we are entering for sweepstakes, promotional and “amusement with prize” games, and then placements in the international arena, where we’re taking our electronic bingo products out there. And finally, we expect with the introduction of the new platform and the new interfaces that we have completed to be going back into facilities in Oklahoma that we were once in but are not in now because we could not interface to their older back-office systems. Our development team has done extraordinary work this year in putting those in position where by the end of this month, we will be able to seamlessly interface to virtually any gaming system that is out there in the world, and that will allow us to go in and plug in and not have to operate a separate bingo system for—in facilities that already have established back-office currency and player tracking systems. So that ability to go into those facilities is very meaningful for us, and it is business that we have had in the wings, and now in the first quarter of next year we will actually be able to realize some of it because the interfaces will be complete. One last one, quickly, if I may. Any update on Casino Commander and any sort of efforts there at testing or placements or so forth? Excellent question. As is usually the case, we find out that we learn most when we listen rather than when we talk. Since we showed the latest version of the product at G2E, our marketing and sales staff has spent a great deal of time talking with our current customers and potential customers about the features that they most need and the timing [on which] they would actually utilize those features, and the support that they will need from us to make the roll-out of that product a success. I just had e-mailed to me yesterday the final marketing plan and implementation plan for that product. And so I had previously said that we thought we would install some of those this quarter, and in order to better serve our customers and to make sure that the product that we came out with had the features that they would really use, that has been delayed, and we expect that we will be installing the first of those systems at a number of sites in a number of different types of facilities in calendar Q1 of next year. You pretty much have been consistently missing quarterly numbers now for about a year and a half. What confidence can shareholders have in your optimistic projections for next year? Well, first, I take great exception to your comment. If you will go back, there is a string of quarters [in which] we exceeded projections, and in fact, this is the first quarter that we cautioned the marketplace not to expect us to exceed earnings per share above the range of the guidance that we were giving. So I take exception to your comment that we have been missing quarters for the last year. But notwithstanding— Do you think your stock price has gone from $25 to $9 because it is unrelated to your misguidance of earnings expectations to Wall Street analysts? I mean, the stock has gone down significantly for that very reason. Do you agree with that observation? No, I think that there are a number of factors that have driven the stock price down. Certainly, one of them is the fact that our earnings this year are not up to our historical levels, which were driven by primarily a product opportunity for a product that we offered in California for a year that is no longer in operation, that provided a great amount of revenue, which spiked our earnings last year. If you look at our base offerings for this year and the last three years, there has not been a drop-off in our core business from Native American gaming or the charity business that we have. And so if you take out the effect of the spike of the C-TILG product, which is no longer [being] offered, our core business has been very stable. And there certainly were quarters where we missed earnings, and there have been quarters where we have exceeded the guidance range. In this quarter, we have fallen within the guidance range. Could you just tell me just so I am clear what quarter you exceeded the guidance range in the last year and a half? No, it was not. We gave guidance of $0.10 to $0.12. One quarter we made—two quarters ago we posted $0.18, and last quarter we posted $0.16. (multiple speakers) this quarter we fell within the guidance range, and we cautioned the public on our last conference call not to expect us to exceed the guidance range because of expenses and situations in market that we thought were going to develop. But anyway I would be happy—Craig and I would be happy to debate this topic to you extensively in a follow-up call. But let’s go on and give somebody else a chance to [ask] a question. I have a couple of questions on New York. Obviously, the key thing is Yonkers. Do you people have any assumptions on what the win per machine will be there versus where we are right now? And if you could share where we are right now on the New York lottery, that would be helpful, and I have one other question. Okay. We can only go to public information in this regard. But the win per machine in the original forecast done in the project justification, that was not done by us but by a consultant to New York State, projected Yonkers to be the highest-earning facility in the network that will be opened this summer. In addition to that, most promising is that the earnings per day on the player terminals in the other facilities, if you will look at the public information that is published by the New York Lottery, have been consistently showing a trend of growing each month, meaning it is gaining player acceptance and player support. And so that is one of the things that— Okay. You can go to public information that is published by the lottery, and Craig, after the conference call, if you will call back in, we will give you the link that gets you that public information. Do you have any idea—are you—in the field you have with the New York lottery, you’re not leveraged by win per machine per day, are you? Yes. We get a share of the earnings off of every player terminal that is in the field. And so if the win per day goes up, our earnings go up. Well, there is a firm date on Yonkers that is for midsummer this year. That is according to the information provided by the New York Lottery. That is where we get our information. A question for you. You mentioned you think you have enough product in inventory to meet the needs for this fiscal year. Did you in the current quarter put anything else in inventory? In other words, how many new machines beyond what you just reported would go into inventory during the year? How many more do you need to make? Okay. We recently renegotiated to extend our relationship with one of our primary strategic partners. As part of that relationship renegotiation, we got an additional extension of time on that, and we made additional commitments to purchase a small number of additional machines. Under our old agreement, we had about 1,100 additional machines that we needed to buy. Under the new agreement, there is another 500 that we will buy in this fiscal year. So there is a total of about 1,600 additional player stations that we are required to purchase in fiscal 2006 and in the remaining portion of fiscal 2006, and we are comfortable with the planned placements and the business that we have in the wings, that that is a comfortable number of player stations to be adding to the fleet as we place these other player stations in the new markets. Okay. So is that a combination of what you are going to sell, as well as what you’re going to place on a participation type basis? Well, nearly all of the opportunities that we have for FY ‘06 are going to be revenue share opportunities. And even though some of them will be the sale of the machine—a small number will be the sale of the machine, but there is an ongoing revenue share associated with the sale of the machine. Okay, and I think you may have mentioned earlier, how much did you recognize for the Israeli project in the fourth quarter? Certainly over the next few quarters. We are—the contract with the Israelis included a technology transfer, meaning we have training obligations and support obligations that are part of the initial two-year term of the contract. And so we are in the process of fulfilling those training and support obligations right now. And when certain milestones are hit, Michael, that will trigger the recognition of portions of that revenue. We expect to hit some of those milestones in the next 120 days. Others of those milestones will take a longer-term to hit. But, as we said, the significance of the Israeli project was first to provide them the best instant lottery ticket product available today. In doing so, we accelerated the development of our product, both for the international markets and for the domestic markets. And so the real value to MGAM shareholders of that contract was not the potential earnings off of it, but the fact that it was a vehicle that got us into the instant lottery ticket [market], the delivery of instant lottery tickets to retail outlets, and got us in it quickly, and we are very pleased with not only the performance of that system but the interest that has been generated by that system among other domestic and international lotteries. Okay, and then lastly, can you give us a little bit more detail on the business model, both the sweepstakes and the entertainment product lines? Well, those products—those business models will vary according to the jurisdictions that they go in and between the three different types of systems that we have available. Some will be on a per play basis. Others will be on a system leasing basis, and it will be driven by both the competition or potential competition in the marketplace, Michael, and the regulatory requirements of the systems. So there will not be a ubiquitous model. It will vary for each jurisdiction and each one of the types of those three products. Yes, just as a follow-up, I don’t know if you really answered that fellow’s question the second from last here. What confidence can you give to shareholders after this—let’s just call it a rough period, okay for the last year or two? In terms of public shareholders, what confidence can you give us that you’re going to get it right this time? Thank you. Well, I guess I would like to say that I don’t—as I said before, if you look at the spike of earnings that we had, it was primarily driven by our C-TILG product, and I’m very pleased with our decision to offer that product from two different bases. First, we made a great deal of money for our tribal customers and our sales during the period that product was running. In addition to that, it spurred some technological architectural improvements which have carried forward into other subsequent products. And so the earnings opportunity that we actually achieved, while we wish it would have been longer-term, it was impressive and beneficial to our Company. As I said earlier, if you take away that spike in earnings, our core business continued on a sound basis, and the earnings off the core Class II and charity markets have not deteriorated significantly over the last three years. [As to] the question of what confidence can we give you—we have a policy of not formally announcing placements until the day that they [the machines] are turned on. Certainly, in the next couple of weeks, we will be formally announcing some placements, some of which we have discussed here today. Because of the completion of these major projects, we will now be able to move forward with contracts that have been on our desks and that we could not implement until we had the major interfaces done to the existing technology back-office systems. So we are confident of that business that we have commitments to get us in, either back into facilities where we have removed player stations, or [business from which] we have the ability to get into new facilities where we have not had player stations because of these interfaces. So the only confidence I can give you is our knowledge of the business that is at hand, and you have ample reason to wonder [on] what basis or [for] what reason you should take our confidence and act on it. And I just would like to say that we have been in this business an extremely long time. When we started in 1997 with the electronic gaming business, we had virtually no product offerings that were modern for the industry. We have a long history of being the first to the marketplace and having others follow us in, and our products have a long history of being the most technologically advanced. And when we’re on a [level] playing field, our earnings capability we think is equal with everyone. And so there are a number of situations that are beyond management’s control, and we have made the decision because of the public nature of our business and our licensing efforts in the lottery and other industries to always stay on the right side of the bright line, and our competition has grown significantly from people who do not have to have those concerns. But this Company has a long history of success and innovation, and we will continue to have that long history of success and innovation in product placements. So I can say that management is confident that the opportunities we talked about today are realities. Could I get a better sense of the timing of some of your cash flows? I think in your guidance you’re implying $45 million of CapEx and $39 million of development agreements, so that is in one sense like $84 million in investments out during the year? Is that correct? I did not follow your math. On the development agreement, we talked about $39 million over the next 12 months, yes. On a quarterly basis, we have $4 million to $7 million, yes. Now on the $39 million on the development agreement, a portion of that is actually receivables, but it does require, obviously, working capital. Go ahead. In that $4 million to $6 million of maintenance CapEx, it includes expenditures for player stations. We already have the player stations on hand, and so in that normal run rate of capital expenditures, the largest portion of that is something that we are not going to have to make on a quarterly basis, because of our current inventory of player stations. Okay. And then also with the expectation of converting some Class II games to compacted games in Oklahoma, does that mean then that your hold for those games goes from 30% to maybe 20%, but also that some of the amounts that previously had been put in an intangible asset will then convert over into a note receivable? Well, I think—there are two different questions there I want to add to. Certainly the business model for games that will be played under a compact appears to be an 80/20 model, and we will have no choice but to meet that model. Okay? Now the second question that you have I think relates to the potential of any conversions, development agreements and the change in the nature of the arrangements should things convert to the compact. I want to say each one of those agreements are different. Every single one of the ones that we have done are different, except there is commonality between a group of them that we did with one tribe. So each one of those development agreements and the assets that we have, both tangible and intangible assets, have to be looked at on an individual basis, because they are handled differently in the event of conversions or other occurrences in the relationship. Okay. And with the $40 million or so of notes receivable you have current, you would expect to be repaid about $6 million of that this year? These are—or are these paid at the end of your 6.5 year term? On all of the notes receivable, again, they vary by the development agreement [and] the facility, some of them pay us typically in a relatively short period of time, mainly within one year, and some of them extend out over a number of years. But we would expect over the next year, we would have roughly $7 million under the current structure repaid under the note receivable arrangements. Okay. Great. And then the last question relates to, in Oklahoma, since many of your placements were put in pursuant to these development agreements, what—you would imagine that a lot of those terminals are protected from removal. So how many are not? You know the ones that were removed, offsetting the incremental numbers in Tulsa? Was the question, how many did we remove that were during this quarter relating to development agreements that we had in place? Well, I guess that is part of it. What I’m—I guess my understanding is that when you had a development agreement in Oklahoma, that meant that they agreed to keep the terminal there, whether it was going to be Class II or Class III, but yet some machines are going out. So maybe not every machine placed in Oklahoma was pursuant to a development agreement. That is correct. The machines that we placed in service in the quarter we talked about North Tulsa had roughly 650 placements during the quarter, but none of the removals during the quarter related to any facility that we had a development agreement with. I will say that as part of the development agreements, there are some clauses that could require us to remove some machines if certain performance levels are not attained. But that would be a situation where it would be a relatively small ratcheting down. It would not be a big chunk at one time. But it also would include a period that we could correct a situation or evaluate our hold [per day] and correct it for the tribe. Okay. Thank you. And just because it is not clear to me, could you just try one more time on the CapEx and the development agreement and the maintenance CapEx? Because it seems like you get $39 million and then $4 million per quarter, and then that exceeds $45 million total. We’ve got $39 million allocated towards development agreements. Of that $39 million, a portion of that will actually be set up as a note receivable, and a portion of that will be set up as primarily intangibles. In addition to that, we will have roughly $6 million that will relate to the maintenance of the existing player stations we have in the field, and purchasing a few machines that we are required to purchase under the agreement that we signed. So you add those two together, and it is roughly $45 million. So the concise answer to your question is, that what is normally a $4 to $6 million a quarter maintenance CapEx is not going to be normal for this year because we are starting the year with all the player stations we need virtually in hand. Okay? I have a handful of questions, some big picture, some small. Clifton, maybe you could go into Casino Commander. When you guys placed that system for trial, are you planning on putting just your games on those systems, or are you expecting that some of the content players will decide that they want to put [their] games on your system? Well, the content players that we have strategic relationships [with] now, under most of the agreements, they will allow us to put one of their titles per unit on the Casino Commander facilities. We have had no additional arrangements made with any other providers at this time who are not one of our strategic partners. And so we would hope that in the future, we would think that in the future, the industry is going to move to a model where everyone’s downloadable system will have a process by which other vendors can put their content on the system and be compensated for it. But initially, the product that will go on our system will be our internally generated content and the content of the people we have strategic relationships with. But we think, David, that is exactly where the industry is moving, that all vendors who want to offer content will have to work out an arrangement to where it could be offered on all of the downloadable systems that the various vendors provide, and that there is an acceptable compensation plan for the provider of the content, the provider of the box and the provider of the system. We see that the operators will drive this, and when they are ready to move to these downloadable systems, that they will have a great role in dictating the business model that the individual players will use. It is not—will not be good for the industry or good for the operators for them to be required to have three or four different downloadable systems in their facility. It will optimize their earnings and flexibilities if they have just one, so we do think that is where the model will go. Whether it takes three years or five years or eight years to get to that model, that will be driven by the operators. Yes, I agree. I guess in the meantime, though, in terms of strategic partners, you’re actually—if you go into Class III casinos, you’re actually competing with them as well. Agree? Well, in a sense. Other than to the extent that their content is on the system, they will be compensated, David, for their content value. And in the long run, all of the major providers not only get revenue from the hardware and systems component, but from the content component. And I think that there is a business model that makes it good for everybody to be working together in this. So I don’t think you would necessarily view it as competition, but the ability to provide your content, if you have got the best content, to a broader number of players, and not be limited by the number of boxes that are chip driven and, therefore, only run one particular game or theme at a time. So I think there is a great model for the all of the major manufacturers in downloadable games, and that is why they are developing their own systems so they can I think play a big role in this. And I don’t think that it is going to be a—I don’t think the manufacturers are going to control the outcome of this. It is going to be the operators. Okay. A couple of quick questions for Craig. Cash was basically zero at the end of the quarter. How much cash to you need to run your business day to day? Well, obviously, cash flow from operations was over $20 million for the quarter. The level of our cash, really, we are able to manage a little bit based off of our credit facility, and so we just draw up and down on the credit facility to operate it to cover primarily our development agreement requirements. Okay. In terms of R&D, can you kind of break out how much you spend on R&D during the year and where that is in the P&L? In the P&L, it is in different line items, primarily in the SG&A and salaries and wages would be where they pretty much hit in terms of the income statement. But obviously, we provide a disclosure in the footnotes that details out what the R&D costs are each quarter. And it was $15 million for the year. It was a 40% increase over last year. Okay. And then also depreciation, sequentially, you said it went down, even though, as I think somebody else asked, you had a number of machines that you purchased from WMS. I guess you have a couple more coming down the hatch. Are those included in your pool that gets depreciated, or do you have some discretion as to what you can depreciate and when? How we handle that is that anything that is new, we do not begin depreciating until it is placed in service. However, once it is placed in service, if we pull it out of service, we continue to depreciate it, because normally we expect that period to be a relatively short period of time. So it’s part of our policy. Okay. And then maybe back to Clifton. You guys are putting out machines that you have out there in Class II in Oklahoma to better compete with what sells out there in Class II. Can you with the changes that you are making, do you believe that those will still fall under what you currently believe to be Class II guidelines or at least what you have in terms of your approval letter from the NIGC? Absolutely. The change in the hardware in no way touches the play of the game or the specifications of the game, the type of game. All of our bingo games are standard-sequence bingo games. We are one of the few in the industry that continues to run standard-sequence games, and we do that totally in deference to the regulatory views of the various regulators that are out there. And so there is nothing in the change in the platform itself that is going to alter in any way any of the characteristics of the game that determined whether or not it is a Class II game. Okay. So can you elaborate a little bit on what it is that is going to make the yields go up on these games? As you are aware, we felt that when the—and we were told by our tribal partners to be prepared in January of this year to convert “in mass” all of our Class II games to games played under the compact. So all of the work of our games content group and our systems group has been devoted to trying to have the best system available to run the games that will be played under the compact, and we made the decision a good 12, 14 months ago, feeling that our tribal members’ projections were correct, that there was a high degree of possibility that the gaming legislation was going to pass in Oklahoma. We made a decision then to stop investing in new titles and stop investing in any improvements to the platform for the Class II product. Because they did not convert in mass in January, we have continued to run virtually our oldest content in that marketplace and on our oldest platforms, and in particular, on our only our initially developed mechanical reel platforms, which have been vastly improved in the next two generations that we have been working on for the mechanical product. And so I think that the system improvements, the new content and the new mechanical reel platform are the things that will improve the earnings of these Class II games and make them more desirable to the players that are out there. Okay. Maybe last thing and then I will let somebody else ask, can you give us any more color at all in terms of what these three new markets are out there, or is there a reason to be so close to the vest on this? Well, obviously, as you are aware, we compete with two major manufacturers in nearly every market that we go into today. And in addition, as of next week, we will be going head-to-head with other major lottery providers for the electronic instant lottery ticket market. And so we don’t like to give too much of a heads up, but number one, the international electronic bingo market is one of the markets that we will be going into. And there are two domestic charity markets that I believe that we will turn on systems in the first quarter of next year—in the first calendar quarter of next year, that we are in the final stages of regulatory approval on right now. And then in addition to those, we have talked to you about our efforts to get product approved and running in the Iowa market. We are working with the regulators there to get final approval on what is the most complex system that will be available in that market place. So that is about as specific as I feel comfortable for competitive reasons of being at this time. How long is the exclusivity in the sweepstakes market that you talked about? You said that was exclusive. How long is that period? Okay. And then you talked about also upgrading your system in Alabama. Could you talk a little bit about the performance there? Obviously, you have some competition, and it looks like those games did not perform as well as they had been in the fourth quarter. So it looks like you’re getting hurt by competition there. There is absolutely no question that that should be a correct observation that you made. And we have not, as I have said in my comments, we have not offered any significant new content for that market, and we are running on the original old bingo platforms that we opened up that market with years ago. When newer competitors have come into that market, they have come out with a series of platform and content improvements. And we have not answered those because we have had our games team primarily focused on games that will be operated under the compact, and opportunities that we were pursuing that we will be realizing in this quarter and next quarter in new emerging markets. We reallocated our games and content team and our game technology teams to address the Alabama market and the Oklahoma market about 90 days ago. And so that is the reason that in the next two weeks we will be putting out our first new products to that market, followed with a large number of products and titles and themes going into those markets in the following quarter. We also acquired during the last quarter some very significant IP related to multitiered bonus round games and progressives that we are in the process of incorporating into our gaming systems for all of our markets. And we feel over the next two quarters—not the one that we are in now—but Q2 and Q3, that those multitiered progressives and bonus round games will be a good revenue driver for us. Okay, and how much does it cost to kind of relaunch and upgrade the system, and have we seem those costs already incurred? Part of the reason for the increased inventory cost in SG&A is that on August 1 of this year, we made a commitment to go ahead and run a large number of player stations through the factory, so the majority of the cost to upgrade those players stations has been incurred. Also, we made a big commitment to changing the ability of our system to handle multiple currencies. That is to say, currency and receipt out, currency and ticket out, and also to stay with the magnetic card system. So that is why we saw in the time period in the last half of this final quarter that we spent a lot more money on the inventory upgrades than we did [before]. As far as how much it cost to upgrade these systems, in most cases, the costs are minor and are expensed, and have been incurred and expensed. A large number of the machines that we have in inventory are our very latest machines that we have acquired, and they already have embedded in them the features that we are upgrading in the machines that are already in the field. And then in Oklahoma, it seems like there are some large facilities moving more towards compacted games or at least one in Tulsa. It was in a newspaper article. Did you guys get any of those placements and (multiple speakers) it seems like there are some compacted games going into Oklahoma that are not yours. Is that the case? Absolutely the case. And in that particular facility that you’re talking about, we did not have an interface completed to their back-office system. And though we believe that we will be getting back into that facility, that initial 400 machines that were put in there, we did not qualify [to install] because it was a requirement to interface to their [then] current back-office system, which at the time we could not do. That is an interface that we will be completing in the next few weeks, and then we expect that we will be getting back into that facility. Whether or not it will be with Class II games or Class III games, that will, of course, be up to the operator’s choice. Okay. And I assume that when you change your system, you upgrade your system. There is no change to the net revenue that you guys get unless you go to the compacted games? Any signs of life out there of actual NIGC enforcement in Oklahoma? That has been a recurring thing. Is anybody more angry than they were three months ago and actually doing something about it? What can you tell me there? Well, I think the fact that a bill was dropped here in the last couple of weeks to update and revise the powers of the NIGC shows the intent of the regulators to get into a position where there is more clarity and they are in a better position to move forward. As you know, there was also—the Justice Department plans to try to drop a bill in the next session, in probably February, having to do with the clarification of the Johnson Act and the role that it plays in Class II gaming. So yes, I think there are ample signs out there that the regulators are trying to get into a better position. As far as enforcement, we have not seen any movement in either the state or federal level at this time. And, of course, our goal is to continue to provide our customers the most entertaining legal games that we can. And so that is all an environment that we have learned that we have to find a way to operate in without expecting any specific regulatory change. And so that is the reason that we are reoffering our Class II products, which appear to be products at least many of our tribal customers intend to run for a long time. We made the decision to upgrade them to the Class III platform. That will also, by the way, facilitate—if they do make a decision to change, it will also make it a seamless transition for us once these new platforms are installed. They are indifferent whether we are running Class II games or Class III games on them, and it is only a software change. So we are improving our ability to be responsive should there be a quick change in the marketplace. Got you. Is there anything you can comment on in terms of the potential in the Texas market, or it is still a ways off? As you are aware, last week, the [Texas] Supreme Court ruled that the state method of funding public education was unconstitutional, and the Supreme Court gave them through I believe, June of next year for the [Texas] Legislature to pass and enact new legislation. Certainly, there is great discussion among legislators and various interest holders that new gaming legislation should provide part of that funding. But, as I have said before, we are evaluating all of the gaming opportunities in Texas that we think now will coalesce as part of this legislation, and it may be that charity is the best opportunity for us. It may be that there are racino opportunities for us. It may be that there are “amusement with prize” opportunities for us. Whatever the opportunities are in Texas, we intend to try to be the most technologically creative supplier of those opportunities, and also have the best and most entertaining content. So we are very excited about the movement that will now have to take place in the next six months to try to address school finance, and certainly in every legislation, every legislative session, some form of changing the gaming laws has been discussed as a potential funder of school finance. And it may be that because of the Supreme Court ruling, there is an environment created now that gives the lawmakers the ability to actually move forward with something. On the other hand, they may opt to have a sales tax or an income tax in the state, or use some other form of taxation to fund school finance, and there may be no change in the core gaming laws. But we intend to be ready to provide systems and player stations or bingo machines or sweepstakes machines or “amusement with prize” machines, whichever way gaming in Texas goes. And I would have to say it is more likely there will be a movement in some of those arenas today than there was three weeks ago. Okay. Sorry, I will ask one more question here. Anything positive that you are seeing in California in terms of the Pechangas and the Morongos, or is it–? Well, as I said earlier, the modifications to the games that we made at Morongo have not been well received by the players there. And so we actually have had machines removed from Morongo. We still have all of the machines in Pechanga, and there is some prospect of increasing the number of machines at Pechanga. In addition to that, the fact that we have now completed the interfaces, it allows us to go into casinos that would not let us bring in our Class II games because we could not interface with their currency system, their back-office system and their player tracking system. Now that we can do that, we think there are a large number of additional tribes that Class II offerings should be attractive to them, and we are aggressively marketing to those tribes. My question is for Craig. Can you walk me through what your free cash flow expectations would be next year if you were to make the placements you expect in the second half? Obviously, in terms of the cash flow from operations, if you go back over the last couple of quarters, you can see that we have a trend of cash flowing from operations positively. Again, the development agreement requirements are $39 million over the next 12 months. That has to be taken out of that. And then in addition to that, we have got our capital expenditure requirements for the fleet of player stations that we talked about at that run rate of roughly $7 million a quarter, which will include what we would expect to have purchased from the agreement with the supplier that we previously talked about. So if you just assume the run rate of $20 million from cash flow from operations that we had this year, that would be $80 million less the $39 million and then less the $20 million to $25 million for the maintenance. This is Clifton. As I said before, the success of the sweepstakes system is going to be totally dependent on the level of acceptance the community gives to the data communication and computer literacy center. And so it is hard for us to do anything but speculate now. But let me say that we would not have agreed to provide that system unless we thought it had the potential of a return equal with the other types of gaming systems that we are offering today. And so if the data communication center is successful, then we think that system could be comparable to other systems that we have out there in the marketplace. There are no further questions standing by at this time. Gentlemen, I will turn the conference back over to you for any additional or closing comments. Thank you, operator. I want to thank everybody for their continued interest in Multimedia Games. I also want to thank our internal teams for their untiring efforts to realize the value of our technology to open new markets for us. The sales and marketing teams, the development teams, test teams, the technical service teams, the customer service teams are the lifeblood of our Company and the reason that we have a future in this industry and have the future of innovation that we do. The next few weeks will be exciting, with the launch of our new platforms in Oklahoma and Alabama, and the new sweepstakes product line. The activity this quarter will be followed by an even higher level of activity in Q2 [FY] ’06, as we expect to announce exciting news on an international bingo and lottery opportunity, and as we proceed with the initial placements in other states that we have already talked about today, and as we implement the conversion in Alabama to our cashless card system at our largest facility. We look forward to reporting to you late in January on the initial progress of FY ‘06 and our plans for the continued efforts in revenue diversification and product development for the balance of the year. We believe that FY ‘06 will be the year that we realize the benefits of all of the R&D effort that we have done in FY ‘05 to enable us to bring new product lines to new markets and to provide better platforms for our existing customers. Thank you for our confidence, and we look forward to visiting with you in the near future. 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_233959

I’m Prathiba, the moderator for this conference. Welcome to the Wipro Conference Call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. I will be standing by for the question and answer session. I would now like to hand over the call to the Wipro Management. Thank you, and over to Wipro. Thank you Prathiba. Good afternoon ladies and gentlemen. The Investor Relations team at Wipro comprising of Sridhar in US and Jatin and me, Laxminarayan in Bangalore, welcome you all to this call. We’re delighted that you’re with us today. Today, we discuss Wipro’s performance of the fourth quarter in the year ended March 31, 2006, and to do that we have Mr. Azim Premji, Mr. Suresh Senapaty, and other members of Wipro Senior Management. We will as usual begin the call with Mr. Premji and Mr. Senapaty commenting on our results, and after that we will have adequate time to take your questions. As a reminder, some of the statements we make on this call maybe forward looking within the meaning of the Private Securities Litigation Reforms Act of 1995. These statements are based on our best view of the world today and our businesses, and these elements can change as the world changes. These are also subject to known and unknown risks and uncertainties that can cause the actual results to differ materially from those expressed or implied in our discussion. Such risks and uncertainties include but are not limited to the risk factors explained in detail in our filings with the SEC of USA. Wipro assumes obligation to update the information presented on this call. The conference is being recorded and will be archived, and a transcript will be available on our website at www.wipro.com. With these brief introductory remarks, let me hand over the call to Mr. Azim Premji, Chairman, Wipro. Good morning ladies and gentlemen. By now you would have seen our results for the year and quarter ended March 31, 2006. As the management team would be happy to answer your queries, I’d like to take some time before that to share some thoughts on our performance and our prospects. The results of 2005-2006 were immensely satisfying on many fronts. During the year, we made strategic acquisitions, made several organic investments for accelerating growth, drew up an aggressive strategic plan, added the highest ever number of people to our team, and streamlined and patterned our organization structure. Through all of this, we deliver industrial-leading revenue growth in all our business. It has recorded strong profit growth, stabilized margins, and crossed several landmarks in the process. I believe that our solid performance is yet another pointer to the resilience of our business models and more importantly the unflinching spirit of Wipro’ites. The results also proved yet again that to reap benefits tomorrow you need to sow the seeds today. In the past, we invested in incubating newer services such as technology infrastructure services, testing services, and total outsourcing, and in new geographies such as Europe and the Middle East. Notably, our R&D services business and Europe bureau crossed milestone of $0.5 billion in revenues this year in each of them. It is very heartening to note that the strong growth in our global IT business last year was driven by areas where we have invested proactively in the past. Similarly, our investments in innovation initiatives are beginning to pay off well. Innovation initiatives contributed 5% of our revenue for the fiscal. Many of our strategic customer wins including some key ones in the recent quarter remain possible because of the breadth of our services and because of our innovation initiatives. Similarly, in our India, Middle East, and Asia-Pacific IT business, we delivered strong revenue growth of 22% and profit growth of 40% in 2005-2006. But more importantly, by winning five total outsourcing contracts, we have set the platform for sustaining our heights. The more recent win of Rs. 360 crores, equivalent of $80 million, total outsourcing contract from HDFC Bank, is an indication not only of India’s maturing IT market but also Wipro’s growing competence in this unique, specialized service line. With the strategic as well as operational success of 2005-2006 behind us, we look forward to 2006-2007 and beyond with excitement and with enthusiasm. The offshore IT industry is evolving from a simple service provision mode to a more complex and higher value-added knowledge creation mode. Delivering value to our customers in the emerging scenario will require a comprehensive for timeliness combinations of the domain expertise, integrated service offerings, innovative solution structuring, and deep technical expertise. We have identified and ruled out initiatives in our strategic and operational plans in this direction. We are confident that this will be a significant differentiator for us that will enable us to continue to lead industry growth rates. Additionally, inorganic initiatives can help accelerate this process and supplement organic growth rates. Our experience with acquisitions so far has been quite satisfactory. This has given us confidence to pursue this strategy more aggressively in the future. We will similarly pursue strategic initiatives identified in our strategic plan to deliver strong growth in future in all our businesses. Clearly, Wipro businesses are all in the sweet spot of strong growth. We have the baseline to leverage the opportunities and realize our growth potential. At the same time, we will continue to invest to build the next set of growth engines that will help Wipro deliver sustainable and profitable growth in the future too. A very good morning to all of you ladies and gentlemen. Before we take on the questions, I’ll touch upon areas in our performance and financials that would be of interest to you all. Let me start with beginning the composition of our growth. During the quarter ended March 31, 2006, we had sequential revenue growth of 8.2% in our Global IT Services Business, which comprised of 8.2% revenue growth in the IT services and 8.5% growth in the BPO services. The 8.2% growth in the services component was driven by 7.4% growth in the volume of business and an increase of 3% in realization for work account one side and 0.2% increase in price realization of our offshore projects. Revenues from acquisition of NewLogic and mPower contributed 1.8% to revenue growth of global IT segments. On the Forex front, our realized rates for the quarter was totally Rs. 5.23 versus the rate of Rs. 44.83 realized for the quarter ended December 2005, and at the period end, we had about $600 million of ADS that ranged between Rs. 44.60 and Rs. 45.50. We had effected an increase of approximately 3% in compensation for our onsite staff, effective January 1, 2006. We also saw the full impact of salary hikes given to our offshore staff during the quarter. The impact of this competition revision was 1.4% on our operating margins. Operating margins were also affected by losses in Wipro NewLogic, which was in line with our expectation. On the other hand, we saw better price realization improvement in utilization, increase in proportion of offshore projects, and better Forex realization. Our BPO business continues on the right track by delivering yet another quarter of operating margin expansion apart from improved revenue growth. These factors helped us not only to absorb the download pressure but also improve our operating margins by 30 basis points on Indian GAAP. For the quarter ended June 2006, we expect quarter led growth to broadly stable price realizations. While lower profitability from acquisitions would continue to impact the profitability, we will endeavor to maintain our operating margins in a narrow range. We’ll now be glad to take questions. Thank you very much sir. We will now begin the Q&A interactive session. Participants who wish to ask questions may please press “*” and “1” on your touchtone-enabled telephone keypad. On pressing “*” and “1” participants will get a chance to present their questions on a first-in-line basis. Participants are requested to kindly use only handsets while asking a question. To ask a question please press “*” and “1” now. Hi sir. We have had a very strong quarter, as a matter of fact the best quarter in the industry, but our guidance on a sequential basis is a bit muted at just over 4%. Could you flush that out, what’s the reason? I believe, Mahesh, if you look at our overall growth that we’ve achieved in the previous two quarters, the customer adds that we’re seeing in terms of 42 customers last quarter and 171 customers in the previous 12 months, the kind of traction we’re getting in terms of existing customer base growth also, the number of customers $1 million has gone up from about 210 to 221, a number of $50 million runrate customers have gone up from 2 to 4, and it gives us the confidence that the 2006-2007 outlook is fairly good and therefore we continue to deliver better than what the industry average growth would be for 2006-2007. However, if you look at quarter one, I think we cannot be short term about it, we have to look at it overall from a longer term perspective to medium-term perspective. So, where quarter one is concerned, if you look at some of the YOY growth perspectives, it is about 34%, if you look at the guidance number. Generally, for us the quarter one has not necessarily been a very high sequential growth quarter. Secondly sir, the gross margins in the Indian IT business have fallen…sequentially they usually fall, but even YOY basis they have fallen, so is there something specific that happened this quarter? Sequentially because you have a mix of product in the quarter four’s and quarter two’s which tends to be a little higher. By services generally sequentially growing quarter up to quarter, the product revenues get to be SKU’ed in quarter two and quarter four, and they have generally a lower margin than on the services. So that sequentially is yes, your observation is right, but not compatible on year on year. Anyway, I’m going to…Sir, the third thing is, in terms of large deals, now one of your competitors is pursuing them very aggressively whereas another one is talking of large deals being not so good for the business, they’re locking into rates which might not be the best strategy going forward because the rates might actually go up and the clients stand to negotiate very aggressively when they are negotiating large deals. What is your sense, I mean how much should a company pursue large deals, what could be the impact of large deals on profitability? That’s the point Mahesh. Therefore, the important factor is try to be selective, which one to take and which one not to, rather than jumping on every dealer. That is how our approach is. Yes, there are multiple deals which are at very, very low margins, there are many other deals which may be low margin to start with but over the lifecycle can be profitable, and there maybe some additional businesses which can pick over rate and therefore we need to look at it medium-to-long term rather than sacrificing just because on a shorter term basis there is no money or the margins are lesser. So, it is important to be selective in a deal-to-deal basis, because one cannot say that all the deals which you’ll be fighting…because all of them are useless. Selectiveness is very important, and a lot of history is available in what you call big IT vendors who have lost a lot of money on deals which they have not been smart enough. I think we being the later beginners, there is at least the history and experience available for us to pick up from there and not to be bitten. Thanks a lot sir. Just one last thing, you mentioned this figure in your initial remark, about the onsite salary hike causing a quantum of impact, I missed that, if you could repeat that. I said that on the onsite we had given a compensation increase of about 3% effective 1st of January, and in the offshore we had given a compensation increase in November 2005, which had impacted the quarter three by two months and quarter four by three months, that means an additional one month. So all that impact was about 1.2%, which was mitigated through varieties of other reoperation improvements, in terms of utilization, offshore mix, etc., etc., so overall we’ve seen in the Indian GAAP a 30 basis points expansion. Hi gentlemen. My question relates to the margins. Actually in the current fiscal we saw a 200 blips decline in margins. What’s our take going forward and at what levels the company would have steady set margins? Got it, got it. So, we have seen a fair amount of regain in the margins after the initial blips we had got, and now we are currently looking at the stability, and what we are saying is why there are a lot of opportunities to be able to improve our margins, whether in terms of bulge, or utilization, or offshore mix, and other productivity improvements. There are pressures with respect to compensation increases and so on. Price is the main point of we’re seeing a fair amount of stability rather than a lot of high increases in the pricing. So, given this scenario, there are lots of pluses and there are lots of minuses. So, we think in a short-to-medium term, the margins will be within a narrow range. Okay, fine. The other question was related to the consulting part of business. In the last two financial years, we are seeing a decline in consulting revenues from 1.5 billion to 1 billion and now up to 0.95 billion; could you elaborate a little bit more on that, what’s happening there? Yeah, it’s Sudip Banerjee here. Yes, your observation is right. Consultancy goes through short cycle revenues which we get because the projects are of typically eight weeks or six weeks’ duration. So, we have periods where they go up and again periods when the consultancy revenues are not high. I think the important way that we look at consulting is whether it is additive to the rest of business. We find that in the last six months many of the business that we’ve gone in the other areas, the wins have come largely because of the consultants that we have. So, today we have roughly, between the consultants under the Wipro consultant umbrella as well as the consultants who are embedded in all our industry verticals, about 320-330 odd people, and many of the profiles of these, typically the consultants who we have under Wipro consulting, they are practitioners from firms like Accenture, McKenzie, Deloitte, KPMG, etc. They have been able to substantially uplift the profile of the clients that we have been wining in the last six months and have been getting us an early engagement. So, we don’t necessarily measure consulting revenue and see that as the only yardstick of consulting performance. We see the wins that we’ve got in all our other businesses as a real value of consulting to us. So, we continue to invest in getting more and more consultant profiles, because they’re helping us in our overall business. So, the way to look at it: a) we have a direct consulting revenue which is generating consulting revenues and profitably, and while doing that a part of that, depending upon which project or who is more specialized, they do help in terms of trying to address a strategic deal for our normal business in terms of whether it is application development, EAS or anything, etc. So, which in other words means while we were driving the growth in the direct consulting revenue, we were also benefitting out of the same consulting drive for getting bigger wins and enhancing our credibility with the customer and enhancing our share of volume in the large customer potentials that we see on existing customer base. The hedges that we have apart from what we’ve been applying into the outstanding receivables at the end of March 2006 is about $600 million, largely US dollars and the cost increase was given for offshore effective 1st of November, so the impact of that was felt for two months in the December quarter, and the impact of that in the March quarter is one additional month. We had also given about 3% increase in the onsite wages effective January 1, 2006. We have not shared that because what we do is instead of deciding a number now, we sort of take it steadily at that point in time and try to see what are the normal compensations across to those kind of benchmarks and based on that we decide. So, even if we have a number it could undergo change depending on what the actual real situation at that point in time is. But generally, you have a number available because the industry talks about an increase between 10-15% and generally works around 12% kind of a range. Just one more question, actually in this quarter we saw a sequential increase in pricing and onsite revenues, is this one of kind stuff or are we seeing some changes in pricing scenario going forward? Yeah, we have seen that pricing realization increase in the onsite as well as offshore — offshore is very small but onsite is very high — primarily because what we had lost in quarter three because of less number of working days, we regained a significant part of it in quarter four…had gone up significantly. This is Divya from Motilal Oswal. My question is, BPO margins for this quarter have declined to 25.7 from 27.5 last quarter, what’s the reason for the same? Yeah, I can answer that. Basically what happens is…how gross margins depended to some extent on the training bench that we carry, and this quarter we had a larger training bench and that’s what affected the gross margin numbers. But if you look at the operating margin numbers, they kind of reflect the true picture. The tax rate for the quarter has also declined quarter on quarter, like 13.2% this quarter, is there any runoff item here? Yes, that is true. About 10 crores of write back was there in quarter four, which dropped the EPS of the year and also for the quarter. EPS for the year dropped by about 40 basis points because of this one-time credit, and EPS for the quarter dropped by about 0.8%. So, normalized will be a +0.8 for the quarter. See, we are seeing more and more sectors coming out of the tax exemption period from that perspective, but there would be certain other kinds of incentive schemes that could possibly be there. So, we think on a medium term the tax rate will not be significantly different beyond 100-200 basis points. Thanks. One last question, attrition for the quarter was down from 14% to 16%, this is despite the salary hikes you’ve given over the last two quarters, what is the reason? This is Pratik here. I think the primary reason has been that we did have to deal with a significant percent of involuntary attrition, which was triggered from Wipro’s end, where we did have to ask quite a few employees who had come in based on fake resumes, which we uncovered and investigated. So, it accounted for almost about 1.5% of our total attrition number, which we have shared with you. We have put in the processes which should prevent any such happening in future; however, you can never say that it’s completely over. Our policy of non-tolerance on such matters will continue to be as strict as ever, but we do not expect the kind of number which we saw this quarter to be repeated again. Yes, good morning and congratulations on a very good set of numbers. The key thing I wanted to focus was on the wage hike that you have given in October and then again in January onsite. You know, since then there have been some concerns in the industry on actually wage pressures sort of rising and attrition levels I think across the board are also rising. So in that context, I just wanted to understand what you feel has been the trends and could this even imply that there might be need for a mid-term sort of wage hike? Mithali, this is Pratik here. Our experience has been that around this time is the timeframe when organizations begin to ramp up, so some of the things which we get to hear, the pressure which begins to mount on companies, is usual. So, we are not seeing anything which is extremely unusual. There will continue to be pressure on middle management talent, and that’s something which we’ve experienced in the past. Seeing the way the ramp ups which are happening across, would it make us revisit our own plans of hikes when we want to time it? At this point in time, we do not think that would be necessary, but it’s something which we’ll continue to watch very carefully. Right, so as of now, you don’t feel that the wage pressure is trending in a direction different from what you predicted, let’s say, a few months back? Yeah, I think the wage pressure we have to look at it in two slices. I mean, what is your proportion of people who are coming in from campuses and how many are those laterals, and we feel the pressure will continue to be there as in the past for the laterals. But, as you know, we have the head space to be able to take in more people from campuses, which is something we had embarked on almost about 18 months back. So, we have that head space, and on campus we do not see any significant movement on salary levels, which have remained to be in a very narrow range over the last three years, and that we do not see changing this year as well. Right, and is it possible to share what is the proportion you have, let’s say of less than three years experience in and where you sort of target to take that up to? The last quarter we were less than three years at about 42%. That number remains to be at the same level for the reason being that this quarter the predominant hiring was of the laterals, because it’s not the season for the rookies, but predominant lateral hiring again was in the one-to-three bracket. So, the number continues to be at the same figure of 42%. I think we would like to remain around the same figure or perhaps marginally go up, but we do not have a fixed number in mind at this stage. Okay thanks, and the second question is on pricing, where if you could give us an idea about what you’re seeing in terms of pricing trends incrementally over the last few months, both in the case of new client acquisitions as well as re-negotiations? Mithali this is Girish Paranjpe. Working on the new client, we are seeing slightly better realizations coming in, and on existing clients we have done re-negotiations, again we have seen some improvement especially where the original rates were not market competitive. So, we’ve seen a kind of an improvement there. But, if I look at overall price levels, they’re in a very narrow range. I see, and finally just one question, you did mention in your opening remarks that quarter one has historically been a weaker quarter, are there any reasons sort of behind this? Hi, Girish here again. There is no such reason. I think it’s to do with the composition of our various business lines and how budgets are spent by our clients over the 12 months, and as you know the composition of business for each of our sphere group is slightly different, so that extends…some people have a stronger first quarter and some people have a stronger second and third quarter, and I think that’s the variation that you tend to see. Hi, good morning and congratulations on the good numbers. My first question has got to do with the GM contract, how is the winning of the deal shaping up in the form of ramp up, did it contribute in a meaningful manner in the first quarter or should it start from first quarter? Hi, this is Sudip. The contract is progressing well, on schedule, as you probably know that June is the timeframe for the turnover of the existing EBS contract. So, all the selected parties are working in their transition phase and that transition is currently proceeding as per schedule. As the deal starts in the next quarter, can we expect the margin implications because of that or this is predominantly a company asset? But Sudip, we did say in the earlier comments that broadly we do expect the margins at the global IT level to be moving in a narrow path. I see, just in terms of the future outlook from the last contract effective, do you think next year you will see larger proportion of contracts closing or do you think it will be predominantly organic growth driven by existing clients, which will be the key ramp up? Okay, but in terms of the larger contracts, do you see any acceleration in closure or as it was in other contracts. Thanks and good morning everyone. Just one more question to Mr. Senapaty on these large deals. When you look at them or evaluate them, do you have any internal financial thresholds, do you have a certain sort of gross margin in mind, and if so how does that compare to your regular deals? Yes, absolutely, we have parameters that we think…pattern of the contract and also we look at if there were to be a dilutiveness what is the kind of period up to which it will be diluted. So, another parameter also we look at is what kind of money we make in terms of EBIT per person in some of those deals also. Also many times you find deals where you could be making an entry into an account, which is a very large account, and through this you make an entry and then again you can build on it, because it maybe infrastructure centric or it maybe an application maintenance one, and on the top of it could be sitting an application development and many other opportunities going up the value chain. So, one has to look at this deal not only on a standalone and a short-term approach but a longer term approach and what all can add and therefore what is the kind of a bucket it’s going to have to generate profitability or cash flow, based on which you take that call. And in each of such areas we have a kind of a parameter which we go through before we bid for it or we sign for it. Okay, a couple of questions on the just concluded quarter. The SG&A cost seemed to have gone down quite a bit in absolute terms during the quarter for the IT services business, any particular driver there? Yeah, but this is a minor variation and I suppose within 50-100 basis points they will keep moving up and down. No, I was referring to the US GAAP number, but anyway Mr. Senapaty I’ll take it with Len after the call. Just one final thing in terms of your outlook for the next quarter, is it uniform across IT services and BPO or is there a difference? Outlook is similar, but not necessarily the growth rate, because we had a muted growth rate so far as Wipro BPO was concerned for the last year and while…Ananth can you just repeat the question please? My question was the guidance for the June quarter, essentially the growth trend you mentioned various reasons for the relatively muted guidance, is that applicable both to BPO as well as IT services? There’s no significant difference, because we give a combined guidance and we don’t think it is a true material for us to give a guidance separately. Hi, I just had a quick question on the overall strategy. It looks like we’re in a very strong offshore IT environment, but just wondering given the potential revenue opportunities out there, would you be willing to accelerate your revenue growth rate, your topline growth rate and get deeper into some of your clients, etc., at the expense of some margins in the short term. And if so, I was just wondering if you could elaborate a bit more on that strategy, your thoughts on that, how important are margins to you? And secondly if you could just also update us on the various margin levers where we stand, especially in things like utilization rates and onsite-offshore mix, etc., how much more leeway do you have over there? Yeah, coming to the first question, I suppose there is no straight answer, because what you look at is the long-term profitability rather than any one-time profitability that you look at. So from that perspective, this decision has to be rational and look at on a medium-to-long term how you get out of a deal. Then, the second point also with respect to the levers, on utilization we saw some uptake in the last quarter, and we think there is an opportunity for us to do better so far as the year following is concerned or the current year is concerned. Similarly, movement of offshore-onsite, we’ve seen a decent amount of movement in our own portfolio over the last few quarters, and going forward our objective would be to move in the same direction even further without wanting to in any manner constrain on the growth. There are certain other initiatives in terms of productivity improvements, in terms of trying to take up the fixed priced projects which will be some of the enablers or facilitators of getting productivity improvement done, and as and when you talk about larger deals, larger deals tend to be for the longer term, and longer term tends to be a little bit of a fixed price, so some of that will get achieved through that process too. So, those are some of the positive levers that we have. The negative levers we have is an MSI, that is a compensation increase, exchange rate could go either way, but as you’ve said, for about $600 million we are headed as of March end for a fairly decent realization, and net-net we think so far as margins are concerned our movement would be in a narrow range. Okay, and just another followup question on that, on the margin front, if you could elaborate a bit more on the outlook for margins in the Indian IT business, and secondly if you can just give us some guidance on the tax rate for the coming year, please. As far as the Indian IT is concerned, we would over a period of two to three years look at improving the margins, because the service business is growing faster, more and more initiatives, more and more investments that you’re doing in that part of the business. It is trying to get much more comprehensive solution orientations in the IT services business, in the IT production services business, and typically since the services business will have a higher profitability, a higher growth in that business would have an upward trend, which is with the margins going forward. Your next question was? BPR, the quarter four and year 2005-2006 was a little lower because of some quantum write back that we had in quarter four. Going forward, we think the movement would be between 100-200 basis points. And if I were to just ask one quick question on the acquisition strategy, I was wondering if you’d be willing to take on slightly larger acquisitions in the coming year? Yes, we will be willing to take on but within the framework of what we have in terms of string of pearls. So, when you are trying to look at acquiring a particular skill set or filling up a particular gap, that gap can be there in a company that we’re acquiring, which is a $30 million revenue or $100 million or $200 million. The price will not hold us back not to do that acquisition, plus we don’t want to compromise on our strategy just because we want to do a $200 million or $300 million or $500 million acquisition. Therefore that is not a driver. The driver is the purpose, the strategic reason why we want to do it. So can you comment whether at this point in time you are looking at any deals of a much larger scenario versus what you’ve looking at in the past? I can’t specifically comment, but as we go by, yes, the sizes will be sort of little larger from an earnings perspective. Hi sir, congratulations on a good quarter. My first question pertains to your revenue guidance as such. What sort of incremental revenues from acquisitions are you building in this guidance? So, are all the acquisitions integrated or are there some acquisitions which are still left to be integrated in the next quarter? There are about two of them for which the revenue has already ticked in. There’s another one which will tick in the current quarter. Well, we don’t give specific guidance but that’s not a large number, quarter four number of that was under $3 million, which wasn’t consolidated into ours, because the closing only happens in the current year. So, in your BPO revenues, while the BPO revenues have grown strongly this quarter, do you expect that in near term next one or two quarters again BPO would maintain that base our could there be some issues in that? Well, this is T. K. Kurien, let me answer that question. The growth you’re going to see in the BPO business really is going to be a step function, because in the short term what we have focused around is really making sure that our portfolio is healthy and our portfolio can deliver to the operating margin guidance that we have given in the past, in terms of at least what we have communicated in terms of a range. So, that’s the objective. So there will be a step-function growth. In the next quarter, it’s going to be flattish and the growth would really kind of come on the following quarters. So you can really expect big jumps and then a flat road as we consolidate. One thing on BPO, you had earlier talked about reducing the voice-based business, so what are the targets say one year forward or two years forward or whatever, and how do you think that you’ll achieve that? Here, what we have done over the past one year, actually when we look at a deal we really don’t break it up nowadays between voice and non-voice, because we have changed the way we sell. Now, we sell solutions which run around an entire process, which runs from end to end, and that includes some component of voice and some component of transaction processing. So today if you look at integrated fields, the way we define it, it’s running at around 20%. Last year same quarter we were probably running at around 6%. So that’s the change that’s happened in the last one year. So, the number of deals which are pure voice deals, would that proportion be 80%, that’s excluding the integrated deals or is that… To some extent, okay. Thanks on that. Sir, the second question is on large deals —to Mr. Senapathy — sir, we are seeing a lot of wage inflation and talk about that in the market right now, so when you bid for large deals what sort of wage inflation do you build in that, and are you worried that the higher than expected wage inflation could lead to some margin attrition there? I think when you talk about a longer term deal you look at review engineering opportunities, you talk about offshoring opportunities, you talk about the productivity improvement that you could put into that, and also talk about therefore a factor into the compensation increase that will happen and the kind of mix that you can drive there within that after zero experience versus up to one year’s of experience of the project, then after two years of experience of the project. So, all these are taken into account for trying to do a margin assessment and getting into the deals. So, these days, yes, and if this component is a large component and this component goes out of VAT, of course it will be of concern. But at this point in time, whatever we have, whatever we’re building, and what we’re seeing as a situation, it has not necessarily given us any kind of a huge concern. Sir, broadly can you share that when you bid for these deals, what sort of wage inflation you keep in mind over there? Yes good morning gentleman. My question is, if you could please give us a bit of view on your hiring plans during fiscal ’07? For example, how many campus offers you have out there, what is your likely mix of freshers versus laterals in ’07, and where you see head count sort of ending up at the end of the year? We sort of work out head count increase to be able to meet our growth numbers, to meet our revenue as opposed to sort of getting into targeting some kind of a head count addition. Based on whatever projections we have on revenue, we plan it out in terms of hiring, because we still have a decent percentage of our hiring done through laterals, which is a much, much shorter time frame as opposed campus, and hence we do not specifically share any data with respect to exactly what that number is. This is Pratik here. Specific to the split between people who would be coming in from campus versus those from laterals, the split would be roughly 50/50. And the bulk mix we talked about, we have laterals fixed at about 42% of the people less than three years, and based on the mix that Pratik talked about, we would expect that to go up. Hi, my question is with regard to the HDFC Bank deal that you’ve won. Will you be able to deliver simultaneous services to your clients within the US over the next two to three years? Is the company gearing up to procure total outsourcing, and what is the timeframe for the same? Thanks. This is Suresh Vaswani here. We have launched total outsourcing service globally as well, so we would be bidding for similar contracts globally like we’ve bid in the domestic market. So, HDFC Bank was one, Sanmar was the other one, SBI was the third one, so based on the same value proposition we are also bidding for customer contracts globally. Hitesh, just to take it forward, while HDFC Bank has been more like an infrastructure deal, we have some initiatives in terms of a large deal on the application development side, _____we need to throw some flavor there. Yeah, Hitesh, we now have a fairly good experience with large deals, particularly the ones which were RFCs, which were bid out in 2005. Some of them have closed in 2006, and we have a healthy mix of application and infrastructure in them. In fact, we have just signed another large deal of $100 million, which we unfortunately don’t have client permission to announce at this stage. But with all these deals, one of the things which we do find is that the mix is very much application as well as infrastructure. Typically in total outsourcing type of contracts of the HDFC kind there is a mix of application, there’s a mix of infrastructure, and it tends to be in the ratio of 60:40. Suresh, what kind of margin implication, if you extrapolate such kind of deals to your clients in the US and Europe will have on your overall margins? Secondly, whether you would end up being one of the prime vendors for your end customers? I’m just trying to understand what kind of annuity is going forward can you build in your business and in the global IT services business? It is to build a fairly decent percentage of our revenue coming through this kind of thing, particularly when you have a larger base, and you want to grow on an application development and maintenance side, we need to do more and more of these kinds of deals, and consequently target a particular percentage of an order book, a particular percentage of revenue getting into this quarter. To one of the two questions you asked, this total outsourcing model also lends itself to a partnership model. So, frequently we will find ourselves in the position where we are leading the overall customer proposition, but we’ve tied up with multiple partners. They could partners who have strong on-ground maintenance service available in the geography, they could be telecom service provider partners and so on. So the model lends itself to making sure that we deliver a single point interface with the customer in terms of his IT operations, but it could mean that we partnered with two or three partners of ours and we are getting the whole contract. I appreciate it. Just one more question with billing rate. You did mention earlier that you expect the same to be moving in a very narrow range. The impression I have obtained from the discussions is that probably the market opportunities are slightly better than that. It is possible probably in the current year that the billing rate could actually inch up, say about 4-6% in both onsite and offshore, does it look unlikely? No, we didn’t say narrow range. Narrow range is our operating margin guidance, but what we talked about the pricing was, we said it is more stable. Hi, congratulations on a good set of numbers. Actually when I go through your client market, if you compare from the second quarter FY 06 to the fourth quarter FY 06, there has been a noticeable change with respect to the $3-5 million and the $5-10 million bucket. If you could throw light, whether it’s largely from the ramp up with respect to the sales team, efforts of which were made in the first half of FY 06, or is more to do with higher investments in the service offerings, or is more to do with ramp ups with clients in the BFSI and the telecom space. As an add-on question to it, if you could highlight what further strategies would you need on the sphere side to improve the client mining? There has been a very serious effort from our side to invest in resources and our attention on high-potential clients and also to create a formal organizational structure and a kind of a tracking mechanism to make sure that we kind of devote our best resources to our top clients and make the relationship grow. I think what you’re seeing in the account growth is really a pay off of these kind of efforts that we’ve made. In terms of future growth strategy on the sales front, if you could highlight more geography wise with respect to US and Europe, because Europe has been going at quite a good growth rate for all the players, if you could highlight some point over there? Actually the reason why Europe has grown faster is that they’re growing out of a smaller base and they have a lot of catching up to do with especially North America. And given the fact that they’re in this kind of catch up mode and they have kind of renewed interest in offshoring, we expect European growth rates to remain at a higher rate. Also, if you could just highlight of the 40 client additions which have taken place, how much of them would be in the telecom and how much of it would be in the BSFI space? Hi, can you comment on the growth outlook for your R&D services and enterprise solutions, specifically will they be growing in line with the company or lower? This is Ramesh Emani. In terms of the growth in these R&D services business, as we are not giving any specific divisions, specific growth numbers or guidance numbers, but what you can see from what we have done in the last one year is we have grown at about 33%, and in the technology business we have grown 40%, and we are definitely seeing that we will be able to maintain above-industry average growth even in this segment. Enterprise consists of seven verticals. They include retail, manufacturing, energy utilities, and services, etc. Some of them are growing faster and some are not growing as fast, so the real faster growth that we have seen and we expect to continue is in verticals like healthcare, verticals like energy and utilities, and verticals like transportation, media, travel, etc. Those are the three areas that growth rates in the current years have been in line with the company average and in some cases much ahead of company average. I just want to come back to your acquisition strategy where you mentioned that you’re going to go for the string of pearls, but you also said that you’re not averse to making large acquisitions. Now, is there any particular criterion on margin that you’ll be putting on the large acquisitions? The criteria would be single whether it is large of small, to be aggressive in terms of margin, to be aggressive in terms of the cash flows, to be aggressive in terms of energy helping us to take our growth rate higher. Do you see too many targets out there in the market with $200 million sizes which have margins similar to yours? I don’t think one is looking at a company with targets similar to us, because then it will become more of an aggregation, but you would have to look as to whether by doing an acquisition you will be able to fix value to energy, that the margin irrespective of what at this current level is can be taken up to a level within a finite time, based on an identified action or front on which you execute and deliver. My next question is on your sales and account management investments. Now, could you tell us what are the number of sales people and account management people in your company? Going forward…we have been investing on our sales engine and we’ll continue to invest more and more on the sales engine like we said. Whatever operational improvements we achieve, we’ll have to reinvest in building solutions, in having more stronger front ends, more high quality consulting kind of front ends, and so on and so forth. My last question is on your innovation initiatives, can you just throw some light on it, what exactly you mean by that? I’m A. L. Rao here. Under the innovation initiatives we have two broad activities -- one a centrally funded innovation team whereby fund projects that will create either point solutions for specific industry applications or intellectual property components for the product engineering solutions. The second initiative is what we call it as centers of excellence; these are more run in each vertical. They focus on competence building in the emerging domains as well as using that to leverage a service domain. So, across the COEs and the centrally funded investment projects, the overall target is to create either specific industry solutions or intellectual property components and use them to provide the solutions to specific customers. Last year, we achieved 5% of the revenues through the initiatives. And going forward, we have also kicked off what we call as quantum innovation where we would like to scale up the current activities to much higher returns. We are targeting in a three-year timeframe anywhere between 8-10% of the revenues to come from the newly initiated quantum initiatives… Congrats on your excellent result. Just looking at your financial services revenue in your IT services segment, the financial services revenue is contributing around 20-21%, are you in the process of developing any specific products for financial services, maybe Basel II, or are you in the process of hiring any company with a strong product domain specifically for the financial services side? Hi, Girish Paranjpe here. We are not building any products, although we have done work in, let’s say, Basel II area with multiple clients. We don’t think it is right for us to build full-fledged products and become a product company of any sort. But having work experience and having done work in that particular area, it does give us a benefit and an edge while we are in a competitive situation. We are not specifically sharing the CapEx for FY 07, but if you look at the kind of expenditures we did last year versus what we wanted to do this year, it’ll be significant upscaled because of some of the facilities that we’re building, some of the training facilities that we’re building, some of the centers that we’re building outside of India, whether it’s China or Bucharest, etc., or even in Japan and extensions, we’re increasing the capacity also in our London office and many other non-UK, European centers. From that perspective we are going to have a significant upscale in our investment in CapEx plus the acquisition also. Secondly, just wanted to know the proposed merger of Lucent and Alcatel, will it be having any impact on your operations? As of today we have a large engagement with Alcatel. We are working with multiple product groups. I don’t expect as of now any significant impact in the short term, because they would obviously go through an intensive product strategy in discussions and we’ll have to wait for that, but I don’t think in the short term any impact will be there. Also this kind of transaction creates opportunities, as we’ve explained, because when you have two companies merging and one you have made strong inroads and other you don’t enough, that’s an opportunity, and also the risk as to whether for any reason the kind of an opportunity we currently are dealing with gets reduced. But our objective is to be able to work on a priority basis to make sure that we are able to make an opportunity out of it. In many ways in the past we have succeeded and we will continue to keep a close watch and see what the kind of initiatives and steps we need to take to be able to optimize on that. Thanks you Mr. Shekhar. At this moment, I would like to hand over the floor back to the Wipro management for final remarks. Thank you, ladies and gentleman for participating in this call and taking your time out. We hope you found this call and our interaction useful. Should you have missed this call, an archive is available, both audio and in a short time we’ll have a transcript with us. And at any point of time if you need any clarifications, the IR cell would be delighted to talk to you. Thank you once again and look forward to talking to you again next quarter, and have a nice day. Ladies and gentleman, thank you for choosing WebEx Conferencing Service. That concludes this conference call. Thank you for your participation. You may now disconnect your lines, thank you and have a nice day.

EarningCall_233960

Good day and welcome to today's SigmaTel, Inc. fourth quarter earnings release conference call. This call is being recorded. Operator Instructions. I would now like to turn the call over to Mr. David Donoven. Please go ahead, Mr. Donovan. Thank you. Good afternoon and welcome to SigmaTel's fourth quarter and full year 2005 earnings conference call. You should have the press release detailing our financial results which was issued a short time ago, and is also available on the SigmaTel website. Before we begin, I need to mention that this presentation contains forward-looking statements which are based on our current expectations including forecasted revenue, earnings and expenses. These forward-looking statements are subject to a number of risks and uncertainties, including the risk of adverse changes in the global economy, delays in the release of new products, fluctuations in customer demand for SigmaTel products, manufacturing inefficiencies, shortage of components used in our customers' devices, fluctuating foundry capacity and intellectual property litigation, common in our industry. We ask that you keep this in mind in relying on any such statements of expectations. For a more thorough discussion of the risks to which the forward-looking statements are subject, please refer to our Press Reese lease from earlier this afternoon and to our recent SEC filings. The discussions today will use non-GAAP financial measures. A reconciliation of non-GAAP financial measures can be found in today's Press Release, which will be on SigmaTel's website under the investor relations section. At this time, I'd like to introduce our Chairman, Chief Executive Officer and President, Ron Edgerton, to provide a brief overview of our business in 2005 and focus most of his comments on how this positions SigmaTel for 2006. After Ross Goolsby, our Chief Financial Officer, updates the details of our financial results, Ron will conclude the formal portion of the call with guidance for the first quarter of 2006. Ron? Thanks, Dave, and welcome, everyone. 2005 has been a year of great accomplishments and transition for SigmaTel. The Company reported double-digit revenue growth of 67% for the full year 2005 compared to 2004. Despite a very competitive pricing environment, the company was able to maintain gross margins above its of long term corporate target, reporting gross margins of 54% for 2005. We recorded pro forma EPS for the fiscal year 2005 at $1.30, and we saw operating income increase to $56.4 million. The company made significant strategic investments during 2005 to enhance its technologies and diversify its product offerings as well as diversify its end markets and to enhance the long term growth of SigmaTel. We launched our next generation in portable multimedia system on chip, the 3600, as well as our first wireless project, the STFM 1000 FM turner, both to very favorable market reviews. Our primary 2005 objective was to use our internal development and diversification strategy to position the company as leading mixed-signal multimedia semiconductor company, and moving into 2006, we achieved that objective. With our acquisitions in 2005 and our internal growth, SigmaTel more than doubled its headcount. In 2006, one of our goals is to significantly improve revenue per employee during the year as we strive to leverage increased headcount and into higher revenue. In Asia, we have successfully established an infrastructure that allows us to provide a higher level of technical support to our customers and strengthen and expand the customer relationships and market presence in the region. In 2005, we opened offices in mainland China, Taiwan, Japan, Korea, and Singapore. In 2006, we expect to leverage our worldwide infrastructure to support our expanding core product lines and our acquired product lines. We began 2006 with our best consumer electronics show ever. Meeting with more than 100 customers and partners, we showcased for the first time under one roof, all of the SigmaTel's diversified, innovative technologies. We demonstrated a fully functioning STMP 3600 flash-based reference designs that are smaller and they have more processing power than current high capacity market-leading players. In addition these players were running MPEG-4 and H.264 video. We also showcased some, several of our customers' new players which are base on our STMP 3600 showing support for XM Connect-and-Play, video games, Windows CE and a Linux operating system. Other demos included our Avalon hard drive player reference design, SigmaTel high definition audio CODEC implementations, the PR818 and the Sansung Miniket product line, as well as printer and digital photo frame solutions from our imaging systems group. The STMP3600 is in full production and we expect to see significant design wins hitting the market in first quarter 2006. This technology provides the highest level of innovation and the best performance on the market, allowing for portable multimedia devices to offer functionality. The STMP3600 also supports Microsoft's PlaysForSure initiative. Additionally, as the market continues to move to video and other forms of multimedia, much of which is DRN protected content, the need for more processing power and device functionality becomes even more important and even more of a competitive advantage. We have already trained more than 180 engineers from 48 device manufacturers on the STMP3600 technology. SigmaTel's highly innovative wireless architecture provides an industry-leading platform for wireless features. We are expanding wireless strategy beyond the FM tuner and VFIR, and have plans to apply it to other wireless applications in the future. We're considering its application for technologies such as Bluetooth, WiFi, ultra wide band, DMB, DBBH, and GPS and We have identified licensing sources for these technologies and are unlikely to need further acquisitions to support our technology road map. We're also seeing continued growth from our integrated components group. Based on current trends, the group is well positioned to significantly increase its revenue in 2006. Sony continues to expand the implementation of its sound reality technology across its VAIO desktop and notebook product lines using SigmaTel solutions. Our high definition audio CODEC product line remains closely aligned to the new high definition audio standards being driven by Intel and Microsoft. Our imaging groups are also on track for a strong 2006. The West Coast imaging center continues to win portable digital camera designs that will be arriving in the U.S. early this year. The team is playing an integral role in developing new technologies as SigmaTel expands its focus to support video functionality across multiple types of portable multimedia devices. Additionally, the imaging systems group launched its new STDC3000 at the wireless symposium last week. STDC3000 is targeted at the color laser printer and multi-function printer markets. We are receiving positive feedback from customers on our position and technology in these markets. Our intellectual property strategy was also a big focus in 2005. We were successful in expanding strong patent portfolio in the United States and even more significantly, in Europe and Asia, specifically China. The ITC case against Actions Semiconductor is proceeding, and we expect to have a ruling by March. The licensing and IP strategy that we announced at the beginning of January is designed to protect our customers and their investment in our intellectual property. This is the first time that one company has sole ownership of seminal Moon-Hwang patents. In combination with our other patents, we have initiated a licensing program for designers and manufacturers of MP3 players that are not using a SigmaTel Sock. Our primary IP strategy to convince customers to use SigmaTel solutions because we have the best features across multiple price points, we have competitive pricing and they should not want to waste time on other chips that could lead to distracting legal entanglements. Before I hand it off to Ross to discuss the financial results, I'd like to make a few comments about the fourth quarter. Revenue came in at the low end of our guidance range provided in October, primarily due to supply constraints for NAND flash memory. Our customers saw a limited supply in the higher capacities, such as 512MB and 1GB and above, during the quarter. Even though supply may still not be as completely sufficient to meet demand in the first part of 2006, the additional capacity at Micron, Finix, and others, as well as a renewed demand for hard drives shouldn't help mitigate this issue in the future. We feel confident that we have positioned the company with superior products, IP, and international sales, marketing and support infrastructure to enable our customers to sell superior products. And now I would like to turn the discussion over to Ross so he can cover the financial results for the full year and fourth quarter of 2005. Thanks, Ron. Revenues for the full year 2005 were $324.5 million, an increase of 67% compared to fiscal year 2004. We maintained corporate gross margin above 54% for the year. Pro forma net income for 2005 was $49.2 million or $1.30 per diluted share, down from pro forma net income in 2004 of $55.2 million or $1.46 per diluted share, a decline of 11%. The bottom line was impacted by our continued investment in R&D resources and our international expansion, costs associated with the product and revenue diversification achieved through our acquisitions of Protocom Corporation and Oasis Semiconductor, and an increased tax rate in 2005 as our NOLs were utilized during 2004. We also incurred $7.3 million in litigation expense during 2005 to protect our IP. This had EPS impact $0.13 for the year. Revenues for the fourth quarter 2005 increased 4% to $82 million from $78.6 million in the fourth quarter of 2004. Sequentially, revenues increased 12% from $73.5 million in the third quarter of 2005. Revenues from portable SoCs, including our new STFM product, targeting the portable digital audio clear market were approximately 85% of total fourth quarter revenues. Revenues audio CODECs where approximately 8% of total fourth quarter revenues, and revenues attributable to our recent acquisitions were approximately 7% of total fourth quarter revenues. Gross margin for the fourth quarter was 52% on a GAAP basis while pro forma gross margin was 53%. On improvement sequentially as expected but it declined from the 55% we recorded in the fourth quarter of 2004. Amortization of developed technologies from acquired companies is included in the GAAP gross margin. Operating expenses in the quarter were $37.9 million or 46% of revenues, which included R&D 27% and SG&A at 19% of revenues. Including operating expenses was $500,000 per deferred stock-based compensation and $700,000 for in process R&D and amortization of intangibles related to acquisitions. We incurred approximately $2.9 million in litigation costs during the quarter related to Actions Semiconductor. The litigation costs alone had a $0.05 per diluted share impact on our EPS during the quarter. Excluding deferred stock-based compensation, in-process R&D, and amortization of intangibles from acquisitions, our pro forma adjusted net income for the fourth quarter or 2005 $6 million, which represents $0.16 per diluted share. Under GAAP, we reported net income for the fourth quarter of 2005 of $4.6 million or $0.12 per diluted share. The effective income tax rate for the fourth quarter was approximately 12% so the effective income tax rate for the full year was 41%. The reconciling charges are set forward in the reconciliation of GAAP to non-GAAP financial measures table provided in the Press Release. SigmaTel had cash, cash equivalents and short-term investments of $118.9 million as of December 31, 2005. Inventory as of December 31 represents, approximately, 50 days of stock, which is well below our stated goal of 60 days. And now I'll turn it back over to Ron to go over closing comments and guidance for the first quarter 2006. Thanks, Ross. The first quarter of 2006 continues to be a period of transition for SigmaTel. As previously stated, we believe our acquisitions will show significant benefits in the second half of 2006. We expect a product transition from the 35xx family to the 36xx family, could negatively impact the our first quarter results as customers seek to minimize 35xx purchases while transitioning to the 36xx products. These factors, a normal seasonality of 20 to 30% lower revenue from the preceding fourth quarter are factored into our first quarter guidance. We expect first quarter 2006 revenues to be in the range of 52 to $60 million. Gross margin percent should be approximately 52% on a pro forma basis, plus or minus a couple of points, and we expect diluted pro forma loss per share to be in the range of $0.01 to $0.08. GAAP diluted loss per share should be in the range of $0.10 to $0.17. Deferred stock-based compensation under FAS 123R is expected to be $2.4 million after tax or $0.06 per diluted share. We expect, we believe 2005 has positioned SigmaTel for a future of growth and diversification. We are confident that we have brought together a foundation of technologies and professionals that strengthen our future. The expansion and diversification in 2005 were essential for SigmaTel to be able to maintain its competitive advantage and become diversified mixed-signal and multi-media semiconductor company, with compelling product road maps. Our ability to execute to our business strategy will determine our success in 2006. Beyond the first quarter, we expect significant incremental high-end portable Sock business to positively impact results. Our current view of the second half of 2006 is very positive. The memory supply issue in MP3 player market should be alleviated with a shift to video-targeted hard drive players, and with the easing of flash supply constraints due to much greater NAND flash supply. Because of our confidence in our future we're announcing a $30 million stock repurchase plan that will be initiated this week. We feel confident that we have positioned the company to achieve our long term goals. Our focus on execution and integration across all product segments will help us achieve the maximum value for our customers and shareholders. Now we would like to open the call to questions from callers. Operator? Yes, good afternoon. I guess, maybe we could just start by looking at the outlook here, down 30% or so sequentially, is that mostly, did a unit decline, are there pricing considerations that play there as well? Primarily units. Okay. And did it generally across your customer base or are there several customers that are contributing to that decline disproportionally? Okay. As far as looking at the channel today, I mean, inventories exiting your Q3 were very lean, what did it look like exiting Q4? We believe the inventories are quite low now. Also, we believe that the, our customer base is hesitant to buy high-cost flash to go ahead and replenish at this point in time. And so that a lot of the flash is in the market, supply that is in the market, is still going to SDMMC cards to fulfill the needs in those areas. The supply issue with NAND flash shows a concern to our customers in the pricing level, so it's pretty much is impacting across all customers. Okay. And maybe, just, if you could, provide a little more color on the 3600. Talk generally about the adoption or acceptance you're seeing from the customers? Maybe you can talk about the number of design wins. How do you expect that to roll out throughout the year and will it mirror some of the prior product rollouts like the 3500? The 3600, in the first quarter, is actually going to be constrained, we believe, because of getting it into production. Normally there's ramp up that occurs and you need to go through and expand your task capabilities and the substrate's availability on our 3600 is a bit of a limitation in the first quarter. So, if 3600 is somewhere around 5 to 10% of our revenue in the first quarter, that would be something that we'd see as reasonable. Growing rapidly in the second and third quarter and into the fourth quarter, that potentially, by the end of the year, by the fourth quarter, in MP3 area with the related STFM1000 could be 65 to 75% of our revenue. Okay. And, then, maybe just a comment on the FM tuner. Seems like you've gotten some units out the door there. What are your expectations for the full year, are you still sticking to your target as far as, I think you said in the ballpark of 60% penetration by year end? We feel very good about that. The response from our customer base is very positive. We have our SDK out there in numerous customers' hands in order to facilitate designs, and the feedback from the sales force is extremely positive on this product, and so we're actually bundling it with a couple of our products, with our MP3 products, and that program is getting a lot of attraction in the marketplace. And so we feel very good about the FM tuner product, and see no reason why it should not be a continuing success for us. Have you seen some of the top sheer customers adopt a that? I guess what we've been hearing in the channels is some of the distributors are mid-sized customers are a little bit more reluctant. Have you had success with the second and third tier players with the FM tuner? That's my last question, thank you. Sure, the second and third tier customers are the ones that need a little bit more hand-holding and so, and they actually use the public casing designs in China. And, so, we actually have, I believe, eight designs, publication designs in the market for general purpose use, going to 14 in the, in February time frame. So that the second and third tier customers can get PCBs with the, our MP3 chip and the FM tuner mounted on to those PCBs and put them into the public casing products that they have, and so we're doing this in order to facilitate growth in the second and third tier market, and we feel very good about the reaction, at those price points. Hi. Can you just give us a sense of how you expect gross margins and OpEx to trend throughout the rest of the year, beyond Q1. We typically don't give guidance beyond 90 days, but we've stated long term model from a margin perspective is 52.5%, and I would see no reason why we couldn't be at that point for the year. And, from an operating expense perspective, I believe we stated as late as, as early as December of last year, that we see the operating expense level kind of staying where it is for now. In terms of dollars. And in addition to that, I would add that for the first time we're recognizing stock-based compensation expense under FAS 123R and so we're seeing 2.8 million or $2.9 million Q1; 2.4 net of tax, and that's reasonable number to use in each quarter for 2006. Okay, great. And it sounds like the acquisitions are doing pretty well at 7% of revenue. Can you give us a sense of what percent of revenue you expect them in to be Q1? The general visibility right now is a little bit impacted by Chinese New Year. We got very positive feedback prior to Chinese New Year. We'll feel a lot better about the quarter after the, hopefully will feel a lot better about the quarter after the Chinese New Years is over. I'll be going to Asia for two weeks starting the middle of the month and be spending time there. All the feedback prior to the Chinese New Year was very positive, we just want to make sure that it all changes into orders and into product design wins that will support our revenue. Great. And then I know you guys don't give too much in terms of long term guidance, but how do you feel about your, as you look at '06, the relative percentage of revenue from HDD versus flash-based MP3 players for you guys? We actually see that the market may be shifting back some to hard drives, and since we, when we went public and since we went public we were one of the people saying that this is going to move to flash, it's going to move to flash, and people didn't agree and now I think the market has moved to flash and we think there is a good chance it could be moving back on a percentage basis. The increase in video, the requirements for video, are much larger file sizes and we expect music services, music video services, like MTV, and URGE MTV music service will result in people wanting hard drive players so that they can store their video and their music on those players. And so moving to 10GB 1 inch hard drive players could be a significant movement in the second half of the year. So we would expect that the market should be 20 to 25% hard drive, probably, in the second half of the year. It's probably shrunk significantly from that now, 10 to 15%, but it should be moving back to hard drive as we go through the year. Okay. Great. And you guys talked about some flash shortages out there, are you having problems getting wafers from the foundries or have you seen any price hikes or is that supply okay? The supply from the foundries are fine, we have no operational issues in that area and so we've had no issues with our supply chain at all in the last quarter or nor do we see one going into the first quarter. We believe that we'll start seeing it then. The biggest impact will be in the second half of the year. We've seen samples 70 nanometers from various fabs and we've smoke tested those and they seemed to work quite well, so we're pretty confident that these large new players in this market should be able to ramp with very good product, starting in second quarter with significant impact in third and fourth quarter. With respect to the gross margin, you guided to about 52% for Q1 and then long term model, Ross, is 52.5%. So, what's going to drive, how should we be looking at the gross margin throughout '06? Is it 3600 being a bigger percentage of the mix? Or the FM tuners? How do we see some gross margin improvement throughout '06? I would say the answer to that question is, we expect to see gross margin improvement from both products, both 3600 and the STFM product. At this point we're expecting both of those products to be at or above the long term margin target. And, so we expect beginning as early at second quarter at the 3600 really begins to ramp, we should see improvement in margin and as we go into the seasonally strong period of year, the strength in 3600 and FM should continue. Okay. So as that relates to ASPs, what kind of decline did you see in the quarter? And how are you seeing that going forward? I think in the, where we saw the biggest decline in our value segment market, and it was much less than it was from a, with regards to the third quarter, when you compared to third quarter, I would say it was about 5% in the fourth quarter. And, as we look out into the first quarter I would expect something similar to that. I would say it was probably about 40% value line; 60% main stream and high end, from a units perspective. I'm sorry, excuse me, from a revenue perspective. Okay. And then one last question, just on the new acquisitions, Protocom and Oasis, it looks like maybe it was a little bit better in the quarter, going forward you talked about 20 million, roughly, for Protocom and 40 million for Oasis, are those kind of targets in line at this point? I would say at this point, those are not unreasonable. I think there are design wins that would begin ramping in the second half of the year, and those design wins ramping are key to us hitting the numbers. So there is some risk. But, at this point I think those numbers aren't unreasonable. Hi, good afternoon, everyone. Just a couple, I guess, maintenance questions real quick. Is there any way to get a pro forma expense line items? Like the gross margin and R&D from you guys? Okay. Then, I notice on your balance sheet that accrued liabilities shot up pretty dramatically. In fact, more than your cash increase. Can you give us color there? Yes, have increased from the third quarter and it's primarily due to the timing of inventory purchases and payments to our vendor. Then, on the, just looking at, I know you don't want to give guidance for 2006 revenue, but, obviously, you're taking, a significant decline in unit volume for the first quarter, what's your sense of your unit volume opportunity in the MP3 space as you go forward this year? I mean, is there a growth opportunity over '04? Over '05? Yes. We think that the market in 2004 is extremely positive. We think the market is growing strongly in 2004. And we believe we have programs in place at the low end portion of the market, with the FM tuner and with our 35xx product, and to hold market share and potentially gain mark the share at the high end portion of the market with our 3600 product. So, if we can maintain market share throughout 2006 as we were, as we had in 2005, and the market continues to grow, we'll be very happy with that result. And we hope to have, we expect that we have plans in place to achieve those results. I'll go ahead and reference our forward-looking guidance since we only give 90 days out typically. But, for the full year at this point we feel very good about the continued growth in the market and our position in all segments of the market. Okay. And then one last question. You talk a lot about the IP strategy and some of the licensing initiatives. Have we seen any significant licensing revenue yet hit the P&L? There is two different licensing elements. One is licensing our technology for sale at the low end of the market. And we had some tens of thousands of dollars, I believe, in the fourth quarter. We're continuing to look at expanding that program with additional partners, and feel good about our positioning and how that helps us at the low end portion of the market. The IP licensing strategy has just been implemented after we acquired Moon-Hwang patents, and we have sent letters to various companies. We've gotten very positive feedback from our sales force as far as the impact with that program. We actually received an unexpected benefit from the, our IP strategy in that it turns out that there's some significant number of customers in China that do not want the name in the papers, or publicized and so they would prefer not to be involved in litigation of any sort. So we have been receiving positive feedback from a good number of customers that in the past we have not had, and we hope that this program continues to benefit the company going forward. And should we think of licensing revenue as being, growing to be a material part of the model this year? Or is it still going to be kind of mixed in with the rest of the numbers? I would mix it in with the rest of the numbers because our primary objective is convince our customer base and customers that we have not, or potential customers, let's call it potential customers, that they are better off buying our product rather than having to pay licensing fees. And so, if customers buy our products, then inherent in the product is the licensing fee, and so then it wouldn't be broken out at all. Ross, can you give us a break out of the 10% customers? Yes. In the fourth quarter, Creative 15 to 16% and GMI about 17%. GMI. Okay. So, the guidance, the current quarter guidance, that doesn't anticipate any meaningful dislocation in any customer as compared to Q4? No, no dislocation. We're looking at, only dislocation we maybe experience as some of our key customers are moving to the 3600, they're cutting back on what they're buying of 3500. People want to move to the 3600 because of its heightened features, and so we expected that that is causing a perturbation in the first quarter, and that, but it should set the stage for strength in the rest of the year. All right. So no anticipated loss of any meaningful sockets that are contributing a part of revs or a meaningful part of revs or anything like that? No. Okay, and then, just, Ron, can you speak a little bit about, you touched briefly on the ITC matter with Actions. It seems like your guidance, and tell me if I'm wrong here, that the guidance on a unit basis implies some market share loss in the low end flash to the likes of Actions. Is that an accurate statement for the current quarter? Or is the entire market going to be down, like you're suggesting, 30% on a unit basis quarter-over-quarter? Thanks. We expect, except for Apple, of course, which has acquired NAND flash, significant amount of NAND flash supply, that the rest of the market should be down in the 20 to 30% range or maybe 15 to 20% range. But, right around 20% we think is a reasonable number. The very low end portion of the market may not be down as much as the general market because there's more supply of flash in the smaller capacities. 128MB and 256MB is what's typically in the lower cost players sold in China and other regions, and those are more generally available. So that may help, at the very low end portion of market, prop up that market a little bit more than the mainstream portion of the market where flash is more constrained. You guys, just still trying to get my hands around the first quarter guidance. I know you said there were a couple of components, seasonality and then this sort of product transition as folks ramp down the 3500, I was just wondering if you might be able to quantify what you think is seasonal and how much of an impact you think you might be having from the 3500 to 3600 transition? Well, I think 20 to 25% is definitely, would be seen as the seasonal impact. And the rest would be the transitions between the 3500 and the 3600. And so the portion 3600, I assume that you think you'll make that back up as you ramp that, in the second, third, fourth quarter? Okay. Can you talk about the price differential, maybe on a percentage basis, between the 3600 and the 3500, seems like pricing, especially at the low end, has been aggressive now. Actions is going to be coming more into the mainstream with some new products it sounds like first half of this year, so trying to get a sense is you ramp 3600, what kind of price relief you might get from the introduction of that product into the high volume? Okay. Okay. Great. And then finally, I guess, one for Ross. It sounds like you've got a lot of things going on the licensing program. Seems like right now it may be more friendly or at least not to the litigation stage, but can you walk us through, I mean, at some point it sounds like litigation expenses may kick back up to the extent you have to actually file lawsuits to protect your IP? Well, think that's possible. I think, in our Q1 guidance I would say we're seeing litigation costs come down. I think I referenced, we spent $2.9 million in the fourth quarter on litigation. We're see about half that for Q1. I think as you think about litigation in countries like China, it is possible that the cost could be much lower than at the ITC here in the United States. So I think we will incur litigation costs but I don't expect them to be at or near the levels we saw in Q4. Hi guys, this is actually Dan Moris calling for Rick. A couple of questions. You touched earlier on fourth quarter break-out between value and mainstream being 40/60. Just wondering what your expectations are for that split through '06? Well, I think initially it will continue at that rate, maybe the value segment's a bit higher Q1 as the 3600 ramps. But I would say that with the FM tuner strategy we're deploying, and with the IP strategy that we have, I think our share in the value segment can remain where it is; if not, maybe inch up. And so, I think that mix is not unreasonable for the balance of the year. Well, Samsung introduced its first 3600-based design at CES. And there's several other customers that we're dealing are designing the products in for various store brands around the world, our relationship with some of the leading ODMs in the world are very strong, and those ODMs are designing on 3600 end. So the other name brand products out there, we let those customers make their announcements of when they're coming to market. Again, it's their rollout plan. We don't want them in the position of having overhang because people are waiting on their next generation, 3600 base player that could Osborne-ize their, the products that are in the market already. Good afternoon. This is Jim Schnieder for Craig. Thanks for taking the question. First of all a question on the adoption of the 3600. Walking around at CES it seems like there was a number of new high end MP3 players introduced. Can you talk about, for the sockets, where you guys may not be participating, what some of the key or customer challenges are in the adoption of that platform? Sure. There's some leading ODMs in the markets that have products for other customers that we have been talking to and they're very positive about the 3600. We hope that the 3600 is very successful this year. All of feedback is that it's the best product in the market. We need to develop the software and deliver the software features that the market needs. But right now, the feedback is that nobody has a product that matches us on features, on hardware features, on our ability to have FM tuner with the product, with the battery life. Our ability to have 200MHz processing capability. There's just not a competition out there right now. So, we feel that we're in good position to be successful at the high end portion of the market. And as long as we hit our deliverables with our software development, et cetera, we'll be in very strong shape as far as going into the second quarter and second half of the year. I see. So, for the products that might be introduced in the first half of the year, for example, like the SanDisk, Samsung Player, is the 3600 not quite ready for mass production on that scale? That was not available for mass production when that product was originally being designed. So, that's certainly an opportunity for us to expand our design wins capability, and it is one of the things that we'll be attempting to achieve as we go forward. Okay, thanks. And secondly, with respect to OpEx growth in '06, I think you said actually dollars would be flat, but at the current clip, it seems on track to be turning a little bit past that. Can you talk about any kind of areas where you would see reductions either in the litigation expansions or in headcount reductions in '06? Well, I think that when I talk about remaining flat to Q4, obviously, Q4 we didn't have FAS 123R option expense so my reference to "flat" would not have included that non-cash stock comp charge, but I think if you were to take that out our view is given what we're seeing right now, our OpEx structure is in place. We made significant investments in 2005. Thos investments should be paying off during 2006. But as we look out beyond our 90 days of guidance, I think for just, for several reasons we expect the non-cash stock-based comp charges, our OpEx is to be flat. Hey. Just a couple of quick questions here. For the ASP that you mentioned, down 5% for Q1, is that including FM tuner? No. That was on our core portable Sock products, our MP3 products, our STFM we wouldn't expect price erosion that quickly. In fact, that should help add back into the silicon content into a given player, so if we get the design wins and the mix that we're expecting with STFM1000, we should actually increase silicon content significantly in MP3 players in the first quarter and moving throughout 2006. No, it's sub $2. Depending on the customer it can be significantly lower than that. We're actually selling it on a bundled basis, also. I think the competition is somewhere around $1.75 to $1.80. We want to be positioned below the competition. But the amount below the competition we really don't want to say because if we do then that'll give our customer as starting point for price negotiations. Okay. Another question here is, we talk and spend a lot of time on the MP3 side of things, should we expect season declines in all of the other businesses as well? In Q1? I think that's a fair characterization. I think it's probably a little less in our audio CODEC business, but in the rest of our businesses, like our new acquired business, our West Coast imaging system and East Coast imaging systems groups, I would say that's the normal season kind of seasonality in Q1 is what we'll see. Okay. And lastly on the operating side you mentioned that in the previous question, that it would be flat, including stock comp. Is that all, of stock comp, is it all in operating expenses or there's some goes into that as well? There will be the amortization of acquired developed technology that will go forward for a period of time, probably two to three years. And I said in Q4 that amount was about $780,000. Hi, Ross. Hi, Ron. Several different questions. First is about the rollout of the 3600. You mentioned that there were some, it sounded like production inhibitors in Q1 which comes as a bit of a surprise given that I thought most of that, the kinks had been ironed out in Q4. Can you talk a little bit more about that? Well, it's not a kink, as far as testing or our assembly houses or any of that, it's just the normal process when we bring a new product to market is that we don't build all the product up front until we're certain that it has passed all of its qualifications and that the substrates that are needed meet all of the requirements of the product. And so, with any new product you would typically have a learning curve, product ramp up and then go ahead and, as that product ramps up, have a greater capacity once it is proven through production. So it's at the stage now of having past all of its qualifications and so we're placing, we've placed orders on the fab, in a prudent manner. The demand is actually higher than what we had originally expected. If we had ordered more wafers we would have been able to achieve higher quantities, if we had ordered more substrates, it's just that the pick up on the 3600 and transition to the 3600 is happening faster than what we'd expected. So it's not a production issue at all, it's a question of forecasting the mix, and the fact that the 3600 is such a compelling product, that the market is moving to it faster than what we had expected. Okay. I'll ask a question again, then. Not the same question, but a question that's been asked several times before and then picking up on what you just said about the demand being higher than expected for the 3600, I think most of us, can't speak for everyone, but most of us are a bit perplexed, because we haven't seen the design wins, we haven't seen the level of activity in any expressed form regarding the 3600 uptake. Is there any way that you can provide some more color on how the 3600 is rolling out? And it just, the impression I'm left with is that it's more of a Q2 material impact than Q1. So, okay, so, we mentioned Samsung adopting the product, and there're other customers out there that have adopted that, as we have said, we cannot preannounce their products in the marketplace. We think some of the ODMs are having some significant design wins and we're getting very positive feedback from them. And so the training numbers we mentioned before, 180 engineers have already been trained on our SDK, and 48 different companies. And so just that type of interest in our product is, we think, is a clear indication of how it, how the product should ramp going forward. So, we think that's a clear leading indicator and one of the reasons we included that in our script was to point out how many people are getting trained on this product. And so, in our ODMs, people that know our ODMs are free to talk to them about how positive they are about the 3600 to confirm the quality of the product. And so we feel very good about the 3600 and the ramp up and success, we believe, will be seen as we go forward. Okay. Could you talk a little bit more, then, about the software time line that you referenced in the, with regard to the SDK and rolling that out? We had the initial SDK release in October of last year. More robust release with more NAND flash and others capabilities in with our release 4.2 in December. And we'll have our SDK coming with PlaysForSure capability 2.0 in the first quarter. So, that's one of the things that our customers are wanting is the SDK that has the PlaysForSure 2.0 capabilities in it, and that will be rolling out this, in February. Okay. Thanks, Ron. And one final question, and that is: Can you provide any details about the reaction to the IP strategy and how it differs in Europe versus Asia? Yes. We've actually had at least one significant customer in Europe switch over to SigmaTel because they do not want their supply chain disrupted. So the fact that they know that this licensing program is going on in China is, has had a significant impact. And so we have had at least one customer switchover to SigmaTel and others that we expect to switch over to SigmaTel based on the initial feedback. Hi, thanks for taking a follow-up here. I guess, if I could squeeze in two quick questions. One: The Rio acquisition you made a couple months back was very interesting, but we haven't really seen any follow-through on terms of a reference design coming from that group. I was wondering if you could update that effort. And then, the 48 OEMs you talked about being trained on 3600 platform, could you just give us a comparison number for the 3500? Sure. The, at the CES, actually I'm a little surprised at the comment about not seeing the reference designs from our Cambridge team because the Avalon, what we call our Avalon reference design at CES, we've had numerous customers talk to us about getting it into production as soon as possible, so that product is being shown, and has been received very well as far as feedback from our customers. So that is definitely a positive for us going into 2006. And then the other question is as far as number of customers that have SDK training, we have over 300 designs in the market, I believe that our customer base is, probably, somewhere around 150. That number is a little bit fluid because the MP3 industry has been consolidating in China. If, we can get to 100, 75 to 100 that would be great. But it's the old 80/20 rule. 80% of the market is probably going to be satisfied by those 48, who have already been trained. And the other ones will want to receive training and be able to compete against the products that are coming to market that are based on the 3600. One of the benefits of getting this product out and having a Samsung out there using it on their players is that people see that it's the leading technology in the marketplace. When you get that type of endorsement from a very large semiconductor company, a very sophisticated consumer electronics company, it shows that the quality of the technology. And so we think the halo effect of that, and other products that you'll see rolling out, will be very positive for us going forward. But the Avalon, the customer products that you talked about, with those be shipping this quarters? Or what's the time frame? It could be very end of Q1 and beginning of Q2. So their products could actually be, their products could shipping in early Q2, which would mean that they would have to buy products from us in the first quarter. Just to finish up with the comments on the 3600 and the Avalon. We will be at CeBIT, our representatives will be there, and we'll be showing these products at CeBIT. So we would encourage, and we expect that you'll be able to see CeBIT, numerous samples or examples from the various ODMs in the marketplace. Sorry, Ross. That's okay. Thanks, Ron. During the first quarter, Ron Edgerton will be presenting at the Weisel Technology Conference at the Fairmont Hotel San Francisco on February 8th at 8:00 a.m Pacific time. This presentation will simulcast and webcast, audio only, and available on our website for 30 days following the presentation at the conference. We expect to report our first quarter earnings on April 25, 2006 at 3:30 p.m. Central time. On April 26, 2006 at 10:00 a.m., SigmaTel will hold its annual shareholders' meeting at Laguna Gloria Art Museum in Austin, Texas. This completes our fourth quarter earnings call. If you have other questions please contact Debbie Laudermilk, David Donoven or myself, Ross Goolsby. As a reminder, information regarding a replay of the call will be available on our website later this evening. Thank you.

EarningCall_233961

Here’s the entire text of the prepared remarks from China Medical Technologies’ (ticker: CMED) 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 and welcome ladies and gentlemen to the September China Medical Technologies Earnings Conference Call. My name is Audrey 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 this conference. If at any time during the call, you require assistance press “*” followed by “0” and an operator will be more than happy to assist you. As a reminder ladies and gentlemen, this conference is being recorded for replay purposes. I’d now like to turn the call over to Tip Fleming, China Medical Investor Relations Advisor at Christensen. You may proceed. Hello everyone. Thank you for joining us today. I’m pleased to welcome you at China Medical’s second quarter earnings conference call for their 2005 fiscal year. China Medical announced its second quarter results yesterday morning in US. You may find a copy of the press release in the company’s website at www.chinameditech.com. Today, your speakers will be Charles Zhu, China Medical’s VP, and Sam Tsang, China Medical’s CFO. After they finish their prepared remarks, they will be available to answer your questions. Before we continue, please bear with me as I take you through their Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such the results maybe materially different from the views expressed today. The number of potential risks and uncertainties are outlined in our public filings with the US Securities and Exchange Commission. China Medical does not undertake any obligation update, any forward-looking statements expect this required under applicable law. As a reminder, this call is being recorded and replay of this conference call will be available via webcast on China Medical’s website. Now, let me to turn over the call to Charles Zhu. Charles? Thank you, Tip. Hello everyone and welcome. Thank you for joining us on our first earnings call. The July to September period marked the second quarter of our fiscal year, and it’s our first quarter as a public company following our successful IPO (indiscernible). Overall, we are pleased with our results and our continued growth momentum. Top line revenues increased to 81.6% year-on-year, and 43.3% from the previous quarter to RMB88.1 million. And net income increased 51.3% and 42.1% respectively to RMB42.9 million. For the High Intensity Focused Ultrasound or our HIFU business, we continued to penetrate the China market and further extending our leadership in the market. We’re adding a greater number of sound product distributors to improve our coverage. In second quarter, we increased the number of distributors from 10 to 16 and are targeting to have about 30 by the end of March 2006. Most of these distributors have the experience in selling big budget medical equipment such as CT and MRI scanners. We believe these distributors will help drive our revenue growth and also reduce our risk of relying on a more number of dealers. We continue to invest inaugurating our current product. In the past quarter, our R&D team has successfully developed a non-invasive temperature monitoring technology using ultrasound. The prototype was demonstrated at the World Congress of Ultrasound in Beijing, where the test results were validated against the measurement by invasive thermal sensor. We are trying to apply this novel technology to clinical procedures by end of this year. We’re also investing more resources on sales and marketing events to promote the awareness of HIFU technology in both systemic and clinical communities. In the past quarter, we attempted a series oncology product (indiscernible) and attended conferences both in China and abroad. Overall, our HIFU technology have become more and more trusted, accepted globally and has attracted more new ventures into the market, including one of the largest medical equipment company in the world. We believe it’s good to be improving the exposure of such a emerging technology and into uptake the new player, in several years to complete the regulatory approval processes. There is currently very little penetration in market and we’re in a very strong position to acquire complementary technology and businesses to capitalize on our first mover advantage. We are closely studying the development on HIFU technology not only in tumor applications but also in cardiovascular and diagnostic applications. For the Enhanced Chemiluminescence Immunoassay or the ECLIA-IVD product and their reagents business, we are on target to develop more reagents to be used with our analyzers. Since our IPO, we have added 10 reagents to the 27 types which are in different stages of getting final regulatory approval. We expect some of the key reagents will bring in higher recurring revenue including tests for hepatitis B. We’ve also obtained 5 purified proteins out of the 7 HIV proteins in collaboration with China CDP. We expect to finish the development of all 7 proteins within 6 months, which will be used as the key raw material to develop HIV test reagents. In terms of sales and marketing, we increased the number of ECLIA distributors from 20 in the previous quarter to 40 and we expect the number to be about 50 by the end of March 2006. Although our strategies to sell our current semi automatic system to maintain small type hospitals, we have managed to successfully penetrate some larger hospitals because of our competitiveness in pricing and customer service quality. These experiences have helped us to be more prepared to compete with the imported products in high end-markets when our fully automated systems is introduced in the second half of 2006. At this time, I would like to turn the call over to Sam, so he can give you an overview of our second quarter financials. Sam? Thank you Charles and welcome everyone. Our financial performance in the second quarter demonstrates our strong growth. Net revenues were up 81.6% year-over-year and 43.3% sequentially to RMB88.1 million, or US$10.9 million. Net income was up 61.3% year-over-year, and 42.1% sequentially to RMB42.9 million or US$5.3 million. I would like to focus my comments on the major line items of our income statement. I have mentioned our strong growth in the net revenues. We are operating 2 quarter late. One is, HIFU and the other is ECLIA. Revenue from our HIFU was up 45.9% year-over-year and 61.4% sequentially, to RMB59.4 million or US$7.3 million. The increase in the HIFU sales was due to the increased awareness and acceptance of our HIFU technology in the medical community in China. It was also, what we saw of typical seasonal practice, due to the timing of capital spending at Chinese hospitals during the calendar year. Historically, our June quarter tends to be the richest quarter for HIFU sales. The September quarter is better followed by the March quarter. The December quarter is usually our best quarter. Therefore, you can see that the sequential increase of 61.4% is higher than the year-over-year increase of 45.9%. After the introduction of our ECLIA product September last year, we believe this seasonal impact on our quarterly results will be reviewed. Revenue from our ECLIA was not more than 2 times year-over-year and 16.2% sequentially to RMB28.7 million or US$3.6 million. So, significantly, year-over-year growth for our ECLIA business was due to the expansion of our distribution network and the significant increase in the sales of our ECLIA product, following their introduction September last year. The sequential growth was primarily generated by the recurring revenue from the sales of our ECLIA reagent kits that are used with our ECLIA equipment. Moving on, our gross margin decreased slightly to 69.8% this quarter from about 71.1% last quarter. The slight decrease was due primarily through the sales mix and the incremental raw material cost. Our operating expenses more than double, year-over-year and were up 45.3% sequentially to RMB12.5 million or US$1.5 million, it’s the increases were, due primary with the substantial addition of staff; in relation to the expansion of our operations, following the acquisition of our ECLIA technology in August 2004. Our headcount almost doubled to about 270 people. The commencement of our FDA project in the US for the HIFU will increase promotional activities for our product and additional expenses after the public listing of our company, all contributed to the increases in operating expenses. Our operating expenses as a percentage of revenue increased to 14.2% this quarter. Our interest income increase substantially, to RMB1.1 million of US$0.1 million for this quarter. This was primarily due to the interest income that was generated from the net profits received from our IPO. The income tax expense increased to RMB7.2 million or US$0.9 million for this quarter. The increase was due primarily to our higher taxable income for this quarter. Our effective tax rate for this quarter was 14.4%. Our December income tax rate is 15%. Also, we saw of every thing I’ll just mentioned, net income was up 61.3% year-over-year and increased 42.1% sequentially to RMB42.9 million or US$5.3 million. Well, let’s turn to our operating cash flow and cash position. Our cash flow from operating activities was RMB64.1 million or US$7.9 million for this quarter. At September 30, 2005, our cash and cash equivalents were RMB771.8 million or US$95.4 million. For our projection, we are projecting net revenues for the financial, for the fiscal year ending March 31, 2006, to fall between RMB360 million and RMB400 million or US$44.5 million and US$49.4 million. We believe our net income for this fiscal year will be between RMB175 million and RMB190 million or US$21.6 million and US$23.5 million. 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_233962

Here’s the entire text of the prepared remarks from Fiserv’s (ticker: FISV) 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 and welcome to the FIserv earnings conference calls for the third quarter of 2005. We currently have 85 participants on this call and all participants will be able to listen only until the question-and-answer session begins following the presentation. At the request of FIserv today's call is being recorded and also is being broadcast live over the Internet. The call is expected to last 45 minutes. You may disconnect from the call at any time. Now I would like to introduce the Fiserv management team in attendance on this call. Les Muma, President and CEO, Norm Balthasar, Senior Executive Vice President and Chief Operating Officer, Kenneth Jensen, Senior Executive Vice President and Chief Financial Officer, and Tom Hirsch, Senior Vice President and Controller. At this time I'd like to turn the conference over to Mr. Les Muma. Good morning. Welcome to Fiserv's third quarter earnings conference call. We appreciate your participation and look forward to presenting our third quarter results and answering your questions. Before we start, Fiserv would like to state that the Company may make forward-looking statements regarding 2005 and 2006 earnings and revenue targets, sales pipelines, and acquisition prospects during the course of this conference call. Such statements are covered by the Safe Harbor included in the Private Securities Litigation Reform Act of 1995. These statements may differ from actual results and are subject to a number of factors. Please refer to our third quarter earnings release for a discussion of these factors and non-GAAP financial measures discussed in this conference call. Our earnings release is accessible on our website, www.fiserv.com. Fiserv posted diluted earnings of $0.58 per share for continuing operations in the third quarter. That included an income tax benefit of $0.03 per share. We have raised our estimated 2005 full-year diluted earnings to $2.28 to $2.31 per share excluding a realized gain of $0.14 per share in the first quarter, from the sale of our Fiserv stock. Our financial segments internal revenue growth rate continues in the mid single digits at 6% for the first nine months of 2005 compared to 2% in the prior year. Our BillMatrix acquisition was completed on August 12th. This acquisition further solidifies our extensive payment capabilities and gives Fiserv a significant foothold in the fast growing area of expedited electronic bill payment. We are excited about the future potential of electronic bill payment and look forward to working with the innovative BillMatrix management team. Fiserv is taking an important step towards further globalization of its operations through the formation of a new business, Fiserv Global Services. While Fiserv currently conducts business in 60 countries, this new initiative will further globalize our delivery capabilities in our business unit and client in the range of technology and processing disciplines and expand our market into other parts of the world not currently served by Fiserv. In October we hired Arun Maraswori as President of Fiserv Global Services and as a member of our management committee. Arun was previously the President of CFC's India operation, which he grew to nearly 4,000 employees. We are pleased to have someone of Arun's extensive experience in growing this type of business on our management team. Before we open the lines for questions I would reiterate that our performance through the third quarter of 2005 was strong and that looking forward our management team continues to focus on both acquisitions and organic growth and providing long-term shareholders returns. We will now open the line 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_233963

Ladies and gentlemen, thank you for standing by and welcome to the AMD's Q4 '05 Earnings Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and the instructions will be given at that time. If you should require assistance during the call, please press ‘*’, then ‘0’ on your touchtone phone. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Mike Hasse. Please go ahead, sir. Thank you. And welcome to AMD's fourth quarter 2005 earnings year end conference call. Our participants today are Hector Ruiz, our Chairman of the Board, President, and CEO; Bob Rivet, our Chief Financial Officer; and Henri Richard, our Executive Vice President of Worldwide Sales and Marketing. This call is a live broadcast and will be replayed at amd.com and streetevents.com. The telephone replay number is 800-475-6701. Outside of the United States, the number is 320-365-3844. The access code for both is 808058. A telephone replay will be available for the next 10 business days starting at 7 p.m. Pacific Time tonight. In addition I would like to call your attention that our Q1 2006 earnings time will begin at the close of Friday, March 10. Before we begin today's call, I would like to caution everyone that we will be making forward-looking statements about Management's expectations. Investors are cautioned that our forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from our current expectations as set forth in the forward-looking statements. Semi-conductor industry is generally volatile and market conditions are particularly difficult to forecast. Because our actual results may differ materially from our plans and expectations today, I encourage you to review our filings with the SEC where we discuss in detail, our business and risk factors, setting forth information that would cause actual results to differ materially from those in our forward-looking statements. You will find detailed discussions in our most recent SEC filings, including AMD's annual report on Form 10-K for the year ended December 25th, 2004 and AMD's quarterly report on Form 10-Q for the quarter ended September 25th, 2005. With that, I'll turn over to Hector Ruiz. Thank you, Mike. Our fourth quarter results underscore the undeniable fact that the AMD growth engine is gathering momentum. The strong approach of our execution led the Company to records in total revenues, micro processor units and revenues across each of our server, mobile and desktop product lines, as well as micro processor gross margin and operating income. Our solid ASP improvement confirms the rise of AMD as a premium brand for both consumer and commercial customers alike. And our JV expansion successfully completed a public offering. Review to the timely capital infusion for that business and allow an AMD to bring increasing focus to the growth opportunity in front us. In our micro processor business, we experienced almost 80% year on year growth in what continues to be the largest quarter of the seasonal cycle. We continue our strong projectory in the enterprise for the superior performance for the characteristics of the AMD Opteron platform drive unprecedented opportunities for our customers and partners. In the fourth quarter, we were pleased to add AIG, Albertson's, Clear Channel, and Nissan Motor Company, among others to our expanded list of Global 2000 companies and their subsidiaries who have adopted AMD 64 technology. As of today, 90% of the top 100, and more than 45% of the top 500 companies on the force Global 2000 use AMD base solutions. We're thrilled to report that eBay is bolstering the search functionality on its site with hundreds of Sun's new AMD Opteron processor-based Sunfire x64 servers. EBay will combine the power and performance of the Solaris operating system running on AMD Opteron processors for better performance and energy efficiency. AMD's Opteron model 880 with true Dual Core technology continues to lead the industry in TPCC benchmark performance for 4P servers. Customer momentum in the commercial segment continued with the launch of the HP dx5150 clients and new blade server offerings from HP and Fujitsu Siemens. We're also pleased that Supermicro announced general availability of a broad wide range of AMD Opteron based server and motherboard blade solutions. Our mobile business continues to gain steam, reflected by all time record revenue in the quarter and continued growth in global demands for AMD's Turion 64 mobile processor platform. We are pleased to report over 100 platforms based on AMD's Turion 64 processors are either shipping or in development worldwide. AMD continues to show strong progress in key high growth markets, particularly China, one of our largest and fastest growing markets. We were honored to announce broader option of our platform by Tsinghua Tongfang China’s third largest PC maker. In addition, we licensed our low power AMD Geode GX2 processor to the esteemed Ministry of Science and Technology and to Peking University for use in developing new technologies to support primary education in rural China. Our AMD64 base products continue to earn industry recognition, receiving 20 more awards in the fourth quarter, including the Tech Innovator Award from VARBusiness, Gear of the Year recognition by Maximum PC and acknowledgement as one of the hot products of the year by EDN Magazine. Each of these awards was for our best-in-class AMD64 dual core technology, the only industry standard microprocessor family designed from the ground up for multi-core computing. On the manufacturing side, our Dresden team continues it excellent performance record, both in terms of the continued operation of our World Class FAB 30, as well as in ramping our new state of the art 300mm FAB 36, which more than doubles our capacity in the next 3 years. By all measures, the fourth quarter was outstanding, characterized by accelerating customer and end user adoption of our AMD64 platform micro-server mobile and desktop product lines, the successful public offering of our expansion business, flawless manufacturing execution in our FAB 30 and the grand opening of our new FAB 36 facility in Dresden, Germany, as well. Superb execution of our financial strategy, with a reduction of debt and the expansion of our cash balances. It was a spectacular end to a year of reinvention for AMD, providing once again a healthy foundation for continued growth and success in 2006. Now let me turn it over to Bob to review the results for the quarter, as well as the outlook. Thanks, Hector. AMD had an excellent quarter including: Continuing market share gains in server, mobile and desktop markets; continued growing demand within the commercial sector for not only AMD-based server offerings, but for AMD based mobile and desk top offerings as well; improvements to the balance sheet, including a reduction in debt of $639 million, and year-end cash and short-term investment balances increasing to $1.8 billion and the successful IPO expansion which closed on December 21st. And financially, we reported another very strong operating quarter. Before I review the operating statement detail, let me mention that the completion of the Spansion Flash Memory IPO requires several changes to our reporting. So I want to take some time to help you understand both our reported results and the way model our business going forward. So in addition to our GAAP consolidated financials, I will also discuss non-GAAP results. For your convenience, we have included within our press release a new table which reconciles AMD going forward to the consolidated GAAP figures. I would like to take a few moments to walk you through this table labeled 1.6 in the press release. The first column shows our fourth quarter GAAP results including total consolidated sales, of $1.84 billion, up 45% from the fourth quarter of last year and up 21% compared to the third quarter of 2005. Net income was $96 million or $0.21 per share. This data includes 86 days of Spansion's results before the IPO, and also a non-cash charge of $110 million. The third column shows non-GAAP results, excluding the $110 million non-cash, loss on ownership dilution in Spansion, which results in an EPS of $0.45. Column 4 shows the impact of the Memory segment in Spansion on each line of AMD's financial statements, which totals a negative impact on net income of $39 million. The fifth column reclassifies the net impact of the $39 million from each line item to one line item. Excluding this line, the Company's operating results are presented in a forum that will be more consistent with the presentation of future results. Fourth quarter sales of $1.35 billion, a 34% increase compared to the third quarter of 2005 and a 78% increase compared to the fourth quarter of 2004. Gross margin was 57%. SG&A was 18% of sales; R&D was 19% of sales. Operating income was $268 million. The Memory segment of Spansion on net income was a negative $39 million. Net income for the quarter is still 205 million or $0.45 per share. Switching to the business segment highlights, CPG sales were $1.31 billion, another new record, and a 79% increase over the same period a year ago. We also grow 35 percentage points for the third quarter of this year. Our strong micro processor sales indicate that we once again took share across the server, mobile and desktop product offerings, particularly in the performance segment, as indicated by our ASP growth. Unit sales in the quarter increased by 27% quarter-on-quarter, and we saw a 6% improvement in average selling price. Server, mobile, and desktop processor sales each grew significantly compared to the third quarter of 2005. Mobile processor sales growth was driven by increased shipments of AMD Turion 64 processors. Server and desktop sales growth were driven in particular by increased customer adoption of Dual Core AMD processors. Geographically, processor sales were especially strong in North America, Europe and Greater China; and distribution in consumer and commercial channels are reporting very lean AMD inventories worldwide. CPG's operating income of $287 million established another new record in the quarter, up again from the record levels of the third quarter of 2005. Included within CPG's results are the bonus and profit sharing accruals that had previously been included in the all other segment. With the deconsolidation of Spansion, we have reclassified and confirmed these expenses into the specific business segments that earned them, primarily CPG. Net income impact to the Memory segment and Spansion at AMD was a negative $39 million, as I mentioned. Again, Column 5 provides an outline of how AMD would have looked in the fourth quarter when you exclude the Memory segment results and all Spansion related charges. Going forward, you will see a line item called "Equity and Net Income of Subsidiary" below the "Interest, Income and Expense" lines reflecting our current 37.9% ownership in Spansion results. Turning to the balance sheet, the year end balance sheet reflects the deconsolidation of Spansion into the line item "Investment and Subsidiaries." Our cash balance was $1.8 billion up $452 million compared with the third quarter. This increase was due to cash flow from operations and loan pay offs from Spansion. Debt was reduced by $639 million compared with the third quarter. This includes the $201 million convertible debt conversion and approximately $440 million of Spansion debt moving off our balance sheet. AMD's debt to capital ratio finished the year at 28%, good progress toward our target of 20%. Fourth quarter capital expenditures, excluding the Memory business was 250 million -- $250 million for AMD. Inventory declined as a result of the Spansion IPO and a $61 million reduction in AMD processor's inventory. Now I would like to discuss the outlook. AMD's outlook statement for the first quarter and full year of 2006 are based on current expectations and do not include Spansion. The following statements are forward-looking, and actual results could differ materially depending on market conditions. AMD expects first quarter 2006 sales to be flat to down slightly compared to the 1.35 billion in the fourth quarter of 2005. If achieved, this would approach a 70% increase from -- from comparable sales in the first quarter of 2005. Operating expenses, which include R&D and SG&A will increase by approximately 6% compared with the $506 million in the fourth quarter of 2005. Stock option expense in the first quarter will be approximately $16 million at the current share price. And finally, a reminder, the line "Equity and Net Income of Subsidiary" should be modeled using our current Spansion ownership of 37.9% multiplied by your estimate of Spansion's quarterly net income going forward. For the full year 2006, you should be modeling capital expenditures of approximately $1.4 billion; depreciation and amortization will be approximately $825 million; the tax rate within a 10 to 15% range; and I also wanted to call your attention that we will have an extra week in our fiscal 2006, which we will take in the second quarter of this year. In summary, 2005 was a very good year. We made significant strides in taking market share, improving our operating results and strengthening the balance sheet. We believe that we are very well positioned for 2006. And with that, I'll hand it back to Hector. Thank you, Bob. We began 2006 with more momentum and higher quality momentum than at any other time in our history. Revenue is not just growing, it is accelerating. Platform adoption has never been stronger particularly among the world's most respected OEMs and industry partners. Our marketing capabilities are now recognized as world class and our global footprint is getting stronger every day. The industry is helping. Customers and partners that have elected to partner with AMD are seeing the opportunities that come from providing the freedom of choice to their customers. We have seized the mantle of the technology leadership in our industry and are continuing to distance ourselves from the competition. In our world class Dresden operation, the new ramp of our new FAB 36 is going extremely well. Production started late last year; yields are outstanding and beginning to approach the 530 levels. Production shipments are expected to begin before the end of this quarter. We are methodically marching toward the substantial expansion of our capacity in preparation for a significant sustainable increase in worldwide market share. We have not peaked; this is just another stage in our climb to greatness. We are poised and ready to gain even more share. And consistent with the revenue and profitable growth engine that we have become; we have positioned ourselves to grow at least at twice the rate of the industry. Once again I want to thank each and every AMD employee for remaining major focused on the task of creating the world's most innovative semiconductor products and technologies. We remain highly motivated by the prospects of helping to create a marketplace that is better for our customers, partners and end users worldwide, and we are very encouraged that our industry is showing a strong desire to break free from the artificial competitive barriers that have constrained all of us to date. Thank you. And I would like now to turn it over to Mike Haase for the Question & Answer session. And ladies and gentlemen, if you would like to ask a question, please press star then 1 on your touchtone phone. You are hear a tone indicating you've been placed in the queue. You may remove yourself from queue by pressing the pound key. And if you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star then 1 at this time. And our first question is from the line of Michael Masdea with Credit Suisse. Please go ahead. Yes, thanks a lot. I've just done the math; I'm trying to get a handle on how much market share you put in the quarter. Any estimates from your end? It looks like it's a lot more than your competitor might have thought? Well, we have the numbers. A year ago, we had 9.6%; a quarter ago, we had 11.9%, and it looks like we had 15.3%. Great and then given the concerns about the liquid demands from your customers, your competitors, any concerns that you might have gotten spill over demand which is not going to sustain into the new year based on your familiarity with your design? Yes. At the end of the year, obviously there are some cancellations from your competitor. They talked about some chipset shortages. Do you think there's any chance you got some incremental demand are because of those shortages that might not be there in the coming quarters? Mike, our customers have to plan their production weeks and weeks ahead. You know, you don't turn things like this on the dime. Our designs are different. Our products are differentiated. There's no doubt that there seems to be production struggles with our competitor; but again, I don't think it affected our quarter. Great. Last question, just on the ASP side, obviously, it's pretty clear you get instance in the service side, but on the desktop and mobile side you seem to be on par in like for like offerings with Intel. Is it just a mix issue? And how do you continue to move up that mix? Well, we're continuing to improve our mix, obviously. Our server business is the fastest growing part of our business; our mobile business, the second growing part, but we also grew our desktop business very significantly, and our ASP increase is both the combination of a better mix, but also some ASP improvement in certain segments. And I won't give you more granularity than that. Hey, just a couple of questions related to, you know, market share over the next year. I'm sure you listened to Intel's conference call last night, where they pretty confidently stated that they're going to gain some share back and I think cited performance provide cost and some reasons for that. So have you noticed signs of Intel getting more aggressive at all in pricing; your pricing is going up. Would it have gone up more without some action from them? That's the first part of the question, and then the second would be, you know, just can you give us more color on your processor road map in '07 so that we can get a bit more look into how we should think about your competitiveness in the major product areas next year? Well, Adam, let my try to answer part of the question, and when I finish Henri can do some of the other piece. First of all, the market continues to be, as it always has been, very competitive. Anyone that thinks that pricing competition doesn't exist, you know, is dreaming. It is very competitive, but as some of you analysts have already concluded that we are very competitive in cost, and therefore, for us it's the cost issue not the one that drives us. The second part is we're dealing with a much complex and broader range than we've ever had in the history of the microprocessor industry. So on one end you have the very high performance, high volume, feature-rich products in the server space, in the gaming space, etc., where, you know, frankly people want those features. They want that performance and they are looking for that particular thing in those products. It's not an issue of pricing. As a matter of fact, we know for a fact in some cases where some customers have turned down practically in pricing products because they don't need them. They really want the performance, the features, etc. that we are offering. On the other hand when you go back to the other extreme, when you get to the value platform from the very low end of this space, which is more commoditized, the pricings are low enough, currently there's very little room for price improvement. So I think we're dealing with a scenario where, as I stated before on previous calls, you know, it's a demand for our products that is driving what we see as the healthy outlook for us going forward. As far as what we'll do in 2006 and beyond, we stated in our previous analyst meetings, that we have a business model that we believe that in the 2008 or 9 timeframe we should aim to achieve 25 to 30% of the market. We still have that as our goal and as a business model, and we believe we're steadily making progress, quarter by quarter by quarter. From intents of giving you any more granularity than that, that's about as best do, and can tell you. On our products road map, before I turn it over to Henri for any additional comments, I would just like to say that we rely heavily on the input of our customers. Our customers tell us whether the road maps we have are appropriate for them, and we're getting very strong inputs and strong encouragement, that if we stay in our road maps and execute in 2006, we have an excellent outlook to continue to grow and gain share as we did in 2005. Okay, you know, if you get, as you know, work toward achieving this goal, 25, 30% share, can the third party sort of chipset vendors produce enough to accompany that magnitude of volume three or four years from now or is there going to some increasing demand on you to produce more chipsets internally? You know, we are open to any idea; first of all, we must do everything we can to meet the needs of our customers and that is in terms of value, performance, cost, etc. But what drives us is total cost of ownership, and in doing so we are working very closely with partners worldwide to make sure we're as intimately linked in our planning and anticipation of these challenges going forward, and I think the fourth quarter is a good example of a job that we do reasonably well. We had a very stronger quarter, a stronger quarter than probably most people anticipated, and in fact they are a little healthier than we expected. And we were able to manage with our partners to meet the needs and demands of our customers. That process will continue. We intend to get better at it and yes, it's a challenge. We're doing well; we're not planning on that being a stumbling block. Okay, so there's no need to think more about that as you bring on a lot of capacity as a way to sort of fill up extra capacity down the line, or that's just beyond your current thinking? Good afternoon, first of all congratulation for the team on this phenomenal job, I guess I had a couple of questions, one, Bob you gave depreciation for the year. Can you provide guidance for Q1 depreciation and ramp that how it ramps as you go through the year at this point? It's fairly linear spread. I'd say probably, you know, I'll call it maybe 10% more in the first half of the year than the second half of the year, but not a lot of difference, Mark. We have got it between the roll off and the roll on. There's not a lot of change in that number. Okay, great. And then obviously your mix is continuing to richen. Can you give us a sense as you look at your gross margin you had in the quarter of 57%; as you bring in that incremental depreciation and as yet as your continues to gets richer; what's your sense of how gross margins trend as you go through the year? Well, as I stated before, you know, there's more of a challenge in the first half of the year than in the second half of the year, I'll call it have a lot of capacity and capability; but obviously we have to ramp into it. Depreciation comes on by tool, not by wafer start. And so we'll have a little bit of challenge in the first half of the year, less in the second half of the year; but we think, as you said, the ASP can offset that issue as we continue to improve our ASP quarter-on-quarter as we've demonstrated for many, many quarters in a row. But I would say the challenge is more upfront right now in the first quarter as we're just starting to see output from that facility. Okay, very good. And just as one housekeeping item, I just wanted to make sure I understood the moving parts in the P&L, if I look at Spansion's results versus what you reported on a consolidated basis through the 20th, is my math correct that basically they did 104 million of revenue in the last 5 days of the quarter? Okay, very good. And then just lastly, maybe for Hector, as you are ramping up FAB 36, and sounds great that things are going well there, when is your sort of expectation as to seen we can see wafer starts on a basis at FAB 36 cross over that of FAB 30? Mark, you know, I haven't done the math. I would be glad to step back and think about it and give you an answer, but off the top of my head, I don't have that math in front of me. Hi, congratulations, guys. I don't think I've ever seen competitive momentum shift like this, so congratulations. Two questions, one just following up on what Mark said, you shouldn't be recognizing Spansion revenue on your P&L dollar-for-dollar the same as Spansion recognizes it, right? Because of the way the selling concession works. Is that true? You know, historically, it was exactly the same. I mean if their quarter and our quarter were exactly and we owned them for the whole quarter, there was no difference between the two. But as I, under the previous arrangement, they were reselling, they were selling Flash to you, and then you would resell it at…. There was no commission there. We moved the sales force. That happens early on in the process, but as through most of '05 we actually moved the compete sales force into Spansion so that discounting, what it was paying for went away. Okay. Thank you. And then the second thing, particularly looking at your mobile products, I was wondering if I can get a bit of a sense as to how that road map plays out in '06, and particularly when 65 nanometer products hit. As you know, we have an introduction of our Dual Core in the mobile space in conjunction with the move to our platform to DDR 2. This will happen in the middle of the year. Okay. Useful, and Bob, is there any way you could be persuaded with some kind of data around those gross margin comments? Thank you for tearing up the end demand versus market share question that Intel brought up last night. Clearly, you know, phenomenon market momentum in Q4, again. I hear you are getting 5 percentage points, so are you able to comment on whether without naming specific names, there were particular customers where you had very significant increases in your penetration in Q4 versus Q3? Ben, across the board our customers are increasingly showing interest in your products, even if there was one customer that was very strong, we couldn't give you that. Okay. Other question I wanted to ask, maybe for Bob, given your success, you know, are eating up those NOLs very quickly, it is that at what point now do you think you'll revert more to sort of 30% or so tax rate, please? Well it, you know, no surprise, we continue to chew those up as we continue to knock down very healthy profit levels. As I've indicated, the tax rate will be sub 30% in the 10 to 15 range next year, this year, I'm sorry, in 2006. 2007 obviously, based on our expectations, will start getting; we'll have to move it up again. Maybe with a little luck even this year. But to me it's '07 is when we'll start popping above the 15% level. Okay, great. And maybe the last question, you guys had sort of indicated even at the end of Q2 that you weren't necessarily swimming in capacity, so it was just something that you were keeping an eye on; and yet you had these two, you know, huge quarters. What have you been able to, given that that the industry has been tightening up, been able to do just to, you know, to make that not be an issue? Well, there are a number of things going, we have a phenomenon organization in manufacturing that continues to look for ways to be more productive, and you know, we have been able to increase productivity in our factory, frankly to an incredible level, the factory is just running incredibly well. We have been able to also squeeze more; move an area out of the factories by doing more very creative, clever arrangement of the equipment, etc. Probably the transition will complete, completion of the transition to 90 nanometer was very helpful, and the yields are high. The yields remain at phenomenal levels. And as I've stated before, all of the leading industries that are benchmarked by some of them continue to show that our manufacturing is world class. A think of lot of that has allowed to have continued plan increase in unit capability. Going forward, our plans continue of course to emphasize capacity, productivity, etc; but in addition to that, this year, we have the addition of FAB 36, which is very significant, and the beginning of our foundry, which will start producing product in the second half of the year or revenue; and that will also contribute to our capacity. Thanks, and again, congrats on the quarter. I was wondering if you could just, Henri, if maybe you could remind us of what the increases in capacity are now targeted to be through the year, and as you bring on Fab 36, and to what extent you are seeing visibility in terms of your order flow to fill that capacity. First, you know, let me make some comments in general about silicon, and Henri can comment about demand. We are ramping Fab 36 as rapidly as we can. In addition to that, we are bringing on board the capability of our foundry for the second half of the year. Those things will complete. In terms of the contribution they make, the Fab 36 will meet full capacity sometime in the 2008 time frame, and we believe that in the current mix, remember one of the things we have to deal with, the mix changes. Someday we'll be building hard core and that will have an impact on units. But again in today's mix, I can see our unit capability being able to grow, you know, 40% up this year. And continue to go up, so that when we get to the 2008 time frame, we're talking about a 100 million-unit capability for us. So you kind of grow line in between them to be perfect with function of mix and demand. But those are our plans. And it sounds that as you broaden out your region to customers, that your visibility of fulfilling that 40% unit is improving, or how can you shake that? Tim, there's two factors that influence our visibility into the business. First, we're increasingly deriving a larger portion of our revenue from Q1 OEM. We continue to have a very strong channel organization, but ours represents a larger portion of our revenue. Secondly, our commercial business is growing very quickly, and we have a pipeline in place that allows us to know not only what we're going to do next quarter, but also further down the year. So the additional visibility that these two items give us is obviously helping us have a much better grip on what the business looks like. If I could just ask one thing for Bob, and that was just to clarify, on the bonus payments, it seems that they would have been fairly significant going into the fourth quarter, and perhaps less significant in a way in '06, given the planning that you have. Yes, I mean I'll get in personal with you. I'm sure every year your bonus targets get reset. We're no different than anybody. Clearly this year we believe, and I think we're demonstrating based upon what's happened throughout the year and in the fourth quarter in particular, the team did an outstanding job, and they deserve to be rewarded. But of course, the bogies get reset as we start '06. Thanks. If we were to look into the first quarter of the year, I wonder if you can give us a sense of, or maybe rank is a better way to think about it, where you think the opportunities are greatest, in service, desktop or notebook? And then maybe the same question for 2006. Well, clearly the server business is going continue to be our engine of growth. We have a lot of opportunities there. I'm not going elaborate on what our market share might be. We have to wait for Mercury Research and other analysts to give us their view but it's clear we have gained significant share in this fourth quarter and I think the momentum and as we've told you many times before, there's an underestimation in the market of the momentum of the Opteron platform and its adoption in Fortune 500 companies. And bear in mind that as we told you at the analyst meeting, we are going increase the number of platforms in the marketplace and broadening the spectrum of solutions based on the Opteron platform. So I think that's going continue to grow very quickly for us. Mobile, obviously is doing extremely well. That's driven by the fact that the market is growing; but also I think that increasingly customers are looking for differentiation and Turion 64 platforms provide that to them. But interestingly, we're also doing extremely well in desktop; and in particular; in the mainstream and high performance segment of it; where; you know, the supremacy of our Dual Core technology is clear and where the demand for the Athlon 64 X2 and the Athlon 64 FX continues to surprise us on the positive side. So for Q1, obviously across all of the segments, we are very positive. On the overall, year we still have an enormous opportunity on tap in my of the high-growth markets of the world. You know, we've have made great progress in China; but there's a lot of other places where we have plans to execute, and I feel that we have the right product mix and people in place to go and seize those opportunities. So I would say first quarter it's pretty much more of the same; for the rest of the year, expect to see us continue to show great progress in commercial and in high-growth markets. Okay. And I could, if you were sort of isolating your thoughts to the emerging markets, I wonder if you can give us a sense of the trends that you are seeing there in terms of emerging market mix; because, for example, in handsets, which is obviously, we're starting to see a lot more higher end models get adopted in emerging markets, you know, recently. I'm wondering if that's something we can also see in PC market. Well, actually, you know, that's really a very complex question, because the answer is emerging markets is unfortunately is not in homogeneous stream, it's very, very different. And an example that I can speak to that is very clear and obvious, is when you look at the emerging market growth in Latin America, as an example, and in Mexico, it's heavily influenced by global players, tier one customers who are very strongly present there. In Brazil, I mean, there are a lot of local players who are very strong also, and they're in where people refer to. So it's a very two different scenarios playing there. And then you have India, where frankly at this point in time, some of the strongest driving forces in India tend to be consumer oriented. So it's a country with a very strong appetite for the consumption of content for consumers, and there you're looking at a very different picture. The good news is that we see, when you add up all of those markets, you see a very healthy demand across a very broad spectrum of products which we offer. So we've very, feel very bullish about our ability to be able to serve those markets. So I think there are, but let me ask Henri to add something to that. I won't give you the region, but just to give you a vantage point, our largest improvement in AFC in percent was in one of the high-growth markets in the world; so there a clearly a lot of opportunities for AMD in the mainstream in the high performance segments in these markets. It so happens that in the past year, our marketing was our focus at those segments; also our lower-end products were sold in those markets, but we're finding great success in the positioning of our new Turion, Athlon 64 and Opteron brands. Very interesting. Just one last question, which is, you know, obviously you have Dual Core entering the market and the demand is starting to build. Maybe what your sense is as to how you view Dual Core versus Single Core and the relative level of interest that you are seeing in Dual Core chips. Well, clearly in server, you know, Dual Core is rapidly gaining traction and we expect that conversion to be almost complete by the end of 2006. In the science space, it's a little bit different. As we had a question a couple of calls ago where, you know, I made the point that it's really a software issue. It's not that people aren't interested in Dual Core, you are correct, there's a lot of growth in that space for us, but I think as applications come to the market and take advantage of the technology, then that will drive faster adoption than what we're seeing right now. Now, we have, you know, we happen to have both very high performance Single and Dual Core processors, and so our view may be skewed by the fact that we have the superior technology. Thank you. And our next question is from the line of Joann Feeney with Punk Ziegel & Company. Please go ahead. Good afternoon folks, and congratulations again. I just have a brief question, the growth that you project for 2006, you're saying you expect it to be at twice the interest rate. Now, clearly the achievements you've had in the second half of '05 would carry you well beyond those rates if you just kept that level of sales flat, so clearly you are looking at a projection based on your levels in the second half of '05. Is that a good place to start? Well, I think-- let's just be pretty open and transparent here. I think in a competitive space that is as strong as ours, where you have been incredibly, you know, brutal and monopolistic competitor versus one that's creative and innovative serving customer's needs, and to the market, I think that's pretty aggressive. And if we, you know, our intent is to work our buns off to beat those numbers; but I think for us to do anything more than that, frankly, I don't think makes any sense. In terms of the ramp-up over the course of '06. You know, you said you expect to increase yield pretty rapidly. I'm just wondering what levels you'll start at and how quickly you'll get to maximum yields. I think, if I understand the question right, let me just back up a little bit, when we moved from 250 nanometers to 180, it look us a certain amount of time to reach maturity in yields. Then when we went from 180 to 130, we were able to cut that in about half of that same time. Then when we went to 130 to 190, the time that it took to get there was significantly shorter. And our goal now as we go from 90 to 65, frankly, by the time we start shipping product we would like to be at mature yields. So that's almost like saying zero time. I know it's aggressive, and where I think our manufacturing team feels up to the challenge of stretching for such an aggressive ball. Thanks so much, and congratulations on the terrific execution again. I apologize for spending more time on such a basic issue, but I just want to make sure I understand this. You are talking about going double the market rate, and the number off of which you to grow double the market is that 3.9 billion that you break out which is the subtotal excluding the Memory segments? I think that whatever the number is for our business without the Memory segment, that is the basis of which we will grow at twice the market or better. Okay, so if I just work through that and I say roughly 3.9 billion, and if we assume PC markets grow 10, just assume ASPs are flat for now, that's 20% growth that would get do you about $4.7 billion. But you're already at 1.35, or if it's down a little bit in the first quarter as per your guidance, $1.3 billion. So what am I missing about the sequential expectations as we go throughout the year, then? I think it's very simple. And I think we intend, you know, underpromise and overperform. And you know, at this point in time we're confident and have a high confidence level that we will deliver at least to twice the market rate. Okay. And then final question for me is, if you look at your ASPs which are going higher, because of your excellent execution and product offering, and your competitor's ASPs, which are going lower, as the gap closes between your ASPs and their ASPs, what kind of impact do you have that has from a competitive standpoint in the marketplace? I go back to the point that we made earlier, is I think that we, it is a very competitive place. Our mix is improving, but the ASPs continue to go down with time because that's the nature of the beast. It is important to highlight that as we put pressure on the market, so that there is perhaps an operation of ASPs converging, I think the only people, the people that win are the customers, and the end user. And I think that will be healthy. I think healthy for everybody. Certainly healthy for us for sure. Thanks, guys. Most of my questions have been answered, just a few quickies. Can you give us CapEx guidance for '06? I guess I'm not prepared to do that. I mean, to me, we'll do this quarter at a time. To me, to some degree, we need to talk with based on the revenue expectation that takes place. So right now, I'm only prepared to give you first quarter guidance. I guess to put it another way, can we assume just a normal sequential wrap, nothing different in there? Unexpected, I guess? No. I mean, nothing unexpected. I mean, we will continue to increase our design, our engineering capabilities so that we can increase the number, our architecture for the future, the number of platforms, et cetera, et cetera. We will continue to make the appropriate investments in marketing to have the appropriate teams around the world to execute and acquire more customers. So, you know, to me we will continue, we like being in the lead, and we're going to continue to maintain the lead and invest appropriate. That's fine, and then can you give us a sense of what the rough mix was between server, desktop and laptop in Q4? No, we think we've been going very good down that way. The only thing I can server led the growth, followed by mobile, followed by desktop. Great, and last question, obviously you're capacity constrained. When do you think you guys will be able to catch up the demand and get a little more comfortable? First of all, we haven't said that we're capacity constrained and we don't believe we are. We think we are planning very tightly with our customers, and we're executing well. That's why you see our inventories being fairly lean, but we're executing. We did not have affect any customer during in the quarter. And we don't plan to in 2006. So we're balancing things reasonably well. At the analyst meeting, you gave some targets for gross margin, R&D, and G&A for AMD prime. Given the outstanding performance in the quarter just finished, and congratulations on that are there any adjustments that you would want to make to some of the ranges on the line items? No. To me, you know, we put a lot of thought in that modeling, and our expectations. So to me we'll continue to try to execute to those ranges. So I would say no. There's no update. Okay, so the gross margins, the range you had given there was 51, 57, and you achieved that in the fourth quarter, but you still think that's the appropriate range for the out year? Yes. I mean, just to remind you of Fab 36, this giant facility starts production right now. So that's a large depreciation bill that needs to be absorbed to get cost to match output and revenue and cost to match; so to me it still is appropriate at this point in time that we will continue to, hopefully, you know, beat the numbers. But that's a decent range to live in. Very good. Others, also, you have reduced some debt recently, which I would imagine will effect the interest expense line. Can you give some guidance on what you expect to see, what we should be looking for interest income and interest expense as we go through the year? No, I think you can model it off of our balance sheet, you know, what's going to happen from there. And obviously, I will deploy excess cash to reduce debt on a continuous basis to focus in on the 20% debt to capital ratio. Okay. The options expense, can you give us some idea of the break down to COGS, R&D and SG&A, as it will go into the income statement? Yes, congratulations on excellent results. Does ASPs increase in all three segments, in desktop, mobile, and dual core, and can you give us some sense of the magnitude of the ASP within each of the three segments? Yes, that's a little bit too much granularity. They were either stable or increased in every one of the segments, and I'm not going to give more than that. Right now, obviously it's very dependent on stock price, but right now I would guess based on the current trading level of the stock, around 16 million for the quarter. Thank you for your question, and we'll go next to the line of Mike McConnell with Pacific Crest Securities. Your line is open. Thank you. I wanted to dig a little bit into the server space. Obviously, you've had a lot of success in the architectural front. I wanted to ask a couple of questions the interconnect, with Intel pushing out the cost common system interconnect, was curious what you're going to be doing with HyperTransport this year. You know, there has been some talk about a potential licensing deal. Is there something we should also think about this year that could help you further some drive market share gains on the server side? It is our desire on HyperTransport to continue to make it as open as possible, and make it independent in the industry, as it had been adopted by a number of folks. It continues to move in terms of improving the technology. You know, by next year, we'll be implementing HyperTransport 3, which is a third generation of product. It is, you know, an integral part of our road map and architecture, and will continue to get better. And as I said before, we have done a fairly open licensing approach to it and we'll continue to do so. Great, thanks for taking my question. First on the pricing, I understand that you said it was, it's always competitive. Did you say that Intel was being more aggressive than normal, or kind of, in your opinion, kind of in track with normal competitive pricing? Okay. And last question, you mentioned that the 65 nanometer yields were excellent. Can you help us understand what would potentially motivate a faster ramp of production silicon there? Is it just simply the yields getter better than you expected, or are there other constraints that lock it down to the original schedule that I think you have been articulating? May be let me just correct a perception. The ramp of FAB 36 is beginning at 90 nanometers, and will transition to 65 sometime towards the latter part of the year. The yields that I referred to as already approaching maturity were based on the 90 nanometers beginning of the ramp. Our 65-nanometer data, which is already coming out, looks very encouraging. Matter of fact, we have already microprocessor products build on 65 nanometer that are really looking as planned. Excellent at this point in time, and are confident that our ramp beginning the second half of the year will go well. It continues to get stronger and stronger. And what motivates the change from one node to the other, frankly, is that we able to meet our customer needs and demands are better as, and how rapidly we can make that transition. We focus really on features, performance, value that it brings to customer; and of course, cost is important and that also takes part of the equation. But at the top of the list, what is it that our customers want and need from us relative to the product. Thank you. Hoping you can review a couple of things I might have missed. First off, on the OpEx guidance for the first quarter, can you just repeat what you said earlier? From the 506 level, which is the last column on schedule 1.6 that we showed in the earnings release. So the recash number to exclude Spansion. Okay, and then could you repeat again, what you said earlier on inventories out in the channel and on your balance sheet as well? First, I'll start with on our balance sheet. We depleted inventories in the fourth quarter. So you know, I'll call it very good manufacturing execution, and inventories actually went down; and we believe based on all of our checks, whether it's OEM or distributors, our channels are very tight and lean in the channels. And lastly, any other granularity that you could give us, on the progress that you are making in corporate on the PC side, not on the server side, but on the corporate PC side? Well, you know if you, we always said our strategy was to penetrate the enterprise through a strong server offering, and we have delivered on that promise in 2005. Towards the end of the year, you saw some of our partners introducing client offerings for the enterprise. And you know, part of the positive upside in this fourth quarter was the result of acceleration to the penetration of our product offerings in Fortune 500 companies, but I'm not going to give you more detail than that. It's just, as we indicated at our Analyst Meeting, this is the focus of 2006, winning in the commercial space with clients. Absolutely. I've always been a believer that it's a matter of choice. The freedom of choice is what we need to be able to have our technology adopted by more customers around the world. Thank you. And our last question is going to be from the line of David Wong, representing A.G. Edwards. Please go ahead with your question. Great, thank you very much. Could you give us some idea of what percentage of your microprocessor, would there still be some of the FABs by the end of 2006? Thank you. And ladies and gentlemen, that does conclude our conference call for today. I'd like to thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.

EarningCall_233964

Good day ladies and gentlemen. We would like to welcome you to today’s Interland First Quarter Conference Call. Just a reminder that today’s call is being recorded and at this time I would like to turn the conference over to Mr. Peter Delgrosso, Senior VP Corporate Communications. Please go ahead. Thank you Delia. Good morning and welcome to Interland’s First Quarter Conference Call for the 2006 Fiscal Year. I am Peter Delgrosso, Senior Vice President of Corporate Communications for Interland. And with me on the call today are Jeff Stibel, President and Chief Executive Officer and Gonzalo Troncoso, Executive Vice President and Chief Financial Officer. Following prepared statements we will open the call for corrections, as a reminder to those of you who would like to listen to the call later, a webcast replay will be available at Interland.com under the investor relations section. Before we begin, I want to make sure everyone understands our reporting schedule moving forward. As previously announced Interland is moving from it’s past practice of reporting on a fiscal year ending August 31st to a conventional calendar reporting year beginning on January 1st, 2006. As a result the company will report financial results for the quarter ending November 30th, 2005 on this call and again for the fourth month transitional or sub period ending December 31st, 2005 roughly one month from today. The specific day and time of that call will be provided in the near future. During this conference call we may make projections and other forward looking statements. These forward looking statements include but are not limited to the ability to build a more efficient enterprise, grow the business, build a powerful world class brand, add revenue, ensure the consumer segment of the web hosting market and strike deals with leading industry players and other factors more particularly identified in the press release we issued today. Actual results may differ materially from those contained in the forward looking statements. Factors which could affect these forward looking statements that Interland does include but are not limited to the ability of the company to execute it’s plan for revenue growth and to build new orders and the impact of competition, these and other risks associated with Interland’s business are discussed in more detail in it’s public filings with the SEC including it’s annual report on Form 10-K, it’s quarterly report on Form 10-Q, and it’s current reports on Form 8-K and it’s proxy statements. This presentation may contain information such as EBITDA that is deemed to be a non-GAAP measure under Regulation G promulgated by the SEC. A reconciliation’s of these measures to the most directly comparable GAAP measures that is contained in the company’s press release which we issued this morning. Again that press release has been posted in the company’s website at Interland.com. Now I turn the call over to Jeff Stibel, President and CEO of Interland. Tucows Inc. (AMEX: TCX) is the largest Internet services provider for hosting companies and ISPs. Through 7,000 partners globally we provide millions of email boxes and manage over five million domains. Tucows remains one of the most popular download sites on the Internet. Tucows Inc. makes the Internet easier and more effective by reducing business complexity for our B2B and B2C customers as they acquire and deliver services to millions of Internet users around the world. Good morning and thank you for joining us on the quarterly earnings conference call. Before I begin I would like to announce some exciting news. Interland and CNET networks have entered into an agreement in which CNET Networks will transition it’s CNET Advantage, CNET Site Builder and ZDNet Site Builder customer who would like to continue their service on to Interland’s hosting platform. Interland has the opportunity to migrate approximately 5400 subscribers, which are primarily comprised of consumer websites over to its branded service. This agreement adds the complementary group of customers that will fit in well with our recent web.com consumer acquisition. Specific terms of the transactions are not available, however the deal was expected to become accretive to Interland within three months. Since the last earnings call in November we’ve made significant strides as a company to stabilize the business and position it for growth. While we are in the midst of the turnaround, the results to-date is encouraging. And points to the power of our business model and our leader position within in the industry. Since I joined in August 2005, I have spent the majority of my time restructuring Interland within my senior management team to clearly define the best task for the company. During this past quarter, we made considerable progress in forging important relationships with major industry players, which we will discuss further on this call. We stated in the past that our corporate goals going forward are to stabilize the business and financial results, diversify revenue streams based on what is quarterly business and grow our subscriber base and revenues. This has begun to take shape. As a result of our efforts during the quarter we shrunk our net loss by $3.6 million, improved EBITDA by $800,000 and reduced our stake for subscriber acquisition cost by 35%. This means we are marketing more effectively and spending dollars more efficiently. We feel confident that this can continue. Now let us get right into the highlights from the quarter. Gonzalo will touch upon on the specific financial results a little later on this call. But for now let us take a look at the milestones for the company at a high level. We are happy to announce that we signed an agreement with RH Donnelley, one of the largest yellow pages publishers and local online search companies in the United States to provide websites and hosting services to it’s customer base. RH Donnelley is a top publisher and is an excellent partner for Interland given its large sales force. While I cannot delve into the specifics of the agreement at this time we are pleased to be working with RHD and look forward to what the future holds. With this relationship in concert with our relationships Dex Media and Ambassador Yellow Pages, we’ve established a dominant position in this market. During the quarter we announced our acquisition of web.com including it’s very powerful domain name, it’s web hosting business comprises of approximately 9000 subscribers, it’s accredited registrar business and trade mark rights. This acquisition contains incredible amount of potential for the company. In addition to it’s tremendous branding opportunity this acquisition added additional revenues, significant online traffic and an entrance into the consumer segment of the web hosting market. As a result of this acquisition the company announced that it intended to change it’s corporate name to web.com Inc. The formal name change is expected to take place in the first half of 2006. The name is a strategic move designed to more clearly align the company with it’s branded line of business. Web services including websites, web hosting, web email and web marketing. The web.com Inc name firmly embraces the company’s mission of providing websites to the masses. We are very excited and look forward to making web.com into a world-class brand synonymous with all things web. On the employee front it has been a very productive quarter. As I stated on the last earnings call one of my first towards the business has been to round up my management team and to assess the employee base to identify the best corporate structure for the company. During the quarter, we had two significant hires to the company. We hired Vikas Rijsinghani as Chief Technology Officer. In that role Vikas will serve as a key member of my executive team and is responsible for overseeing all technology operations, development and product planning. Vikas was formally a founder and CTO of Vertical One and Proficient Networks and his extent of experience with creating and running technology organizations. He is already contributed significantly to the team in a short time at the company. Another important hire for the company is Judy Hackett as Chief Marketing Officer. Judy is responsible for overseeing all marketing for the company including the new rebrand of web.com. Judy has over 20 years of experience in strategic planning, marketing, advertising and brand development and has held key marketing roles at companies such as CareerBuilder, HeadHunter, Turner Broadcasting and numerous television station. Judy is rare bread that possess both a strategic and tactical mind. I’ve enjoyed working with her so far and look forward to what we can accomplish together. For these employee additions overall, Interland’s employee base stands at roughly 280 which is what we projected in the past. Before I turn it over to Gonzalo I wanted to talk about important metrics moving forward for investors to track. In addition to the standard financial reporting we intend to track four variables that we think are key to determining our success. First, subscriber acquisition cost or SAC. In order for a business to be successful we need to acquire new subscribers profitably. As I mentioned we’ve already reduced SAC by approximatey 35%. Second average revenue per user or ARPU, it is critically important that we track ARPU as we are in the subscription based business model. Eventhough we are comfortable with our current ARPU we are willing to have that number go down if we can grow subscriber base through lower ARPU efforts such as consumer web hosting, a specific business line we acquired in the web.com deal and have expanded on with CNET Networks. So as long as the margins and profits dictate. Third subscribers. Our revenue success will be a function of the number of subscribers we have times ARPU. We will work to optimize these variables moving forward. Lastly Churn. Churn will dictate whether our marketing model is sufficient on a gross basis to fuel subscriber growth. This will determine whether we are building or growing subscriber base. Life time value is also a function for churn. At present our low churn means customers staying with us for approximately 40 months. I now turn it over to Gonzalo Troncoso, our Chief Financial Officer. We continued to implement stringent financial controls during the quarter and began to see significant cost savings across the board as a result. During the quarter Interland moved closer to being EBITDA positive and significantly reduce our net loss. Now I would like to discuss the financial results for the past quarter. Total revenues were $12.1 million down from $20.6 million in the previous quarter, substantially fall of the revenue decline was due to the company’s sale of it’s dedicated server assets. You may remember that we had previously disclosed that revenues for the month of September were expected to be approximately $4 million. In line with our guidance we now reporting total revenues of $12.1 million. Net loss was $2.6 million or negative $0.16 per share and improvement of $3.6 million versus a net loss of $6.2 million or negated $0.38 per share in the previous quarter. This improvement of net loss is a clear indicator of our execution during this turnaround. EBITDA or earnings before interest, taxes, depreciation and amortization for the quarter was $1.3 million negated, an improvement of $800,000 from negated $2.1 million in the previous quarter. This $1.3 million negated EBITDA includes restructuring charges, net of one time gains of roughly $800,000 and stock based compensation of approximately $400,000. Again this EBITDA improvement is another example of business decisions we are making in order to turn the company around. Our cash and investment position which includes cash and cash equivalents of $23.3 million and restricted investments of $9.4 million was $32.7 million compared to $26.5 million an improvement of $6.2 million versus the previous quarter. As Jeff discussed previously we are going to report various key metrics that we feel will give investors added clarity into our business. I would like to touch upon them at this moment. One of the most critical metrics for any growing business is subscriber acquisition cost or SAC. This is how much we have to spend to bring the customer on board. Compared to last quarter our SAC decreased from $173 to $112, this is a 35% improvement. A 35% reduction in the amount of money we have to invest in order to attract a new customer. This metrics has a tremendous impact on our financial models. Another important metric is customer churn. We have managed to maintain industry leading churn rates. Infact during the quarter, our churn stood at about 2.3%, this is extremely important since churn is a critical element in the evaluation of our last time volume of our customer base. Street Math will tell us that a 2.3% churn equates to above 4 months of revenue from our customers. If we couple that with a low SAC we end up with a very strong business model. Additionally low churn rate are also a testament to our superior customer service experience and to the reliability of our services. Now eventhough SAC was reduced significantly our subscriber count remained at roughly 137,000 subscribers. This demonstrates the efficiency of our marketing efforts as opposed to adjust our ability to cut cost. And last ARPU. Average revenue per user remained flat at $27. And now I turn it back to Jeff for his final comments. As you can see Interland soon to be web.com has begun to deliver on it’s promise of turning around the company and positioning it for future success. We are encouraged with our progress to-date and look forward to the future. I want to end by highlighting some of the key milestones and accomplishments we’ve discussed on this call. 1) We have improved net loss by $3.6 million and EBITDA by $800,000. 2) We demonstrated the ability to appropriately align cost with the business. 3) We’ve improved our SAC and have continued to spend only where it makes sense to acquire these subscribers. 4) We established key relationships with RH Donnelley and Ambassador Yellow Pages and entered into a business agreement with CNET Networks. 5) We purchased web.com and have a plan in place to change our corporate name to Web.com Inc. 6) Last but not least we added top management talent including a Chief Technology Officer and Chief Marketing Officer. With that final note we are now ready to answer questions from the financial community. I guess a couple of questions, you gave as part of the info there, first can you shed some more color on your consumer strategy, there has been company that had recently gone to market that have pretty stronger evaluations relative to where you are trading site and primarily I think consumer oriented sub, can you talk about what channels you might leverage, you got some existing channels from prior management, that seems like they are pretty powerful there. And then I guess relatedly can you talk about the Qwestor (Ph) relationship Qwest Dex (ph) and any of these other legacy deals Verizon or whoever, where are we with any of those in terms of traction? Sure. I will pick the first piece on the consumer segment, what we are looking to do in terms of diversifying into new market is first. Again what we are looking at is what is core to Interland both from a technology standpoint and a market standpoint. So what we determined is that our hosting platform enables us to very competitively to enter into new markets. The consumer segment is clearly one of that. So everything that we are doing in terms of building a world class model business, small big in size business market place for web hosting websites, web marketing. We can leverage that to enter into the consumer market. We’ve made first inroads with the acquisition of web.com. That gives us roughly 99000 subscribers so it built us a base. The CNET transaction gets us upward of another 5600 subscribers as well and what we are going to look towards fueling is to try to aggressively grow that business model as we grow the small medium business multiplex because we believe that the underlying cost structure is negligible to enter into that market. That answers, hope your first question, Vik? Yeah. I guess so, on the consumer space, just a follow up is, you mentioned potential pricing pressure on ARPU, should we try, guys to may be pursue some sort of, giveaway a free site, techno model (ph) low end site, and try to up sell or do you not intend to go that route may be just try to do really low end product like five or ten bucks a month just to get somebody going? Great question. I think we are looking at the entire spectrum. As you know from my background I’ve done a lot of three model business and no but those can be done very cost effectively and profitably and we are not going to simply avoid a market for the model just because it’s special on ARPU. With remaining to break out ARPU between consumers free if we enter that space in business but we certainly won’t avoid just because it puts pressure on ARPU. We are looking for bottom line success and as you mentioned that they are lot of good opportunities to grow and I think that speaks to why evaluations are so high in some of these different consumer market places. Because work can be so strong and we believe that we can enter those markets very cost effectively because of our underlying core technology and possibly ultimately because the margin suffice. Let me speak to the second question as well. You asked what was happening with some of our legacy deals, specifically the two that you were mentioning with Dex Media and Verizon. I’ll speak about Verizon since we did mention that last quarter that Verizon’s counts what is going away, I believe that that deal was lost and it was announced in 2004. Again those customers have already started churn, we are not adding new ones and the migrations have already begun that would take a number of quarters before it is fully done. The important thing to note is that our subscriber count last quarter was, the quarter that we are announcing was roughly flat, it is opposed to the fact that we are not adding new Verizon customers and that they were churning out. It is not say that we’ll be able to keep up with that churn going forward as it is a significant base but we did do a strong job in terms of maintaining that. With Dex we still feel very strong about that relationship, it continues. And we continue to leverage it and to try to build that partnership going forward. As you know we also signed a deal with RH Donnelley and Ambassador, we are very excited that we have an independent relationship with RH Donnelley right now as well as the fact that we think that we have positioned ourselves in the yellow pages market to be the leading provider of websites and web services. I just wanted to follow up on the last question in terms of the consumer market place and who do you really see as your competitors here, is Go Daddy, Yahoo Small Business Networks Solutions, I just wanted to understand exactly where you are headed and what your strategy is relative to them? Sure. I can break that into a two part question because I think there are two distinct types of competitors in the web hosting or website business. On the one hand you have the very fragmented group of competitors. These are for the most part not well branded, the focus surely is not exclusively on price and they are the ones commoditizing the space. They are certainly competitor in that they are going after the same customer that we are going after. In part they believe that this product is a commodity. We don’t believe that this product is a commodity, we believe that what has happened is this product has been marketed as a technology. People are focused on megabytes and storage and bandwidth. We don’t intend to do that, we intend to focus on what the value is, for small businesses that is having a website and is online. For consumers it is the ability to post photos, to share the network, the potentially to communicate and blogs and email. So that is one area where it is certainly competitive to date, and we are certainly have competitors and you had mentioned a few of them. The other side of that is the people who are focused primarily on consumer hosting and had done a better job of marketing to the consumer. The Yahoos of the world, the Ebays of the world. And Microsoft has done this as well in the past. Each one of them have to have looked at hosting as the non-core market who could read that, but what they have done is, they have acquired a large of customers and those consumers, if it is Yahoo, Yahoo is a search mechanism, or a portal, if it is Ebay, has an option site, and they are trying to leverage the customer base to additional revenues through other vehicles, hosting being one of them. We look at them as both potential competitors but also potential partners, Earthlink is a good example of a company that has a large group of users focused primarily on the ISP markets. And as they look to expand, they moved into hosting. And as a result we actually have a partnership where they actually license some of our Site Builder technology. So we look at those as both opportunity as well as competitors. But in terms that the direction that we are headed we are looking to productize and to offer some real added significant value to both consumers and small business as opposed to just focusing on the price sensitive technology on at the market place. So on the consumer side, you just mentioned Blog, I mean, it’s movable site, the typecast is that sort of the service you will be looking to offer? Well. We are going to look at the wide spectrum, that the powerful thing about our model is that with 18 patents strong, and our core technology and infrastructure has allowed us to move very quickly and effectively into new markets such as what you described. So what we need to do is, we need to focus on what the consumer need is and we need to be looking forward in terms of having that visibility into the vision of what the next new consumer product is going to be. You never wanted to be head on with the large competitor, you want to find a niche and you want to find the next new solid opportunity. So as we move into this market place we’ve acquired a relatively large base. If you had the CNET networks, the transactions as well as web.com, it gives us a very robust base to start with. And then from there we are going to look to determine what the consumer needs are if we are going to enter those markets and we are going to do it in the most cost effective way we can, so that we make sure that we are not spending ahead of others. Great. One just final question is, on the web.com again you mentioned it a couple of times in terms of direct traffic, is there any way you can give us a numbers in terms of what kind of direct traffic are we talking about, the acquisition seemed a bit high from a revenue standpoint? Certainly, we weren’t just purchasing revenue in that case, we were purchasing direct traffic which we did say, was significant, we haven’t disclosed the specifics of that. At this point we just closed that transaction at the end of last year and the brand itself. We think it is going to enable us to be a much stronger company as a result. And gentlemen, we have no further questions in queue at this time, I would like to turn the conference back to over our panel for additional or closing remarks. Great Thank you. And thank you all for joining us on the earnings call. If anybody has any additional follow-up questions as always, feel free to call either myself, Gonzalo or Peter. Thank you all. Tucows Inc. (AMEX: TCX) is the largest Internet services provider for hosting companies and ISPs. Through 7,000 partners globally we provide millions of email boxes and manage over five million domains. Tucows remains one of the most popular download sites on the Internet. Tucows Inc. makes the Internet easier and more effective by reducing business complexity for our B2B and B2C customers as they acquire and deliver services to millions of Internet users around the world.

EarningCall_233965

Good day everyone and welcome to the Entergy Corporation’s Fourth Quarter 2005 Earnings Conference Call. Today’s call is being recorded. At this time for introductions and opening comments, I would like to turn the call over to the Investor Relations, Ms. Michele Lopiccolo. Please go ahead ma’am. Good morning and thank you for joining us. We’ll begin this morning with comments from our CFO, Leo Denault. After the Q&A session I will close with the applicable legal statements. Leo. Thank you Michele, and good morning. Let me begin by offering Wayne’s sincerest apologies for not being able to participate in the call this morning. Unfortunately he has completely lost his voice so he can’t address you today. Therefore I will attempt to incorporate some of what he was going to cover in my remarks, and between me and the rest of the management team we will do our best. I will begin then by providing you with an update of our recent accomplishments before moving into my typical explanation of quarterly and full year results, then I’ll close with the discussion of earnings guidance and I’ll try to put that guidance in the context of the goals we are working to achieve in ’06 and beyond. Before summarizing our recent accomplishments, I would like to start by reminding you where we were headed before the storms. In mid-summer we are actively executing on a major share repurchase program and we were evaluating another staple activity in the increase. Our utility was pursuing cost management initiatives in both healthcare and support service areas while also pursuing generation acquisitions under its buy plan. In Nuclear, we were continuing to demonstrate operational excellence with the goal of applying our expertise to newly acquired or contracted plan. In addition, we were completing a multi-year productivity improvement initiative in executing our contracting and hedging strategy. Then the two hurricane struck our utility, putting many although not all of these initiatives on hold. I provide these context to emphasize that everything we accomplished in the fourth quarter and what we hope to accomplish in the coming quarters is aimed at getting us back to where we were. From our perspective, getting back to where we were requires focus on three areas: stability, recovery and growth. And I am pleased to report we made progress in all three fronts. In the area of stability our most important fourth quarter achievements were operational. We successfully navigated through accomplished challenges to stabilize and repair our utility system so that we could again provide service to our customers. At the same time we stabilized our headquarters operations by relocating 1500 employees to safe work location with minimal disruption or productivity loss. From a financial perspective, we restored stability to our balance sheet by executing the financial plan that we announced in November. This plan provided need of liquidity, also providing excess capacity should another two-sigma event occur in the future. As part of that plan we completed a new $1.5 billion corporate revolver for the parent, we issued $500 million of operating company debt, we marketed $500 million of equity units. You might recall this amount is at the lower end of half a billion to a billion dollar range we were considering. And finally we infused $300 million of equity into Entergy Gulf States. This infusion helped the subsidiary with the highest overall restoration costs, to maintain its liquidity and its investment grade credit rating in anticipation of obtaining some form of cost recovery. During the fourth quarter we began advancing our storm recovery initiatives, the second focus area that we view as key to getting us back to where we were before the storms. At the federal level, the Gulf Opportunity, its own legislation; and the Katrina Relief bill were both passed. The Go Zone legislation as it is generally called permits public utilities to elect a 10-year net operating loss carry back for casualty losses due to Katrina. This will allow the utility to accelerate the timing of certain income tax deductions on future tax returns. The Katrina Relief bill provided $11.5 billion of community development block grants and included language that permits funding to be provided to publicly owned utility. The Department of Housing and Urban Development has allocated specific amounts to each of the states affected by Katrina, Rita and Wilma who in turn will administer the grants. We intent to pursue CDBG funding in Louisiana, Mississippi and Texas during the first quarter, and we are working with state leaders on behalf of our ratepayers to make the case for federal assistance through support of the operating companies in the affected area. At the state level we made filings to request interim recovery of nearly $600 million of storm cost in Louisiana and Mississippi, and we obtained important decisions in Entergy New Orleans Chapter 11 proceeding. In December the bankruptcy judge granted Entergy’s request that are debt financing for New Orleans. The debt financing currently stands at $90 million. In addition, the judge confirms that the insurance proceeds can be used as determined by Entergy New Orleans. Both of these decisions were important to analyze overall goal of emerging from bankruptcy as a viable entity. Outside of storm related activities there were several other fourth quarter achievements that were important to our long-term growth. In the Utility for example the Mississippi Public Service Commission approved its own recovery of the Attala acquisition paving the way for the January ’06 closing. The federal energy regulatory commission issued a final order in the system agreement case essentially a firming in ’05 decision. And at Entergy Gulf States, Texas, two new riders were approved. The first allows us to collect $18 million of annual capacity cost while the second allows for interim recovery of $18 million three-year of transition to competition cost while our TTC case is pending. And finally in Nuclear, our contracting efforts were successful in solidifying incremental revenue sources for the future. We executed a major multi-year contract at attractive market price. This contract along with others closed during the period increased our sold forward positions in ’07, ’08 and ’09 by an average of 10%. Over the same years our average sold forward price for the portfolio of contracts increased $3 to $7 per megawatt hour. Now turning to our financial results for the quarter. Slide 2 shows that fourth quarter ’05 as reported results were lower compared to one year ago. The reason for the decrease is attributed to the special items reported in the fourth quarter of 2004 compared to those reported this year. In 2004, we reported a net positive special of $0.18 per share. This special included the impact of tax benefits on restructuring, partially offset by a loss at Entergy coke and an impairment reserve. In 2005 special items had a negative impact on earnings, the specials reflected an impairment reserve and results from discontinued operations following our decision to sell the Texas retail business. The differences in these special items created a $0.34 per share decline quarter-over-quarter as reported result. Operational earnings in the fourth quarter of ’05 were $0.59 per share, $0.09 increase over fourth quarter ’04. The increase coming from higher results at both Entergy Nuclear and the non-Nuclear wholesale assets business. Slide 3 shows utility parent in other earnings declined compared to fourth quarter of last year. Lower revenues were the primary driver, including revenues at Entergy New Orleans, which are reported in other income due to the deconsolidation of that business. Industrial sales in particular were down significantly quarter-to-quarter. We still have two large refineries, customers at Entergy Louisiana that have net returned the full service, two large industrial customers remain out in New Orleans. In addition, the chemical plant in Entergy Gulf States, Louisiana service areas suffered severe damage and will not reopen, with the resulting loss of about $2.5 million of annual revenue. This is the only major industrial customer we are aware of that was a permanent casualty of the storms. We expect that one of the refineries currently down should return to full service by the end of the first quarter. However, the timing of the return of the other large customers hit by the storms is still in question. Continuing outages of these customers will reduce revenues $3-4 million for the quarter. Lower O&M expense partially offset the overall decrease and resulted to utility. We saw the continuation of storm restoration work, which lowers over now along with backend loaded expense reduction that we discussed with you early in 2005. Entergy Nuclear’s operational earnings per share reflected higher results compared to the same period of last year. The increase is due primarily to higher generation due to one less refueling outage and higher contract price. In addition, lower O&M due primarily to timing and the positive impact of accretion also contributed the higher results at Entergy Nuclear. Closing out the discussion of quarterly results, we look at the non-Nuclear wholesale assets business. Results in the fourth quarter of ’05 were higher than a year ago, reflecting the sale of SO2 allowances in the current period. This business has been generating assets with operating attributes that had produced excess allowances. Therefore, we can periodically create value by monetizing a portion of these allowances. Slide 4 includes as reported an operational results for the full year ’05 compared to ’04. As reported earnings reflect an increase of 7% with improved results coming primarily from Entergy Nuclear. Full year operational earnings increased by 16% with higher contribution from each of Entergy’s three business segments. Favorable weather and accretion from Entergy’s share repurchase program were the primary contributors to the higher operational earnings at the utility in ’05. These positives were largely offset by $0.26 per share negative effect due to the storms, additional $0.16 per share is associated with Entergy New Orleans alone. Entergy Nuclear’s full year operational results improved $0.26 per share over 25% due primarily to higher contract pricing, higher generation, lower O&M and the impact of accretion. And finally operational results for the non-Nuclear wholesale assets business improved year-over-year due to lower costs and gains on the sale of SO2 allowance. The results of this business exceeded the goal we set several years ago to achieve a breakeven position by the end of ’05. As reflected in Slide 5, net cash flow from operating activities was down significantly compared to fourth quarter of 2004. The absence of sale proceeds from Entergy Coke, which came in during the fourth quarter of last year account for more than $500 million of the decrease. In addition, spending and lost revenue due to the storm stripped away another $300 million. Lastly, working capital fluctuations at the utility decreased cash, but were essentially offset by higher revenues and lower refueling outage costs at Nuclear. In spite of these effects, however, we ended the year with more than $580 million of cash and our gross liquidity position stands at $3.1 billion due to the success of our financing plan. Further, we now expect to have 2.3 billion of cash available for investments, repayment of debt or equity or dividend increases over the next three years. This level of cash availability assumes recovery of significant amount for differed fuel costs, which is cash we’ve already spent. The $2.3 billion also assumes realization of higher market prices from unsold nuclear generation, an incremental debt capacity that could be tapped toward the end of the period while remaining within our stated debt targets. Moving now to earnings guidance. Slide 6 reflects the major components of our as reported and operational expectations for the current year. We see’06 as reported earnings in the range of $4.78 to $5.08 per share, with operational earnings in the range of $4.50 to $4.80 per share, both excluding results from Entergy New Orleans. We have excluded New Orleans because we are not in a position to provide near-term estimates for that business. The city’s repopulation and the bankruptcy process both have uncertainties associated with them and we cannot predict those outcomes today. Continuing on Slide 6 we show how ’06 earnings estimates build from an operational base of $4.46 per share. In the second and third bars we isolate two of the ’05 variances, which provide more visibility of the forward-looking driver. The $0.10 of weather is deducted in the ’05 storm effect $0.10 exclusive of the NOI is added back. This gets you back to a starting point of $4.40 per share. ’06 utility drivers then follow in the next three bars. These include non-storm related rate actions and normal sales growth at the utility partially offset by the continuation of storm-related outages at Entergy Louisiana were approximately 31,000 customers remained unable to accept service. Higher operating and maintenance expense due to benefits, inflation, operating expenses for the Perryville and in California, costs will incur to implement our independent coordinator of transmission and higher interest expense that results from the $1.6 billion increase in debt at the end of ’05, and our expected increased usage of the corporate revolver during ’06. In Nuclear, the key ’06 guidance drivers are higher contract and market energy pricing, higher generation from operates in fewer outages, higher operating and maintenance expense due to inflation and benefits expense, and increased interest expense due to market price driven collateral requirements. As our release shows, we added specific pricing assumptions based on published market prices for purposes of setting guidance for our 9% open position. In addition, we provided sensitivity so you can estimate how consolidated earnings will change as market prices moved throughout the year. Turning to Slide 7, we showed the key initiatives we are working on to shape our company’s future. A few comments, no surprise that each of these initiatives has been either stability, recovery, growth or some combination of the three. This is because as I noted at the beginning, a lot remains to be done in all three areas to get us back to where we would have been in the absence of storms. We view ’06 as the year of rebuilding for the utility, while the infrastructure restoration is largely behind us, our utility will focus on rebuilding or resolving issues at Entergy New Orleans and beginning storm recovery. Other key objectives we will pursue include redefining corporate headquarters and rebuilding our balance sheet to restore credit rating strength. These are not tasks that we can complete on our own, rather ’06 would be a year where we must demonstrate our ability to work in a cooperative and productive manner with government officials, our regulators and the rating agencies, achieving success in these efforts is critical as we work to protect customers, shareholders, bondholders and employees from the costly effects of past and future storms. ’06 would be a defining year for our nuclear business as well. With initial productivity and fleet alignment improvements in place, Nuclear will demonstrate it has the talent, capability, drive and discipline to operate in a highly competitive commodity-based business. Challenges in nuclear will come in the form of taking measured market risk to capture upside while aggressively managing cost to increased margin. In addition, nuclear will implement to be operated from our Yankee, while also initiating life extension approval processes for VY and to build them. We are successful in both of our core businesses, our goal of getting back to what we would have been in ‘07 and in ‘08, absence of storms is well within reach. Now I know you will probably be quick to ask what the success mean in terms of EPS growth, ROIC, the dividend and share repurchase. Let me assure you that all of our aspirations remained squarely in place. In fact we acknowledge that it may become necessary to revise some of them upward in the future particularly given the market price opportunities that exist in our nuclear business. But now I simply have the time to get ahead of ourselves. This is because our media priorities to work with government and regulators to recover 1.5 billion in utility storm cost. Further this recovery must be done in a way that allows us to begin paying down the $2.5 billion of financing that we effectively advanced with little more than a moment’s notice. It goes without saying our ’06 agenda is filled with challenges. Let me share with you that we are focused on achieving timely resolution of these issues that are before us. And we intend to do so while continuing to create value and drive growth, fairly for that will be clearly evident in ’07 and ’08. We now turn to our Q&A session and our senior team is available to respond to your questions. Thanks. Good morning Leo. Two questions. First is on the utility and the milestones that we are looking for in terms of Go Zone benefits, block grants being directed to the company and getting a window into how much and over what time period the individual states will allow for a recovery from customers? You know why don’t we going to start to get sort of tangible numbers around those three or four areas? Good morning Greg. We are in the process right now of working with the various state committees and the legislatures and the different states on really the CDBG growing ups. And internally we have started the process of developing the applications for the CDBG and I think our expectation is, you know, we may see something out of that around mid-year, kind of the result of those efforts. On the Go Zone grants those would be part of any filing that we would make out of 2005 tax returns and that’s really a situation what we are giving back the loss the number of years. So again I think that’s probably sometime this summer we know the results around that. And you know the ratemaking mechanisms that you’ve seen, we have filed in Mississippi and Louisiana Phase I of two part filings. And in Phase I we are looking for really interim relief, it really starts from cash to come into the utilities that were significantly affected by the storm and hearings on those that are going to happen over the next couple of months and we hope to get some results out of those probably in the second quarter of this year. We’ll follow-up later in the year, you know Phase II filing, when I think there is, the costs will have solidified at that point in time and we will know where we stand with the CDBG, CDBG growing up insurance and we will follow-up with filings later in the year in Phase II overall so the discussion with the commission’s securitization around any additional amounts that CDBG requests at above the Phase I level, and also to be talking to them about securitization or what we look to build up a larger storm reserve than we had in the past. I think we’ll have a fair idea of what it might be and we will probably have to have some kind of regulatory mechanism that truce it up on an ongoing basis, how those funds might come in. Greg, this is Leo, I mean you are right, there is several ways to attack the issue here: insurance, the federal relief efforts that we are going to make as well as rate recovery. And on the insurance front, we will be starting to make preliminary or outgoing proof of loss for the insurers pretty soon but that will start to come in overtime, but we should have a pretty good idea by mid-year or so exactly where we are going to be on the insurance. And then we will continue to pursue the CDBGs and then the rate recovery as well. Greg, this is Curt Hebert, just finish up on what Rick talked about with the CDBGs: the community development block grants. I think it’s important to kind of go back to the setting we were in the last time we talked in November. And if you remember that our point of view was that due to Stafford we really had no opportunity here so what we were trying to do is go to Washington DC, work with our leaders there, work with our state leaders and create some type of opportunity. Obviously that was done from tax initiatives the Go Zone and the community development block grants in the form of the 11.5 billion that was set down through the $29 billion package. Now, you know those opportunities we are having to work through and we are working with HUD or working with the states or working with the local recovery, efforts as well as the CDBG coordinators in Mississippi, Louisiana and Texas, but what we have done is found an opportunity now to go after some of these things and again we are hopeful that in the spring it would be some other opportunities and our work is not done in Washington, we are going to continue those efforts, not to mention continue and to try and make some changes at Stafford. Thanks. Switching to the Nuclear front, overall, this has been the nuclear story is obviously turning into a revenue growth story but over the last several years it was also a cost reduction story but in ’05 and now for your projections for ’06 we are seeing reasonably substantial increases in operating costs in our last visit to your Nuclear northeast headquarters, we came away with the impression that in the long run that was still operating efficiencies to be gained at the nuclear fleet. So why are we seeing sort of a systematic increase in operating costs? That’s my first question on that front. I will start out with that Gary. One of the things we have done is that in, we are showing you the A&G side of this as well. The same cost increases inflation in benefits costs that we have seen throughout the business are also impacting Nuclear. At the same point in time we still see cost reduction efforts. Some of the things that we have been fighting against that we didn’t have to fight against when we first started were areas of security and things like that that it has increased overtime, but we still do see some opportunities to lower cost and to continue down that path. I would like Gary to go ahead and complete that. Yeah this is Gary Taylor, and to build on with what Leo said, I think we have in our efforts really materialized on the things that we said we would do, as has he said but specifically mentioned benefits, increase in security costs to offset some of those, but we haven’t completed our first Phase and we do see some opportunities looking forward, and we have initiated internally what that next step maybe but we still believe there are some opportunities for efficiencies going forward. Okay, then the last question is on the depreciation increase, what does that related to? Is that related to the Vermont power plant operates and will that potentially reverse out when we get license extensions, can you explain what’s going on there? It is associated with the upgrades and other capital expenditures we’ve had at the plants. I really wouldn’t see that that change in much going forward. Leo, I just wanted to understand this appendix, which was attached to the presentation No.9, you’ve mentioned that the storm effect was $0.26 for the year, 14 and 12 for the third and first quarter. And you also reported I guess when you reported earnings that because of this you are doing lower O&M, and hence ’06 O&M is I guess in the budget is hitting by about $0.25 or so ’06 versus ’05. Could you quantify how much lowering O&M was in ’05 because of the storms and all what was doing so, you know what is the normal license fees in O&M going from ’05 to ‘06? Or is it caught up in the storm effect number, so I am a little bit, if you could just clarify that? Some of it is caught up in storm effect numbers as well because what you see is a redirection, a redirecting of O&M to storm cause, and so as we go through and calculate that $0.26 overall impact, there is a benefit I guess for a lack of a better work, two O&M for the fact that some of those hours are going into the storm part. I would say that if you look at that $0.25 increase in 2005, about 50% of that is inflation and benefits costs and things like that, we also got some added costs in there for Attala, which is probably another 25% of it and some for Perryville, which is maybe think like another 10% of that O&M number. So there is a lot, there is a few things going on in there, and then the balance of that would be redirection of O&M, you know, back to O&M as opposed to storm cost. Okay, and then getting back to I missed this, you mentioned regarding the free cash flow projection from 2006 and 2008. You mentioned that it was also dependent on certain recovery of certain cost, could you quantify what that number is? That’s probably about $400-500 million of that we voted. And as I said we have already spent that money in ’05 as deferred fuel balances rose due to regulatory process going forward where we covered those dollars. Okay, and Leo can I just ask you if one was to, you know, we are trying to do a little bit comparison of what you were before and what this cost, how much of the ’06 guidance, which is, has been impacted by the higher borrowings or the new equity stature, convertible stature kind of issued, and so you know as you look out and you get these proceeds throughout the year and you know you have the flexibility of buying back some stuff. So could you quantify to us that how this higher borrowing cost associated with all that went on in 2005, whether through the convertible instrument or the straight debt cost, how much is costing you in your ’06 plan because of that? Because as we go through time and we collect, you know, deferred fuel and things like that, we’ll be able to reduce that burden but $0.10 is how we are quantifying what that impact is. But should I look at that $0.10 in the utility, why don’t the nuclear site is there $0.05 for increased interest expense, can I know? The nuclear site is really related to what the company charges nuclear for the use of capital and collateral requirements, so its offset it to parent. It nets out in terms of where it goes from nuclear to the parent but those are guaranteed fees, we have a disappointment around how we charge the business units for the capital they consume for the corporation and that’s nuclear’s piece of that. Hi guys. Just to follow on the nuclear a little bit and I apologize if this is obvious to other people but on Page 7 where you are discussing the forward-looking assumptions in the nuclear segment, there is a bullet point that refers to $20.15 per megawatt hour, non-fuel O&M expense reflecting inflation of higher benefits; $19 per megawatt production cost. What’s the difference between those two numbers and I mean, why am I looking at two different numbers there? Okay, the basic difference is fuel and A&G. We take fuel out and A&G back in to get the O&M number versus the production costs. So production cost never included A&G expense. So the one is a cash and the other is a book cost, is that how I should look at it or? Not exactly, I think that they both are elements of cash and books and how you look at amortizing the fuel and the like. So it’s really what’s classified as O&M versus the way we’d classify production cost. Production costs don’t include the A&G component. Okay but it sounds like I should use the 20.50 going forward with some increases possibly as the incremental cost of as you sell more megawatt hours? Yeah that’s all in, it just depends on how you are handling, I can’t tell you how we are handling A&G and all that outside of it so, that’s the core below. And I think you got it right Kit, I mean that has A&G component that was missing from there. Okay, well we will leave that at that, and then you mentioned looking forward at Nuclear that you may be looking to the cost control which I think is discussed already but you talked about measured risk and I assume that, suggest that you may to part at least a little bit from what looks like an ongoing this year of hedging program that was pretty much all unit contingent? Well it’s a combination as we discussed before, Kit, about our hedging strategy as you know we’ve provided ourselves the flexibility to leave a greater portion of it open, and fell into the stock market, maybe if you look at our sold forward tables that’s why this year is the first year we are going into the year with a 9% open position. And we’ve provided ourselves the flexibility to leave more than that open if we choose to, so that’s the risk we are talking about and that’s why we have actually provided you with a little more information around what the market looks like when we put this together and what the sensitivity of the portfolio is to changes in market prices. And can you give us a sense that 9% that’s open for ’06, is that by – can you give us an idea by season or by on-peak and off-peak which parts are open? That’s kind of the balance of the year, come on average, rather not get into too much detail about what’s open during what market etc. First, Leo to clarify, your cash flow table, cash available over the next three years, you are excluding any storm recovery in there? Okay, so in theory since you are asking for 1.5 billion, the 2.3 cash available could be 1.5 billion higher if you get storm recovery? You know it always going to depend on how we use that unwind the financing plan, what we all going forward as well. Well in terms of, we put the 2.5 billion out there already in terms of increased revolver, the equity units and the like and basically we have committed ourselves to - as I said we use that as an advance on getting storm recovery. And our plan is as we go forward to use the storm recovery to put ourselves back in the same position, so its going to depend on when it comes in and how it comes in, and how we use to unwind the financing plan. Okay, and then secondly on the new nuclear contracts, rough estimates looks like they were down in the low to mid $70 area, is that correct? Okay, and then the $83 number you are using for non-hedged ’06 power, is that – that’s kind of a full year average price at some time beginning of this year? Okay, and then lastly on the storm recovery cases, it seems like the one stay where there’s been some at least intervener, public oppositions been the Louisiana, could you discuss a little bit of what’s going on with the Louisiana Phase I recovery, what staff and interveners are seeking and their arguments, I guess they are maybe arguing that some of this should be offset by, you know related to your on returns? Yeah, Steve, I think as part of their argument it is is that, running through the FRP, which kind of has been a fallback position but our point is that we’ve incurred a lot of cash and we need to get started on really collecting this cash to give you guys some comfort, the rating agency comfort that we are going to be treated fairly here, so we push forward with Phase I, and Phase II is really what I discussed earlier, an opportunity, I mean the increase in rates is less than 2% in the Louisiana of what we have filed and that doesn’t is in securitization. So our sense is we can stay around 2 to 3% increase and accomplish everything through the storm reserve and it would be difficult to unwind an FRP filing to securitize this cost and that’s really where I think both our interest lie and also the commission and the customer’s interest lie. Just so I understand, in the FRP as it stands, what I think this is supposed to be kind of a big exogenous cost that was forced measure in the FRP as I recall. I mean that’s where this would be, typically the normal reserve is not, so we have had a normal reserve within the context of the base rate change, and then evaluate that through the FRP, but in this event its so large and significant of an impact, we are really suggesting the better way to handle is outside the FRP. And from an interim basis lets get to cash started so that we can improve the financials of those operating company, and then the thing is two, which will be six to nine months down the road, we’ll true all that up and look at the benefits of securitization against that. Thank you, I was just wondering, could you talk about the SO2 allowance sales and what all your expectations for next year? The SO2 allowance of sales in some of the units that we have as I mentioned in my remarks I have attribute with a generate allowances, SO2 allowances during the year. And we look at the production out of those units and the market price and we make a determination about whether or not we should or shouldn’t so market prices for SO2 allowances has moved significantly during 2005, and so not only did we have what was generated in ’05 but we had some from previous periods that we were able to sell into the market. Going forward its difficult to say its going to depend on how much those units run, in pursuit the allowances that they get but I think in the aggregate there maybe around a couple of thousand to 2500 allowances that are available, the markets running about I think $1000-1500 a ton at the moment, so just depending on how we utilize those units versus the market price, that’s how that decision will come. It shouldn’t be a significant going forward as it was in ’05. That will probably be a little bit more than that because we’d, as I said we had some from previous years when prices were a lot lower. And actually we have one less in 2006, we only have two in 2006, one in the spring and one in the fall. Okay, and just from a number some point, is there still some lingering effect from I mean stock repurchase or what is the program at this point, none of it is in effect, what is the statures at this point? We stopped the repurchase program when the storms hit, and we had about $400 million of the program left to go of the $1.5 billion program, and we obtained authority from the board to extend that program, as you recall it was supposed to expire – it was completed by the end of ’06. I mean we have got an approval from the board to complete that by the end of ’08, so depending on how things workout with the rest of the business in the nuclear northeast and the like that, that program would come back later. Right now we don’t have anything in there for ’06. Hi guys, couple of just questions on the regulated businesses, Entergy are consigned if I understand, I was under the impression that there would be a rate filing or rate case regarding recovery of the cost for the steam generators, where does that stay? Has that put on hold? Michael, it has temporarily because of the events around the system agreement, and we are really, there is a variety of things that go into a rate request and you know although the ANO steam generator was put in place at the end of ’05, we will be looking at what does the numbers look like at the end of ’05, what they look in mid-year ’06, we have a compliance filing that we will be making effort around the system agreement so one of our issues have been to make sure that we have that compliance filing sink it up with any rate request in Arkansas, so we are still evaluating that and wouldn’t really make a definite answer here probably until later in the year. No, no, the revenue requirement probably be $10-15 million but I think Michele could give you the proper number on that. Yeah good morning, and a few question if I could, would you expect cash flow from operations to be in ’06? I guess like 2 billion was what you expected last year and then, on top of that you’ll get some fuel recovery, would that be sort of the two major pieces? Its pretty much yeah, but we are going to have, that’s going to be reduced also by lower, you know, that the fact we have got the storm impacts still lingering out there, just one extent but, but it should get back over $2 billion, yes. Okay, and then in the long-term cash flow guidance, do you assume completion of the 1.5 billion share repurchase, that is I want to confirm that? Okay. You know as far as the retail business, do you have a sale process in place timeline for completing it? Its – I don’t know exactly, I’ll have Michele give you on that, in terms of exactly where it shows up. Okay. What sort of in your ’06 guidance, what sort of normalized sales growth do you assume, yeah I know I think you have 4% but adjusted for the hurricanes and all that? You know its difficult to say, too probably seem strong base on recent history but I’d say ’05 is a difficult one to even though we have a lot of data around where ’05 is, its difficult one to use as a balance off point because the impact of the storms in that, and the netting of people who left one jurisdiction maybe for another I think like that. I think outside New Orleans in your October presentation, you said there was revenues would be about $24 million in ’06, which took into account from lost customers offset by gains elsewhere, is that still a good number? Last year you got a benefit from the Jobs Act, which was around $0.07 or so. Does that sort of go away or are there other things that keep the tax rate lower? In terms of what we’ve got going forward in terms of – I don’t think there was anything in ’05, Neil I think that’s… Okay, yes yes, that’s correct, I am sorry, but there isn’t any in’06 because that’s really going to be that production credit, that we are going to get and we are going to start to see that in future period. And then in ’06 you have like $0.08 decommissioning, or in ’05 you had $0.08 decommissioning gain, anything like that in ’06 guidance? That’s difficult to say, there really there is nothing really knew in there, it’s just a continuation of what we did in those previous decommissioning study. So its not going to be play as large as it was going forward previously but there is still some lingering impact going forward. Okay. And just I wanted to clarify a question I think Steve Fleishman was asking regarding the 3-year cash flow forecast and, you know it doesn’t assume any recovery at the storm cost but I think in your analysis where you look at debt capacity at 800 million of incremental debt capacity over the period assuming a staple of 50% debt, that assumes al the storm laid debt stays on the balance sheet, correct? Good morning guys, most of my questions had been answered, but I just wanted to touch base with you on I think Greg’s question about the license extensions, you indicated that they were not expected to have an impact on depreciation going forward, is that right? You guys already have factored into it, you are already carrying your depreciation that you are going to get the extensions, is that right? And just finally on the Vermont Yankee operate, I know you guys have accomplished a lot there with the NRC and also with the state but it always seems that the state has some issue, could you just briefly go over what the Vermont Yankee situation actually is with respect to the upgrading, what have you? I think, its Gary Taylor, as you said, we accomplished quite a bit, we did get the atomic commission on safeguards that rules unanimously on all the issues as well as the NRC issuing their notes, you can have this report, so we would expect to hear from the NRC this quarter, we do have a CPG from the state, I know that the state itself has to look at that in relation with some conditions that they had put on it as far as the NRC’s evaluation but that NRC report was very very clean and the ACRS reiterate that, so we fully expect to be able to inform with that by the end of the first quarter. Okay so just to recapture on Vermont, because that’s where it gets a little bit confusing to me or at least that OE seems to be more of an issue than what one might expect, where are we with Vermont, and when do you expect that to be sort of resolved? And when do you think will actually see the upgrade? Well, we have a to get a public good, which is what’s required by the state of Vermont, and we have to wait on the license amendment coming from the NRC, which we would expect the latter part of this quarter, and with those we fully intent to be able to increase power at the plant. 95 megawatts upgrade and off the top of my head, I don’t have that number but Michele will get that for you. Because when we look at the Entergy Nuclear numbers on Page 5, there doesn’t seems to be much of a change in terawatt hours, I was just wondering if its factored in or how? I just wanted to follow-up on the hurricane recovery issues and the community block development grants, in terms of the process, has the $11 billion that was in the DOD spending bill yet been allocated to the Department of Housing and Urban Development, yes or no? And then has the State of Louisiana yet filed with its applications with the HUD? And have you guys yet filed your own applications? And then lastly and relatively when the enabling legislation was passed in the State of Louisiana to effectively allow community block development grant dollars to flow from state coffers into private corporations, was there either an explicit or implicit agreement amongst yourselves and various Louisiana politicians and stakeholders as to how much money the corporation would be receiving? Thanks Zack, glad to talk to you about that. It’s a process as far as community block grants, is moving forward, as you know the appropriation has been approved by Congress to go to HUD, you know the term allocation is not one that I would use, the money is there, it has been appropriated by Congress, it will be there, the states will be applying entities like ourselves that are interested in getting monies to offset charges to customers, will be presenting their stories and their issues and their cost to those states, some as you had mentioned, maybe sending some of that to private authorities like local recovery groups or something that maybe similar to the Manhattan situation that you had after 9/11 in New York, all of those things are moving forward. Now exactly how much money any entity be it a homeowner or Entergy Corporation may or may not get is just something that is unknown at this time. As I’ve said earlier when I was kind of presenting this, you know the setting we were in back in November, the important thing I think for us to look at right now is the setting we were in at that time, where due to Stafford, we had no opportunity, had we been a public power system or one of the electric power associations, we would have had the opportunity to go get you know $0.70, $0.80 or $0.90 on the dollar, and keep that cost from being pushed to our customers. Here what we had to do is we had to work with our leaders in Washington and the state leaders to try to present some type of opportunity to our customers so that we can offset what otherwise would be required to put in the rate basis prudently incurred storm cost. So, I can’t give you an exact number, I know you would like to have that. I think the important thing for us to realize right now Zack is that an opportunity has been created. I think lots of people saw that at that time as a long put, so if you want to see that we’ve made one long put while working with a good group of people and I have to congratulate Congress, you know, we are really working on our game here and we are trying to make certain that we’ve got every opportunity, I just can’t give you a number. But to make sure I understand when I think Rick had said you know a few months, six months, I think mid-year ’06, that was to be to actually have money in the bank from the whole community block development grant process playing itself out or was that to be at some more sort of a developed milestone along or much longer community block development grant road, what was happened by mid-year ’06, help with that? I think we could say we expect some clarity or some resolution of the whole community block development grant by mid ’06? Yeah I think optimistically we would like to have some type of indication by mid ’06, again I just can’t give you a timeframe to say by the end of July am I going to have an absolute up or down or an absolute amount for you? We have done everything within our power, making certain that we’ve got consult at some board from the very beginning that we were through this process because what we did, as soon as we knew about this situation, as soon as we knew that we had the chance to create an opportunity, we brought people in who had worked through the 9/11 process, who had worked with HUD, who had worked with OMB, and so we are well ahead of the process as being prepared to give our application, and that’s what Rick’s talking about us having our application ready to give to the states so that states will know what our needs are and so they can act on that appropriately. I would hope by mid-year that we have some clear signal that we are going to get some dollars and hopefully what those dollars would be, I just can’t tell you what they are at this point, and I can’t tell you if it would be completely nail down by that point. Got it, and just to make sure that we understand that the process, the process is that Congress has given the money to HUD and then the states have to then file with HUD for certain amount of money and file plans with HUD after how they intend to allocate that money and its subject to HUD Zido (Ph) and then you guys along that same timeframe file your plans with these to be created local development corporations, which will then be making the filings at HUD, is that – the process is, are there other steps that are missing? Well, not every state will have a local development authority, as a matter of fact I don't know that Mississippi is, it sounds like they may not, they may just work through their state, as far as Louisiana that decision is yet to be made, but you know as far as how it works in the application process, that is pretty much how it works. HUD has already given pretty much its guidance as to what it’s asking the states to do, and what its asking the states to give them. Again, by looking back and seeing what happened at 9/11, what we were able to do is go back in and get some lessons learned because last thing we wanted to do is to get into the timeframe that they talked about there, we wanted to speed up the process so hopefully you are going to see some of that showed space here in result and not only in opportunity but something that we can close a door on in and find success in, but I just can’t give you a firm date on exactly when that is, but many lessons have been learnt since 9/11 and we’ll see exactly how that works through the process. Now you had passed that, he Sate of Louisiana had passed a legislation to sort of enable via transfer at the state level. Is there other legislation that has to be passed in other states like Mississippi to allow the community block development grants to pass from the state coffers to a private corporation or does enabling legislation in the stature to each one of your states that met with a hurricane right now exist to allow the transfer of federal dollars in the state coffers and then into private corporations? Well, I mean you are right, each and every state kind of has its own flavor of how it deals with private corporations, but the one thing Zack its gets important to understand to focus on, is it, you know, community development block grants in dealing with private corporations who may or may not seek direct or indirect benefit from there, its something that these states are accustomed to dealing with. Almost every – well every state has a community development block rank coordinator that I am aware of, because they are continually trying to get help from the federal government in areas that they see help is needed in, so we don’t see any, if the – your question is, do we see any issues there and any problems with us getting allocations? We do not. Got it. And then just a small question on Louisiana and the Phase II of the recovery, a follow-up on Steve Fleishman’s question, do you plan on the Phase II process going through the full FRP process or is it just in the Phase I you want to avoid, the FRP so its really just the timing issue or is it sudden that you want this whole process to be outside of the FRP? Great, and then second last question, actually last question, I think Leo you had mentioned that we have these fees aspirations and they are all the aspirations that folks like myself and other investors were looking forward to pride the hurricanes and, you know the whole ghost been to get back to that aspiration level in the stock buyback and dividends and higher earnings, you mentioned that Leo, I thought heard you say that it’s possible that you’d be exceeding your aspirations based on where power prices are and back in the gas curve, could you elaborate on that, I want to make sure I heard that right, you kind of threw it in there? No, I mean I think Zack its since prior to the storms, between that and now there’s been a marked move in power price. And so that, you know what I found, certainly changes are picture going forward as it relates the nuclear northeast and what the opportunities are there, we’ve got a balance that against all the other work we’ve got to do in terms of the utility and the regulatory process and the like, but that’s certainly out there now an opportunity that didn’t exist prior to the storms. And that does conclude today’s question and answer session. Ms. Lopiccolo, I’ll turn the call back over to you for closing remarks. Okay thank you operator, and thanks to all for participating this morning. Before we close we remind you to refer to our release in website for Safe Harbor and Regulation-G compliance statements. Our call was recorded and can be accessed for the next seven days by dialing 719-457-0820, replay code is 3816450. This concludes our call, thank you.

EarningCall_233966

Good morning, my name is Beth and I will be your conference operator today. At this time, I would like to welcome everyone to the Celgene First Quarter Conference Call. Operator Instructions Thank you. Mr. Hugin, you may begin your conference. Thank you, and good morning. I'm Bob Hugin, Celgene's Chief Financial Officer. And thank you for joining us today. With me are John Jackson, our Chairman and Chief Executive Officer; and Sol Barer, Celgene's President and Chief Operating Officer. Before we begin, I will review our Safe Harbor statement. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. Certain forward-looking statements which involve known and unknown risks, delays, uncertainties and other factors not under our control may cause actual results, performance and achievements to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include the results of current or pending clinical trials, our products failure to demonstrate efficacy on an acceptable safety profile, actions by the FDA, the financial condition of suppliers, including their solvency and the ability to supply products and other factors detailed in our filings with the Securities and Exchange Commission, or referred to in the press release issued this morning. Now to the results. We're very pleased with the first quarter results announced this morning. Excellent progress was achieved across all business units of the company, highlighted by the initial results from the launch of REVLIMID. Total revenue for the quarter rose to nearly $182 million, a 62% increase over the year-ago quarter, and up almost 22% from the $149 million from the fourth quarter of 2005. This sharp rise in revenue was a result of a significant increase in product sales and higher royalties from our Focalin/Ritalin collaboration with Novartis. Product sales were strong for all of our products. Total product sales increased to $160 million for the quarter, up from $98 million in the year-ago quarter, and up nearly 25% from the fourth quarter of 2005. THALOMID sales increased to a record $107 million, a 21% year-over-year rise. With new data presented at December's American Society of Hematology meeting leading to further increases in usage in newly diagnosed multiple myeloma patients. REVLIMID product sales totaled $32.4 million for the two and one half months since the mid-January launch, with MDS accounting for approximately 70% of dispenses, multiple myeloma accounted for the majority of the remaining dispenses. Though wholesalers may not inventory REVLIMID, we estimate that contracted specialty pharmacies have established inventory positions of approximately $5 million to accommodate patient demand. ALKERAN sales of $18.3 million were in line with fourth quarter sales and more than doubled the first quarter 2005 level. Although significant potential variability remains, based on the results of the first quarter, we would expect ALKERAN sales for the year to be in the $65 million to $70 million range. Combined market share gains for Focalin XR and Ritalin LA achieved by the Novartis commercial team contributed to the 18% increase over the fourth quarter of 2005. The combined Focalin/Ritalin family of drugs now command an overall 10% market share in the once-a-day attention deficit market, with an even higher market share among neurologists and psychiatrists. Our R&D expenditures are focused on fully capitalizing on the potential of REVLIMID in a range of indications and accelerating the development of our IMiD pipeline and other programs. R&D spending increased to a little over $50 million in the quarter. We will continue to invest as appropriate to advance these promising programs. During the quarter, we launched REVLIMID in MDS 5q Deletion, our first step in building a franchise in MDS. We made significant progress in educating and building a market where for the most part supportive care has been the only option. We are committed to building a major MDS franchise. At the same time, during the quarter we have made meaningful progress refining our launch preparations and strategies for multiple myeloma. We are eagerly anticipating FDA action on our supplemental application. We also made substantial progress in building our international capability. Our global regulatory efforts are focused on making REVLIMID available in all major markets around the world. We are pleased that the review of our European marketing application for MDS is advancing and that our multiple myeloma application was accepted for review in Europe. We are developing our plans in a large number of international markets. To capitalize on the regulatory progress in these markets, we're building world-class commercial regulatory clinical and support organizations to maximize the opportunity following approvals. SG&A expense totaled $54.3 million for the quarter, an increase of less than $1 million from the fourth quarter of 2005. This combination of revenue and expense produced an adjusted operating profit of $47.2 million, and an adjusted earnings per share of $0.09. Cash and marketable securities increased by about $45 million over year end, and totaled almost $773 million at quarter end. The results of the quarter reflect our goal to produce both strong commercial results and to accelerate the development of our pipeline. As we look forward to the remainder of the year, we anticipate that we will continue to make appropriate investments in our clinical programs and international build-out as supported by growing revenue. Those significant uncertainty as to regulatory time lines and launch trajectories make it difficult to project specific product revenue. Our internal targets for the year are consistent with the current EPS consensus of $0.43 per share. Should product sales increase above our internal target? We will accelerate our investment in our key clinical programs and international build-out. Let me now turn the call over to Sol. Thanks, Bob. As you've heard, the results of the first quarter were very positive from both financial and operational perspectives. Let me add my perspective to these results. Starting with REVLIMID, our commercial team formulated an outstanding strategy and plan for the launch of this new product and the MDS 5q deletion indication, and have been executing such in a rigorous and effective manner, resulting in net sales for the quarter of $32.4 million. Although the initial results over the two and a half months of the launch reported today have been quite encouraging, I should note that we are still in the early days of establishing an MDS franchise beginning with the 5q deletion indication, and are very actively engaged in the building and expansion of an MDS treatment market via education and the presentation of clinical data. Launching a new drug in a new indication is always a challenge. The successful launch of REVLIMID in MDS is all the more impressive in the context of the additional challenges pertaining to the implementation of our proprietary distribution system RevAssist, while at the same time, facing a major healthcare reimbursement shift, namely Medicare Part D. I'm extremely pleased that our commercial, medical and regulatory teams successfully implemented RevAssist, including enrolling over 7,000 physicians, validating specialty pharmacies, and educating patients. This was and is all the more challenging when implemented at the same time that the entire healthcare system has been dealing with the introduction of Medicare Part D, a new reimbursement paradigm. Although the introduction of this prescription drug benefit under Medicare should provide exceptional long-term benefits to American seniors, its implementation has been difficult for patients, healthcare providers, and to companies serving these constituencies. Nevertheless, although it is still very early, we have been very fortunate under this program to obtain very broad reimbursement for REVLIMID and are continuing to work very diligently to ensure continued broad access to this drug. Turning to THALOMID, the record THALOMID revenue showing an increase of 21.3% year-over-year, also significantly impacted the overall results for the quarter. THALOMID continues to be very widely prescribed as a first-line treatment for multiple myeloma based on continuing positive clinical data reported at major medical meetings, such data clearly influencing its use by hematologists and oncologists. For example, at the most recent American Society of Hematology meeting, clinical investigators reported unprecedented data from recent and ongoing clinical trials on THALOMID, including two Phase III studies reporting survival advantage for elderly newly-diagnosed multiple myeloma patients treated with oral combination thalidomide therapy. We expect new and maturing THALOMID data to continue to be reported in major peer-reviewed publications and medical meetings, including ASCO, the European Hematology Association, and of course, ASH. Indeed, the upcoming ASCO promises to be very positive for Celgene. ASCO is traditionally a meeting focused on solid tumor advances and it is therefore, particularly encouraging for us to note the increase in number of REVLIMID oral and poster presentations in several hematological indications: myeloma, MDS, myelofibrosis, amyloidosis, and CLL. In total, there will be approximately 24 oral and poster sessions on Celgene products, including 11 discussing REVLIMID and 13 on THAL, including a plenary session discussing the Malfolan Prednasone THALOMID regimen in newly-diagnosed multiple myeloma. Important sessions focusing on the role of REVLIMID's activity in hematological diseases include the REV Malfolan Prednasone regimen in newly-diagnosed myeloma, overall survival advantage in the 009 REVLIMID dex pivotal trial, perspective subgroup analysis of REVLIMID's pivotal trials in myeloma with respect to prior therapy, an update of a Phase II trial in relapse or refractory CLL, results of a Phase II study in amyloidosis, a Phase II study in myelofibrosis, new combination therapy for REVLIMID and myeloma, advantage of early use in myeloma, as well as presentations and posters focusing on pharmacal economics and safety. Additionally, very preliminary reports in renal cell carcinoma are also being presented. Highlights of the presentations and posters on THALOMID include the plenary session on the major Malfolan Prednasone THALOMID versus Malfolan Prednasone trial in newly-diagnosed multiple myeloma and a major multisensor ECOG trial comparing THALOMID and Dexamethasone versus Dexamethasone as initial therapy in myeloma. In addition, we view the upcoming European Hematology Association meeting in June as positive, including a presentation on REVLIMID's activity in relapse refractory aggressive non-Hodgkin's lymphoma. Based on the results of these trials we are currently pursuing, a detailed clinical and regulatory strategy to fully explore and develop REVLIMID's significant potential as a broad-based treatment for hematological malignancies and cancer. Our current regulatory filings encompass myelodysplastic syndromes and multiple myeloma, and I will discuss these global initiatives first. In the U.S., our PDUFA date for sNDA for REVLIMID for the treatment of previously treated myeloma is June 30th. And we're currently formulating detailed plans for this launch. We are also proceeding with our international regulatory strategy for REVLIMID. A more aggressive strategy in Europe, as was in the U.S. is based on our 5q deletion MDS data, and as part of the review process, we are currently responding to the EMEA's questions. The review of our multiple myeloma submission to the EMEA began on March 29th. We also submitted the 5q deletion data in Switzerland with a review initiated at the end of February, and are planning to submit the multiple myeloma data this quarter. We are also in detailed discussions with regulatory authorities in a number of countries around the world, including Japan, Australia, Canada, as well as various other regions. We are also excited about the potential to expand the global market opportunities for REVLIMID beyond MDS and multiple myeloma based on promising initial results, as well as significant unmet medical needs. Chronic lymphocytic leukemia and non-Hodgkin's lymphoma are currently priority indications for REVLIMID. Focusing on chronic lymphocytic leukemia, there are approximately 100,000 people diagnosed with CLL in the United States alone. There are currently several studies evaluating REVLIMID as a treatment for relapse refractory in newly diagnosed CLL. Based on the ongoing clinical results and on consultations with leading investigators, we have formulated a three-pronged approach to CLL. This year we will initiate a controlled randomized dose comparison trial in the treatment of relapse CLL. In addition, protocols for two other randomized double-blind controlled trials will be submitted for review by the FDA under a special protocol assessment namely, elderly patients with untreated symptomatic CLL, in which REVLIMID will be used to induce or maintain a remission, and relapse patients who have responded to a salvage regimen in which REVLIMID will be used to maintain the remission. We will be providing additional information for these trials as the protocols are finalized under the special protocol assessment program. Non-Hodgkin's lymphoma is another incurable hematological malignancy with significant unmet medical needs, affecting close to 200,000 people in the United States alone, greater in prevalence to multiple myeloma, MDS and CLL combined. As a result of encouraging initial data from Celgene-sponsored studies evaluating REVLIMID's clinical potential as a single agent in indolent and relaxed or refractory aggressive NHL, we are advancing our regulatory plans for the development of REVLIMID as a new approach for the treatment of NHL. We expect to initiate additional trials, including two Phase III registration studies, to evaluate REVLIMID plus Rituxan versus Rituxan alone in elderly patients with untreated aggressive NHL, and to evaluate REVLIMID plus Rituxan versus Rituxan alone in patients with relapse or refractory aggressive NHL. We will be submitting protocols to the FDA for these for review under a special protocol assessment later this year, and will provide more details as the protocols are approved. We are also obtaining preliminary positive clinical data on other blood disorders with significant unmet medical needs, such as amyloidosis, myelofibrosis, acute myeloid leukemia and T-cell lymphoma. These are significant unmet medical conditions, representing an aggregate more than 60,000 people in the U.S. We will evaluate the clinical data in these indications, as well as an additional indications including solid tumors as the REVLIMID program advances. Although the opportunity for REVLIMID is significant, it is but one compound in the IMiD class. This class, which is proprietary to Celgene has unique capabilities to profoundly affect a number of biological pathways, potentially leading to the treatment of diseases which are difficult to currently treat. We now have the ability to design IMiDs to provide specific biological responses. We have a number of compounds that are either in the clinic or rapidly advancing to human trials. We advanced our strategy for the next IMiD, CC 4047, formerly known as ACTAMID during the quarter. Specifically, we are moving forward on a regulatory track in myelofibrosis and are finalizing the protocol for our first trial in sickle cell anemia. We will update you on the progress in these two indications, as well as in another potential indication: small-cell lung cancer, later this year. We will also be reporting more about the additional IMiDs CC-11006, CC-11050, throughout the year. I should also note that we are advancing our psoriasis trials with our oral TNF-alpha inhibitor, CC-10004. We are increasing the dose and extending the duration of treatment over the initial positive Phase II trial in a controlled multi-centered dose comparison Phase II trial in moderate to severe psoriasis. Although we do not have the time today to review the status of our earlier stage programs, substantial progress has been made in our kinase, ligase and stem cell programs during the quarter. This is a very exciting time at Celgene. We are very pleased with the initial phase of the launch of REVLIMID and are looking forward to expanding our commercial efforts into multiple myeloma, following regulatory approval. We believe that REVLIMID can become an important agent, in not only MDS and myeloma, but in a wide range of hematological malignancies and cancers. We are committed to fully exploring this potential. We are also aggressively advancing our pipeline, and our research program continues to yield potentially very significant compounds. We are energized by the progress achieved to date across all functions and businesses of Celgene. We understand that focus and execution will be critical to the achievement of our significant milestones for 2006, and look forward to updating you throughout the year. Let me now turn the call over to John for his closing comments. Thank you Sol. It is indeed an exceptional time for Celgene. The results of the quarter were impressive, with the initial phase of the REVLIMID launch very encouraging. As you heard, we are committed to fully researching the potential of this remarkable compound. The success of REVLIMID further strengthens both our resolve and the resources available to accelerate the development of our IMiD pipeline and other key programs. Focus on long-term value creation continues to be our corporate priority. As you know, this is my last conference call as CEO. It's been a fulfilling 10 years. And I want to thank many of you for your support. We've made great progress and are making a difference in the lives of cancer patients around the world. The reason Celgene is one of the very best pipelines in the industry is that we have consistently invested in our future, and we will continue to do so. It's been a great partnership with Sol, Bob and the entire team at Celgene. They're well-prepared to take responsibility and lead the company as I step back to the Chairman's role. I've never felt better about the future of Celgene. Operator, let’s open the call for questions. Thanks for taking my call, very impressive first quarter of roll-out sales for REVLIMID. My first question is about REVLIMID, particularly in myeloma, I was little surprised that it was as high as 30% of sales in myeloma. Are these first-line patients who are ineligible for the expanded access program? Or are they relapse refractory patients who didn't, for some reason, get on the extended access program? And then I have a follow-up on NHL. Thanks. Okay, we’ll first on the REVLIMID and the MDS myeloma -- the MDS was around 70%, myeloma was the majority of the 30% but not all of it, more -- I think it was a little over 20%, is what it was. And we're not able to characterize what stage of disease, though clearly, we have worked very hard to open additional sites in the expanded access program so that people and physicians and patients who want to -- who have been previously treated myeloma and want to get access to 25 milligrams on a free basis, something we've been very committed to doing, and we’ll continue to do that right through the approval of REV in myeloma. Obviously, if patients want to and physicians decide it's in their best interest to go for commercial drug and get reimbursement, that has happened to some degree in the quarter. But clearly, our focus has been on MDS and will continue to be that until we get the myeloma approval. Not completely. It's a range of -- one of the reasons why we have worked very hard to keep the EAP open and to ensure the rapid accrual of the many clinical trials in REVLIMID in myeloma, is that we really believe it's important that once the drug is approved, the 25 milligrams is likely to be the approved dose. That's what the clinical trials -- we used that with a relatively low dose reduction, I think less than about 20% of the patients even have any type of dose reductions in that area. And so we think it's important that people and physicians and patients use the right therapy and the right protocol for doing the drug. So, it is not all 25 milligram from what we've seen in the first quarter. People have used 25, have used smaller -- lower numbers also. So that's one of the reasons why we're hopeful the FDA will move quickly. But we will keep the EAP open straight through and keep encouraging accrual in the many clinical trials in that. So what was your NHL question? Thanks, Bob. I guess for Sol, this sounds like a pretty extensive market expansion strategy in CLL and NHL. And just with respect to one of the two Phase III studies you mentioned in NHL, it sounds like it's elderly patients first-line elderly patients, I guess those patients are not getting our CHOP right now. And what percent of the first-line aggressive patient population do you think is elderly? Thanks. Okay. So let me start with the second part in percentage -- it's hard for us to estimate, but roughly the 15% range. And the rationale for using it initially in elderly patients is the fact that they cannot tolerate the standard regimens, the Rituxan, and CHOP, etc. So this is clearly an underserved patient population. And hopefully, REVLIMID will be very effective and safe for these patients to use. And hopefully will lead to something relatively quickly, although in terms of time lines, it's very difficult for us to estimate that. But this is a trial whose protocol in this year will certainly be going to the FDA under the special protocol assessment. And I can probably be more explicit as we get feedback from them. Good morning, guys. I also wanted to add my congratulations. You mentioned second trend of scripts for MDS, Bob. Can you give us a further breakout of that? We would certainly look at that. The problem is -- or the way RevAssist operates and the way the prescriptions are written, it's an MDS indication. So we don't have information on it, we do our own assessment. But that's very early-stage and there isn't anything official. So the only indication that we get on the script is MDS. As I mentioned, a little bit more than two-thirds of it was myeloma. But beyond that, there were wide range of hematological malignancies, some of the ones that Sol mentioned, that we are very much focused on for a clinical trial study in, and we're also -- even in some of the solid tumors, we've seen prostate cancer usage, other solid tumors also. Yes, I think that -- obviously for that -- for the scripts that were dispensed here off label, people could pay cash for. For the most part, our understanding is those are reimbursed, obviously, expenditures. And we're working very hard to ensure that we have the same type of reimbursement success -- or patients have the same type of reimbursement success that we have with THAL, where we have multiple compendia listing for different indications for THAL to lead to broader reimbursement. And we do think that our clinical trial program -- over 50 REVLIMID trials now will produce peer-reviewed publications that will support it over time. But we are encouraged by, despite the difficult marketplace in terms of Medicare Part D, that patients are getting reimbursed for a wide range of indications today. And it is our job over time to support that with good clinical data and peer-reviewed publications and major medical presentations to ensure that patients continue -- and physicians are capable of prescribing and getting reimbursed for the indications they believe the drug is helpful to their patients in. And so that's about all we really can tell you at this point, but it's certainly -- we believe clinical datas what will drive usage. And we're committed to getting as broad and expansive body of clinical data supporting the usefulness of REV. Thanks. Two quick questions. First one on your European commercial strategy. If you could update us on the idea of still going it alone in Europe, and if you're going full bore in that way? And also if you could talk about the European or western world trend -- sales trends for THALOMID. And the second question is when do you think REVLIMID sales data would be available? Thanks. Well, on the first front, we're very encouraged by the progress that we're making outside the United States, specifically in Europe. But also, we're moving forward on strategies in Canada, Australia, and Japan, as Sol mentioned. In Europe, we have been able to attract very high-quality people to lead the effort from a very wide range of companies and academic backgrounds. We've just -- in Germany, one of the leading thought leaders in the myeloma space has joined us to be a -- on a medical director in Germany. So, from a wide range of sources -- very, very high-quality people are joining us. We're very much focused on the leadership in the countries which we have now put in place in all of the major countries in Europe. And focused on the key medical directors that really have, from a functional point of view, in terms of what we need to do is; one, continue to build-out our clinical trial expertise, because we're committed to broadening our clinical trials throughout the world, specifically in Europe; develop very deep relationship with the key thought leaders in Europe; and having medical professionals and people who are expert in hematology to lead that effort in all of the countries, is a very important consideration. And we've been very fortunate to have very important leaders in those communities, in each of the major markets come and join us -- and also experts on reimbursement and pricing to ensure that, as our regulatory team in Europe, which is also obviously an important component along with clinical and commercial leadership, is that we have the kind of -- once we have approvals, that we are successful in getting reimbursement and the appropriate pricing for the drug. The actual commercial team in terms of sales and people in the field, we obviously have to have market leadership there and advance the plan and strategy. The actual distribution will be late in the process as the regulatory timelines become clear. So I can tell you -- we obviously, have ways to go. And Sol outlined the regulatory strategies there. And that we are making progress. But as he's mentioned, the MDS is a more aggressive strategy, as it was in the U.S., based on the 5q data. The myeloma review is moving forward in Switzerland and in Europe and other countries you'll hear about throughout the course of the year. But we've got to get that done. But I think we're just feeling that the right people have joined us, they're doing a great job putting together a very strong plan, and the commitment on our part in terms of creating long-term value, is through executing through your own organization, that's where a company retains the full economic value of the products. And that's our commitment there. And we're going to look at every other marketplace with that intention where it's appropriate. And if it is appropriate for us to partner other markets because we don't think we can compete effectively and really do justice to the drug and to patients in those markets, we will partner. But clearly long-term strategy is to go alone and build it for ourselves. In terms of THAL outside the United States, that really is something that is a fermion in the markets that we've licensed about to THALOMID to -- that's really something you should hear directly from them. I don't think it's appropriate for us to comment on that, that's really their strategy. We hope they're very successful, since we have a fairly significant economic stake in those revenues. And the last thing on REV; I think that as trends become clear in the usage of REV over the coming months and that we cleared with the commercial experts at Celgene so that we're not providing information that is not competitive or could be used in a way to harm the product by people who compete with us, that we would look to be as forthcoming as appropriate. Hi good morning, congratulations on a very good quarter. I wanted to start with -- to the extent you can, can you just give us a little bit of an indication as to what is your current market share of REVLIMID in MDS? And also based on the preliminary anecdotal experience, kind of what are you hearing from docs out there regarding toxicity that's well-publicized for the product? What's the early experience showing you relating to the hematological toxicity of the product? Is it pretty much inline with the label or what are you hearing from docs? A couple of things. One of the things that we're committed to is that when you think about MDS, it really has been, other than in the very high risk patient population with the use of laser with a reasonable percentage of those patients, it has been a marketplace where supportive care has been the only option for the physician and the patient. So we really have been embarked on a multipronged strategy here. And several important of those initiatives have been, first, to educate the market about the fact that supportive care is – is that's what it is, it's supportive care. It really is not making a difference in the disease or a clinical benefit for the patient. And we have a product here that now has demonstrated, through FDA approval, a clinical benefit in a population -- a certain population of MDS patients. We need to educate people about that clinical data and recognize that there's a benefit of treating patients that have previously not been actively treated. Also, we have to recognize that one of the things that we're concerned about the long-term success of REVLIMID is using the drug successfully, especially the first number of patients. So, our team in the field has been very aggressive to ensure that the physicians understand how to manage the patients, especially in the first eight weeks, with weekly blood tests. And as we evaluate the feedback we get from our different market research, we look very closely. Our physicians saying that they're hearing about how to manage the drug safely. On the positive side of that, the feedback is that we're getting is that physicians have gotten that message, they hear the message, they listen to it, they are obviously – not everybody is going to listen as closely as others. But we feel very good that the side-effect profile that we are seeing, both from a reported basis and anecdotally and in conversations with all the thought leaders and the community physicians, are very much consistent with the side-effect profile we saw in the trial. And nothing new or troubling has come to attention. And, in fact -- and again, I don't really like to say this, but we're seeing that people seem -- the evidence initially is, that they feel very comfortable that they can manage the side effects effectively as we had anticipated. But we're not going to let up. We're going to continue to focus on ensuring that people understand this is a potent drug, it has great activity. And to really have long-term success, you need to get that -- make sure the patient gets through the first couple of months. And what we're seeing with drug holidays, if anything is slightly less than anticipated, but very much consistent with what we would have expected. So again, it's early in the launch of the product. We're careful -- we don't want to draw too many strong conclusions about the long-term. But I think we're focused on what the right messages are. And the feedback so far has been consistent with what those messages were in our expectations. But we're going to continue to be careful about it. And again, I think we're going to be careful about drawing too many long-term conclusions from two and half months -- maybe now, three and half months of experience. Thanks for taking my question. And I also wanted to add my congratulations. A couple of questions. First, just on the reimbursement side; did you see any uptake in Part D beneficiaries in REVLIMID? Yeah and obviously it's important with Medicare Part D, it has been a very difficult time for patients to get through that process, but we are clearly part of the Medicare Part D. And patients are getting reimbursed under Medicare Part D. The key issue with that, whether it's Celgene or other companies is that the doughnut hole is a very important and difficult thing for patients to get through, especially senior citizens with such a large payment required after the initial -- once you get through the initial threshold and get to the doughnut hole. We think that's something that the states have been very helpful to. Many states have programs to assist senior citizens through that doughnut hole, which is allowed. We are obviously not allowed at all to help people through that doughnut hole, states are. And a lot of state programs are helping patients through that -- that are appropriate, that are above the Medicare threshold -- Medicaid threshold, but are not eligible above Medicaid, but have no other assistance for the doughnut hole. And we will continue to be supportive of independent third-party foundations that are committed to providing co-pay assistance to these types of patients, whether it be Medicare or other insurance programs to help them with co-pays for both myeloma and MDS. So generally, it's been a positive. You don't see a lot of the benefits, in terms of existing patients switching to Medicare until two or three quarters later. There's a lag in the whole gross to net effect. And we'll hopefully see modest positive impact in a couple of quarters from that. In terms of REVLIMID, it is very difficult for patients. But we'll keep our fingers crossed that our -- that the third-party providers that we have that assist patients and physicians and caregivers to help people through the work with Medicare and co-pay assistance and free drug -- because we're still committed to keeping our free drug programs, make the drug as available and access as wide-ranging for both THAL and REV. And we still have -- I don't know what the number is, but eight to ten million senior citizens who haven't signed up for Medicare Part D yet. I hope anybody who knows any of those people, May 15th is approaching, there's a penalty if they don't sign up by then. So it’s really in everybody's interest, not just from a commercial point of view, but for the benefit of protection of those seniors, to get into the Medicare Part D program. We have time operator, for two more questions. Great, good morning. Thanks for taking the question, and congratulations again. And John, good luck in your new role. I just wanted to -- Bob, if you can clarify the wholesaler inventory, around $5 million for the quarter. In the 10-K, I think you booked about $3 million for REVLIMID in the fourth quarter. So is that a net addition of $2 million? Or is that $5 million all taken in the first quarter? Yeah. Again, I want to make sure that we look at -- wholesalers do not and cannot inventory THAL or REV under the RevAssist or STEPS program. The only inventory that can be held is that a pharmacy. And with REV going through specialty pharmacy -- that we provide overnight shipment to those pharmacies and so that it's our estimate that of the $32 plus million in the first quarter, about $5 million or so would have not been pulled through. But that X number of days is just consistent with the -- with the pull-through. So, the total number of in-stocking would have been above the $5 million. But I wanted to -- I guess -- I appreciate the question, so make sure it's clear that when we look through the pull-through, the stocking would be $5 million in the first quarter, and a little bit that was put on the shelf to ensure that we qualified for Medicare, that the drug was available in 2005, was pretty much for the most part put on the pharmacy shelf. So it's probably $6.5 million or so that is actually out there in pharmacies. Those are all estimates. And everyday it changes. If what would have shipped that day versus the dispenses change a little bit because we're still pretty early in the process. But in terms of the five and ten milligrams, we would not anticipate a much higher level of that, because again, we have ready supply -- these are a concentrated group of contracted specialty pharmacies that are shipped overnight. So we wouldn't anticipate, again, on the five and ten milligrams, to have much of any increase from that kind of inventory levels, going forward. Thanks for the question, that's good to clarify that. Hi, congratulations on a good quarter. I may have just missed this, but could you walk us through the trials which you have for REVLIMID which could eventually go for compendia listing for peer-reviewed publications, the timeline for that? Well, I guess our focus on the compendia is with every indication that we explore, if we can produce major presentations at medical meetings or peer-reviewed publications. With THAL, I think we have eight-plus compendia listings in the United States. And with over 50 trials underway, if we have positive results in different stages of MDS, we will work very aggressively there to get compendia support. The approval of myeloma, we believe will satisfy our needs in myeloma. So I think we're going to be in good shape there. We're still going to produce very significant peer-reviewed publication, all different stages of myeloma and different combination therapies. Because again, it’s usage is very data driven, we want to provide clinicians and physicians with the widest range and depth of data possible to help assist in the appropriate use of the drug. But all the indications Sol mentioned with amyloidosis, myelofibrosis, all the ones -- NHL, CLL, we are committed to a peer-reviewed publication strategy to get the disseminated of that clinical trial data. I believe our goal for this year is certainly north of 20 peer-reviewed publications in 2006. Then our reimbursement teams have to work with the appropriate people to ensure that we get the commensurate compendia listing and all the ranges of indications. But we have a wide -- we want full, full disclosure. And we think that by the end of the year, we're talking about nine different CLL trials and expected data from several, that will lead to publications, hopefully quickly. So, it is a broad range strategy, it's not an off label promotion strategy, it's simply getting data out there, give physicians and patients the choice. But our desire is to get the drug approved for as many indications as to where we have the data to support that and get data presented in all the ways we can. So, thank you very much. We're going to thank everybody for dialing in. It was certainly a very strong quarter for us, we were excited about the prospects for REVLIMID. We're committed to maximizing its potential, both commercially and in the clinic and in research. And we look forward to updating you throughout the course of the quarter, and certainly at the end of the quarter, our conference call in July. So, thank you very much.

EarningCall_233967

Here’s the entire text of the prepared remarks from Audible’s (ticker: ADBL) 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, and welcome to Audible, Incorporated’s Third Quarter 2005 Earnings Conference Call. All of you should’ve received a copy of the earnings release. If you have not received the release, please contact Kathleen Krowicki (ph) at 973-837-2799 and she will ensure that a copy is faxed or emailed to you immediately. With us today from Audible are Donald Katz, Chairman and CEO, and Andrew Kaplan, Chief Financial Officer. Management will first provide a presentation, followed by a question and answer period. We will provide instructions for asking questions at that time. The statements made in the course of this call which are not historical facts may be deemed to contain forward-looking statements. Actual results may differ materially from those anticipated, and any forward-looking statements as a result of certain risks and uncertainties including, without limitation, Audible’s operating history; history of losses; uncertain markets for its services; and its inability to license or produce compelling audio content; and other risks and uncertainties detailed in the company’s Securities and Exchange Commission filing. Any reproduction of this call in whole or in part is not permitted without prior expressed written authorization of Audible, Incorporated. And as a reminder, ladies and gentlemen, this conference is being recorded. Thank you, and welcome everyone to today’s conference call. The third quarter was marked by record revenue, record new Audible listener acquisitions, and tremendous progress for our initiatives designed to drive growth well into the future, including the much celebrated launch of Audible Air, the completion of our first quarter of operations for the Audible UK, our exciting education initiatives, and our Podcasting tools and services program, which will become publicly available in the coming days. During the course of the third quarter, we optimized aspects of our new customer acquisition programs and launched very successful pre-iPod Shuffle programs late in the quarter. This has led to a far greater percentage of committed Audible listeners. And our September and October performance in particular indicates that the up tick and churn we saw in Q3. Churn was about .6% during the quarter has stabilized as we move into what looks to be a very strong holiday sales season. Before I talk about key metrics for the quarter, I do want to take to share with you two milestones. One is that on this very day ten years ago, Audible was incorporated in Delaware. We came early to the vision of ubiquitous digital delivery of the best of the culture of words that everyone involved early on, including many of our current senior executives looks backward with pride and forward to the markets opening up before us with high excitement. I also want to mention one of those mini milestones that will certainly resonate for investors and longer term observers of Audible’s progress. For close to 72 hours earlier this week, the number one best-selling album on the iTunes music service was the www.audible.com download of Thomas Friedman’s The World is Flat. The audio book powered above Ashlee Simpson and Kanye West and Nickelback. In fact, on Monday of this week, nine Audible titles were among the top ten bestselling albums at iTunes. These sales were generated by a very successful email promotion coordinated between our publishing partners and Apple. The results are particularly impressive because the email was focused on music listeners who had yet to experience the power and addictive character of listening to the spoken word. Before I turn to some key metrics, I do want to mention that in the coming weeks we will be introducing some changes in our service and user experience designed to delight our customers. Also, shortly after the first of the year, we will be coming back to you with full visibility on key metrics including net subscriber numbers, as well as specific guidance related to our expectations of solid profitability and robust growth in 2006. We saw strong new customer growth in Q3. We added 79,800 new customers, and of those customers, 62,000 were Audible listeners, reflecting a year-over-year growth of 102%. As I noted, the total new Audible listener members coming to us through committed programs in which they take a free digital audio player or a discount on a player at retail outlets and make a multi-month commitment to being Audible listeners have been increasing, mostly in recent weeks. The percentage of committed customers rose significantly as a percentage of total new customers in Q3 to 24%, as compared to 17% in Q2. But to offer you some more color on the recent C change for new member composition. During the month of August, the number of new Audible listeners who came in as committed members was 13% of total new Audible listeners. In October, 42% of new Audible listeners came in as committed listeners. Also, in August, 74% of our new Audible listeners were generated through free trial programs, some of which led to higher churn rates. In October, 33% of new Audible listeners came from trials. These factors have led to a decline in churn in October. It’s still early to read the trend, but the numbers in recent weeks clearly indicate stabilization has been achieved. The success of the free shuffle with membership program in the last four weeks of the quarter did cause the cost of customers to rise slightly. But this is clearly a cost that comes back as a very strong and profitable revenue stream reaped from highly qualified, committed members. The strong growth in Audible listeners during the quarter drove net revenue of 16.8 million, reflecting a year-over-year growth of 81%. As expected, we saw a loss from operations for the quarter of $793,000. But before taxes and stock-based compensation expense, we saw a profit of $124,000 which was better than expected. As many of you know, much of Audible’s success to date has been driven by our ability to invent and deploy new technologies just ahead of market adoption to ensure that we are continually expanding our market opportunity, achieving optimal competitive positioning, and driving rich and diversified media streams of revenue, rich and diversified streams of revenue and profit growth well into the future. We have called 2005 a year of investment in pursuit of these goals. And there are certainly important initiatives this year that will ensure we remain competitive and in high growth mode for years to come. While we announced specific investments in launching Audible UK, Audible Air, Audible Education, and our new Podcasting applications, we have continuously stepped up execution along many other fronts, all of them designed to come together as major wins for consumers. Audible Air is our new wireless download service, which we launched in September to rave reviews. Many of you have heard Palm’s CEO, Ed Colligan’s enthusiastic personal review of his experience of Audible Air on his Treo during the last Palm earnings call. Or perhaps you’ve read the in-depth review of Audible Air by David Pogue in the New York Times. For those of you unaware of the product, Audible Air allows for the automatic wireless delivery of our audio content to a SmartPhone, bypassing the PC. I now wake up in the morning and find my Audible audio edition of the Wall Street Journal, and the New York Times or my latest Audible edition of the New Yorker or Charlie Rose or the Bob Edwards Show waiting for me in my Treo 650. The application will also refresh my latest audio book with another personally determined segment of audio automatically, only overriding the portion of the book I’ve heard. It’s an amazing experience. So far the service is being offered to owners of Palm Treos. I would urge any Treo owner to go to the www.audible.com software page to glimpse and hear a piece of the future. We’re also in private data on both of Microsoft’s wireless platform, the one for pocket PCs and the other for SmartPhones, and we have assigned Symbian (ph) application in private data, the signature element, indicating the App has gained prerequisite qualification from Nokia, manufacturers of the popular Series 6V SmartPhones. Beyond the tremendous convenience of the Audible Air platform, the innovation is directed at some big numbers coming into the wireless market. Some 850 million phones are expected to be purchased globally next year, and an increasing number will be SmartPhones capable of receiving our audio. Yesterday at a conference in Spain, Nokia’s CEO said that they expect to ship a 100 million SmartPhones in 2006, a significant subset of which will have enough memory or at least memory slots for SD or mini-SD cards so they can handle Audible Air delivery. Audible UK launched during the final days of the second quarter and completed its first quarter of operations under managing director Chris McKee in Q3. And we are pleased with how things are developing in the UK. We will soon launch our Audible UK audio edition of the London Times, and will continue to ramp our customer acquisition partnership with CD WOW, the big British online retailer. We were also very impressed with the strong sales of our UK source, content at iTunes UK and at www.audible.com US. And we now are partners of the BBC Worldwide are very pleased with our sales trends. Audible Education is a growth initiative that has implications that are social as well as economic. As the initiative promises to create new auditory learning opportunities for individuals of all ages. We were very impressed with the Pearson Higher Ed study guides being produced in advance of their 2006 Higher Ed channels sales effort. We also have just signed an exclusive original content deal with the very successful publishers of SparkNote to jointly create audio study materials and co-market them at Audible and via their high traffic educational destination site, at sparknotes.com. Additionally, we have struck an agreement with Pollett (ph) Higher Education, the leading college retailer to market audible content both online and in stores. We’re also addressing the K-12 market with a content and marketing agreement with Scholastic. You can expect many more announcements along these lines in the near future. We continue to see consistent demand for Audible technology among creators of tethered digital audio players. Earlier this week, our first Audible-ready GPS device, the NuV (ph) from Garman (ph) shipped fully audible-ready, and with our marketing materials and sample audio onboard. We expect more of these handhelds to adopt our audio platform in the near future. And we’re very intrigued to see the market response in light of the NuV’s focus on travelers and outdoor enthusiasts. We were also very pleased with the high adoption rates we’re seeing from our work with Dell and their audio devices, as we are with SanDisk audio devices in the market. We are also on track with XM to bring our technology systems together to allow Audible and XM premium content access from a single device during the first half of 2006. We continue to add consumer electronics accessory marketing partners. Most recently, we added DLO to the Audible marketing partnership family, manufacturers of 30 popular iPod accessories that will all now ship with Audible material that will increase awareness of our service. On the marketing and distribution front, we launched an important new partnership with BookSpan, the large operator of most of the nation’s book clubs from Book of the Month Club to the History Book Club and many, many others. Co branded boutiques are performing very well in the books and websites as is our new boutique at www.cbsnews.com, the first public result of what we expect to be a strong and multi-faceted relationship with CBS. At retail, the successful Audible gift card program launched with Target last Father’s Day will be extended for the coming gift buying season to Best Buy and WalMart stores. On the content front, we have now have 270 content partnerships, more than 62% of which are exclusive, multi-year deals. We closed 29 new or renewed content deals in Q3, 16 of which were exclusive. The new deals include access to dozens of Chicken Soup for the Soul titles, nearly 200 new Spanish language titles, and children’s audio books from Scholastic, which I noted earlier. During the quarter, we also struck several original production deals, one with Rodeo to create audio versions of their popular Abs Diet products, another with marketing guru Seth Goden (ph), and another with writer/performer Eric Bogosian (ph). We also added XM’s franchise spoken word programs the Bob Edwards Show and the Opey & Anthony Shows. And we launched a new twice-weekly program on XM Satellite Radio called This is Audible, that is also available through www.audible.com. This new one hour show features countdowns of Audible’s top seller list, interviews with authors and narrators and features focusing on some of Audible’s most compelling listening. I also want to note that on September 18, a smaller phase of our network infrastructure upgrade was achieved and is scheduled has resulted in an average 50% decrease in webpage load times. Far more profound improvements are expected during the fourth quarter in concert with the exciting new innovations and improvements that I alluded to at the top of the call. Thanks, Don, and hello everyone. As Don mentioned, total revenue for the third quarter grew to 16.8 million, up 81% year-over-year, driven mainly by strong growth in new Audible listeners as well as average Audible listener buying over plan of 19%. Strong sales of Audible content at the Apple iTunes music store accounted for 14% of total revenue. Monthly churn in Q3 of 5.7% was up 6/10 of a percent from Q2, and Q2 churn was up 1.1 percentage point from Q1. Turning to operating expenses, costs of consumer content revenue in the third quarter was 5.9 million or 35.9% of consumer content revenue versus 36.2% in the immediately prior quarter. This decrease is the result of our efforts to manage down content costs via pricing as well as merchandising mix. In Q3, average customer acquisition costs increased to $43 from $40 in Q2. The primary driver of the increase was an increase in the mix of Audible listeners recruited through 12-month commitment programs, from 17% in Q2 to 24% in Q3, as Don noted. Our $100 rebate and free Shuffle programs continue to be a source of solidly profitable customers. We expect this strength in our mix of newly committed Audible listeners to continue in Q4. Expenses incurred in building our UK business, our Audible Air initiatives and the continued strengthening of Audible’s service delivery system are reflected in the operations and technology and development lines. Moving down to P&L, interest income increased to 554,000 in Q3, reflecting earnings on our 69.7 million cash and cash equivalents balance which is invested in government securities with maturities not exceeding one year. And with that, our net loss for the quarter was 189,000 or a penny per share. And with that, I’ll turn it back over to Don. Thanks Andy. So we’re reaffirming our guidance for 2005, an expectation that represents accelerating year-over-year revenue growth for the third year in a row. As I noted, we will be offering guidance for 2006 in early January, along with other key metrics that we will be publishing for the first time. And you can feel assured that the 2005 investment initiatives in the UK, education and Podcasting are all projected to be contributors to both revenue and profit during 2006. I do want to take a moment before closing to observe that right now is as dynamic and promising a moment for Audible and digital media distribution as I have experienced during our decade of business building. On November 11, I’ll be giving a speech in California at one of the first large Podcasting conferences, where we’d be making some important product announcements. We are expecting Podcasting to be additives on both the revenue and profit lines in 2006. And our discussions with media companies about Podcasting and the commerce revenue streams we can build for the creators of premium programming has ratified the sense one draws from the business pages. Big media companies have indeed reawakened to the web, to digital media in general, and as we’ve observed, to Audible. Meanwhile, device penetration is steadily rising, led by our amazing partners at Apple, who seem to put out one magical new www.audible.com compatible iPod after another. And it is clear from evidence such as the iTunes bestselling album list I mentioned earlier that our specialty, the world of literate listening and the consumption of the words people need and want to consume as a means of improving their lives, is at its own upward trajectory within the large digital media distribution trend, as confers to the habit of Audible audio come to us by the day. We envision a day in the not too distant future when newspapers carry listings describing the rich flow of new titles at www.audible.com as they do with television. The technology innovations we have helped create are positive disruptions of the status quo, and we are well positioned to serve the millions of listeners who will want to program their own listening time during those times of the day when they can’t read or look at a screen. Q3 represents yet another step forward. And thanks. So we’ll take some questions now. 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_233968

Here’s the entire text of the prepared remarks from Knight Ridder's (ticker: KRI) 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 Paige and I will be your conference facilitator. At this time I would like to welcome everyone to the Knight Ridder Quarterly 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 “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, press “*” then the number “2” on your telephone keypad, thank you. you may begin your conference. Good afternoon to all of you. Welcome to our call. I am here with Anthony Ridder our Chairman and CEO and Senior Vice-Presidents, Art Brisbane, Hilary Schneider and Steven Rossi, they will begin. Before we go ahead though let me remind you that we are subjected to all of the safe-harbor provisions of these calls as outlined in our 10-K. With that I will turn it over to Tony. Okay, good afternoon everybody. Let me start with the statement of the obvious, this is one of the more complex quarters that we have reported. Our GAAP numbers per diluted share for the period is $3.56. That includes a gain of $2.92 per diluted share on the properties we sold in Detroit and Tallahassee. Also $0.2 to discontinued operations. Importantly the number that we are focused on is $0.67 per diluted share. This is a number we arrive it, after you take our EPS from continuing operations, $0.61 add back the $0.8 for severance and then subtract $0.2 for the favorable resolution of prior years tax issues. The $0.67 is the pending of our first consensus. And 18.3% out of the $0.82 on continuing operations last year as detailed in the release. We would also like to take special notice of the accomplishments of the quarter as they were many. These include the sale of our interest in Detroit, the acquisition of three newspapers in the west, the $400 million general offering, $10 million share repurchase announcement, a significant work reduction, work force reduction in both Philadelphia and San Jose. Additional business with revenues that is exploding, and our targeted publication business just gets bigger and more varied every quarter. I stress them because they are important not only in themselves but for what they say. Basic change in willingness to reallocate growth opportunities. At the same time we are focused on the core business. Revenue results for the quarter were in line with industry trends, but still disappointing. Even with the September that we are somewhat better than August, +2 was disappointing and not reflective of either our first two quarters or the quarter to come. Some of that is associated with the growth that we are experiencing in non-core businesses, yes some of it is one time and reflective of uniquely unfavorable comparisons. Prior to this quarter both in this year and in recent years cost control has been among the greatest trends. And it will be again in Q4, I assure you. Some points I would like to make quickly. A number of our large markets had solid revenue from quantum services, Miami, San Jose, Charlotte, Contra Costa and St. Paul all did well as we released details. But in the end they were not enough to offset the results in Philadelphia and Kansas City, 4.8% and 2.9% respectively. Philadelphia is retail national and classified automotive, below stock, in the way they are proportionately on the scale as a whole. In Kansas City, the story was exactly the same but on lesser scale. Recent cost reduction announced for Philadelphia and San Jose were in part recognition. Revenue in those two places is not rebounded from its high in 2000. We have to have a cost structure, those prices that make sense for the market in which we are publishing a newspaper. While the Biloxi hurricane was devastating, if there were a stronger word I will use it, the employees of our Sun Herald newspaper, it was not material to our financial results. Most of the losses will be covered by insurance. Then the stream of the Knight Ridder newspapers Biloxi is relatively small. The sprit of the rebound from Katrina has been really magnificent. The absorption of the three new newspapers has gone well. Employees and their communities have rolled out the proverbial red carpet for Knight Ridder. We are hearing good things from both advertisers and readers. Business is strong in all the three markets. Finally I shall give you the details on our share buybacks, but let me emphasis this, there will be a lot of buying in the fourth quarter. We will be very aggressive in returning value to our shareholders. Goldman will be buying the shares that they will borrow to effectuate accelerated share buybacks. We have been working on the other 5 million as well. I am sure this is well understood so listen to what Steve has to say. In September when we released our August numbers, I had a statement in the release, and I would like to read it to you. That on a continuing operations basis, excluding the favorable resolution of prior years’ tax issues, including our newly acquired newspapers, earnings per share in the fourth quarter will show growth. I feel very comfortable with that, what that would mean is that we would have to do better than the $1.60 a share, which would be ’04 number. I think that your consensus projection of a $1.25 per share is in the ballpark of where we will end up. Now here is Art. Thank you Tony. Good afternoon. Let me start with retails and with retail and with categories. As you said that for the group as a whole excluding the acquired newspapers, retails for the third quarter was up 1%. The Metro group, which includes our 9 largest newspapers, their category was up to 1.1%. We can see the large market dictate the whole. Department stores, which account for 13.5% of our retail business was down 3.9% in the quarter. Federated was down modestly and Dillard’s was down in the double digits. Old and Bloomingdale’s were both up. I know there is particular interest in Federated May. For the quarter ending by the combined retail it was down about 6%. Federated a little less May a little more. As you know the one KR market affected by this merger is Philadelphia. There are 31 Federated May stores in total in the greater Philadelphia region. I don’t know whether some will be closed, or if that occurs what other chains such as _____ might pickup the space. While we expect to lose some advertising in the coming year because of the merger, it’s too soon to know the dimension. Our best estimate that such a loss could amount to be maybe 0.2% of Knight Ridder’s total advertising. Electronics which accounts for 6.3% retail was down in the high single digits, several large accounts contributing; however, Circuit City and Radio Shack were up. Grocery and auto supplies account for approximately 4% of retail were both down. However most other categories were up and that includes general merchandise with increases from K-mart, Sears, Target and Wal-Mart. Also home furnishing, drugstores were healthy 7.7% and home improvement office supplies, sporting goods and apparel. International, most of the large categories were down. Telecom was down modestly, computers were down more subsequently, auto was off 6.4% primarily driven by 50% drop in business. Gannett was up by 1.1%. Daimler Chrysler and Nissan both showed strong gains, entertainment was down in the mid 2s with many, not all of the movie studios showing decline. Airline advertising continued to reflect the challenges in that industry, one real bright thought is financial adverting, up almost 110%. We then classified real estate and employment both remained strong so I won’t dwell on them, classified auto without the acquired newspapers was down 10.8%; however, comparison is due even in the fourth quarter, was down 6.0% last year. So I am guardedly optimistic for the coming quarter. I want make a comment about our comparison, excluding the newly acquired properties. This is specifically to September performance. This September, Knight Ridder reported a total advertising gain of 5.8%, excluding newly acquired properties, however, that gain was 2.2% total advertising. Retail excluding the new properties 2.0% National was 0.5%, classifieds was 3.1%. Now here is Hillary. Thanks Art. Let me follow up by starting with Digital. Knight Ridder’s online advertising revenue for third quarter of 2005 was $41.3 million, an increase of $14.5 million or 53.8% over the third quarter of 2004. Including the recent acquisition of Boise, Olympia and Bellingham. Growth over the prior third quarter was 51.9%. For the date adverting revenue was $115.3 million, an increase of 54.4 % over the prior year. The increase in revenue was driven by strong growth across all key revenue categories Our largest revenue category was particularly strong with revenue totaling $22 million in the third quarter, 70% higher than the third quarter of last year. The growth in recruitment was a result of increased sales volume and 30 day job posting and higher average selling prices, testing our efforts to better monetize career builders leadership with online recruitment. On the audience front, our focus on increasing the level of engagement with our local unique audience those most valued by our local advertisers has resulted in an increase in local unique visitors to our top nine sites of 44% comparing the July to August 2005 average the same period in 2004. Additionally, our overall audience averaged 10.2 million unique visitors in the third quarter of 2005, an increase of 13% over the prior year. Real Cities, the national sales network of local news and information sites we manage averaged 27.5 million unique visitors, an increase of 20% over Q3 2004 with a 19.7% national reach, Real Cities is the number one network for news, information and current events in the nation. Career Builder Network reported revenue of $133.2 million in the third quarter of 2005, an increase of 72% over the third quarter of 2004. Career Builder’s traffic averaged 51.1 million unique, an increase of 20% over Q3 of ’04 making a first in Career Related traffic according to Media Metric. Career Builder maintained its leadership over Monster in job listings in the third quarter of 2005. Overall, we are very pleased with Knight Ridder’s online results. And if I might add just a few words about our targeted publications effort. These use of the term targeted publications, covers a broad range of products. Outside vertical publication, employment, real estate and cars categories and lifestyle magazines. Free newspapers suburban and weekly newspapers and shoppers. This year we have launched 50 new titles to make three acquisition, we will announce another latest today and one more is pending. Classified vertical pubs lifestyle magazine taken together are growing at a rate in excess of 40%. The daily news groups or three newspapers in the bay area are growing at a 10% on the proforma basis. We are very pleased with our progress in this arena. Let me remind you these targeted publications and our unduplicated reach in our market, means of portfolio products we can effectively sell. I will now turn it over to Steve. Thanks Hilary and good afternoon. I have just a few additional comments about the numbers. Capital expenditures in the third quarter were about $25.7 million, total capital spending in 2005 is expected to drop from $150 million last year to about $111 million this year. As you know, we are building a news production facility in Kansas City, much of the cost of that project fell into 2004. On the cost side excluding our acquired newspapers and severance expense in Philadelphia and San Jose, wages and benefits were up by 4.9% of which wages were up about 2.2% and benefits were up 15.8%. Increased pension expense represents about two thirds of that variance, healthcare is responsible for the other third. Healthcare was up about $2.2 million this quarter, entirely due to last years recognition of favorable healthcare cost trends in the third quarter. Last year we had better than expected plan results up to that point. We will be going against a more normal level of expense in the fourth quarter. And excluding our three acquired newspapers, we expect wages and benefits to be up less than 2% in the fourth quarter. Our equity line performance was about $3.7 million better than last year, principally as a result of improved earnings at carrier builder, Seattle Times and at our news print mills. At the expense stock options the cost would have been $0.5 per share for the quarter. And we will begin expensing options in 2006. The continuing operations raises our tax rate for the quarter at 36.4%. We benefited from the favorable resolution of prior year tax issues, which reduced tax expense by $1.2 million excluding any adjustments we would expect our weighted average tax rate be 37.6%. On an update on our real estate transaction, as you know we have signed an agreement of sale in Miami which should net about $125 million in after-tax proceeds. Environmental testing has been completed and an environmental remediation plan has been approved. We expect closing on the transaction to occur in the first half of 2006. During the quarter we announced our plans to repurchase 10 million shares over a 6 to 9 month time frame. In the third quarter we repurchased approximately 1.5 million shares in the open market and we repurchased 5 million shares in an accelerated share buyback agreement with Goldman Sachs. The agreement allowed us to repurchase the shares immediately from Goldman Sachs. If Goldman purchasing the shares in the open market over the next several months, they began purchasing the shares in late September, we expect them to be completed by year end, as we said in the release, the average price per share at which we settle with Goldman Sachs for the 5 million share repurchase, is the ultimate average cost to us to buy back the shares will be the approximate average share price for the period over which the repurchases take place. Based on where our stock has been trading over the past months we would have a significant refund from Goldman Sachs. In addition we continue to buyback shares in the open market. We expect the open market portion of our announced share buyback, that is the other 5 million shares to be completed in the first quarter of 2006, now back to Tony. 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_233969

Here’s the entire text of the Q&A from Costco Wholesale’s (ticker: COST) 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. Good morning, Richard. In terms of, I think you said you'd assumed a little inflation this year. Can you talk about what product categories and give us any additional details there? Paper goods, nuts, well certainly petroleum-based products like plastic bags and what have you. But I think it's still, if you will, a buyers' market. Relative to what's out there I would imagine the purchasing power that the Costco's and the Wal-Marts, Safeway's and the Albertsons have has helped. Clearly, our purchasing power, given that we are not necessarily always brand, multibrand needy I think we've been able to keep a lot of those costs down. Which of course, keep costs down for our members and makes us more competitive. Every day we see announcements even from our vendors about prices going up on paper goods. That being said, as you may or may not know earlier this year we, one important paper product is disposable diapers. We basically went from the two leading brands of disposable diapers to one leading brand and a private label of what we believe is a very good quality. And where the price point on it is 20% lower. Now, 20% deflation if you will, doesn't go into the pricing because it's a new item. But an item that maybe was going up a few percentage points stopped going up because it was taken out of the mix. So I again, we just to have assume we're going to see a little. I said, all we said three months ago we were feeling the same way and we saw it go the other way. Recognizing, if you had talked to us four weeks into the quarter it was certainly a different picture because of the craziness in gasoline prices. That has subsided tremendously as well. And then I think that you mentioned that on the ancillary businesses you saw double digits excluding gas. I would assume that was driven by pharmacy. Can you just talk about what's driving that and what your expectations are going forward as well? Well, it was several of the ancillary businesses including that. But we didn't, I think in pharmacy, we get great press. And if anybody wants to see the 400 clips that we have from different news stations around the country, we'd be happy to show them to you. The prices, certainly the consumer advocate topics du Jour is gasoline and prescription drugs. And as it relates to prescription drugs, a week doesn't go by where one or two or five or six stations around the country, news stations, are talking about where's the cheapest place in town to buy your prescriptions. We're betting essentially 1,000%. And It's not just that we're beating by a little. These numbers are absolutely extreme. I think that continues to, that value proposition, if will you, continues to help us. Okay. And then last question on payroll, you said it improved eight basis points in the quarter. Were there any new initiatives in place or was it just better labor scheduling or can you give us any additional color there? Well, I think payroll, well I bet you of the 8 basis points, a few basis points of it, maybe not 5, but 3, 2 or 3 of it, is the fact that we had gas sales higher. So, the same gallonage, same labor. And arguably labor and gas business is lower on a variable rate anyway. So, that's certainly helped us. But even taking that out we showed improvement. I think we've just, we've gotten a little better at what we're doing and we're still showing good comps. That helps. If I look back over the last year we've probably done a little better job of the discipline that Jim insists on with SKU count. I've told some of you the story about; in our case, if we've got, our goal is to have roughly 4,000 active SKU's in a warehouse. As it is creeps, and it constantly does, it creeps up to 4,250 he starts to offering his assistants that if his buyers don't want to do it, he'd be happy to sit down and do it in about 15 minutes. Well, the difference between 4,000 and 4,250 even, is probably 300 items that have to share a pallet position and therefore have to be hand stacked. And we've gotten better at that. And when you get better at that, you've got less hand stacking. You've got more stuff on the floor, where you're not having to restock it during the day. Which requires in the case of moving pallets, three people, a forklift operator plus a person in front and back. We're now well over a year and probably 1.5 year anniversary from when we dramatically increased the labor at the front end. So, I think it's basic blocking and tackling. It's nothing new in terms of technology. Hi, good morning, Richard. Just a couple questions. The first one is can you talk a little bit, the sales that you saw slow down in November and the expectations for the December sales? And can you just elaborate more on traffic has sort of been flattish or up slightly? Can you talk about those two things? I'll talk about traffic first. If you look back over the last, whatever, 12 or 16 or 20 fiscal quarters, whether we are report ago six comp or a 10 or 11 comp, traffic was always in the %0 to 2% range. It was never big. So, and we did see in Q, in the third month of the three months it was 0, I think, close to 0, 0 to 0.5, versus 1, 1.25 in the first couple of months. I'm not terribly worried about that. The weather had a little bit to do with it. But as you'll note, I'm more responding to your questions as we try not to talk about it, but there I talked about. In terms of the difference between the three months, the 11, 10, and 6, the 11 we knew what it was. It was, in my view it was Katrina, it's what did it to gas prices. And we were on national local news every night as being the best place to buy gas in many markets. And FX, that was the other thing. FX in September, I don't have the exact number in front of me, was 100 plus basis points in terms of the impact of our reported comp. In the third month in November, it was actually -17 or -19 points. So, it's finally switched. And so there's 100 plus basis points right there. And then I kind of look at it that the, if I take out the FX, if I take out the excess gas, that arguably September, if you want to say the 6 was a 6 in November, the 11 was probably an 8. And that extra 2 was because of gas, the fact that we got so much pressure, more people in the parking lot coming in. So, I would have, if I had to look through the three numbers and again, this is a little built of Kentucky windage here, I would say the 11 was arguably an 8 excluding gas, excluding FX. But 8 was still better than a normalized 6. And the 6 was a 6. But I would have hoped the 6 would have been a 7. When I look, and I know, Bob's little audio call that he does, recording for reported sales, the comps, the trend in the four weeks was good. The first two weeks were I think in the 3 or 4 range and the third and fourth weeks were in the 6 or 7 range. In a way we're already back a little bit. And now why was it a little weaker in those first two weeks? I think in looking at it, and this is again, more looking for answers afterwards. We did have no extension of winter wallet or summer passport. But there were some additional merchandising and marketing initiatives in store a year ago that continued into the first couple of weeks. Like fence promotions and some vendor promotions that were more, there were some handouts. In fairness, that was less than 1 percentage point. But again, if I'm going to look for excuses or answers that was a little piece of it. So we're, yes, it's fun when you have 10's and 11's. And 6's aren't so bad, particularly when the 6 is a 6. And in terms of December, would you expect some, would you expect the higher end of your range or the lower end your range, from where you've seen so far and then the rest of this month? Well I would say this, assuming we were sitting here the day that our last four-week reporting period ended, when we saw a 6 and a 7 in those weeks in three and four. The trend is your friend. I would expect that if the had had been the other way around, where weeks one and two were six or seven; and weeks three and four were three and four or three and five, I would have said I'd bring it down a little bit. That's giving me some encouragement. I would say the guidance, and I'm going to purposely give you some wide guidance, 5 to 7 would be a fair guess. Okay. And then Richard you didn't really mention the membership fee increase or potential membership fee increase. We've seen both of your competitors now increase their fees. Can you give us an update on that? Sure. First of all, just so everybody knows what all of us charge. We currently charge for both gold star and business member $45 in the U.S. Sam's, I believe, up to now is 30 and 35. 30 for the business and 35 for the individual. And BJ's is 40 and 40. So, with regard to BJ's we're $5 higher at both. With regard to Sam's we're currently 10 and 15 higher on both. As we go through out, and not to sound arrogant, but assuming that historically we've done $5 increase from 25 successively up to 45 over the last 16 or 18 years, That at some point if we do, in fact, increase it, logic would say the 45 goes to 50 at some point. We frankly, certainly the fact that the other two have announced effective January 1, so our 45 currently will be the same as BJ's. And instead of 10 and 15 higher than Sam's, it will be 5 to 10 higher. You put that on the positive factor side of the column saying, okay, that's a little less. I can honestly say in that our previous discussions we've always assumed that they stay where they are. So, I don't think that's a big impact. And I've heard from some of you both sides of that argument in terms of trying to get information out of me but also trying to theorize here; that the by the fact that they've increased, it gives us ability to do it sooner. I would argue that by doing it, it gives us pause to say, hey, let's wait awhile. I think personally our competitors have been waiting for to us do something and got tired of waiting. Whatever reason, it doesn't matter. We are currently at 45. We at some point I'm sure will change it. It's not necessarily going to be January 1 or January 2. But it's not necessarily going to be a year later, either. We'll see. We haven't made any plans yet. Richard I just wanted to ask about gas. We saw a number of other retailers who report gas margins separately, blow out cents per gallon in the $0.09 to $0.20 range. And you're normally in that sort of $0.02 to $0.08. What did you do in the quarter? Yes, gross profit cents per gallon. Other retailers who would normally do say $0.08 to $0.12 have been reporting $0.10 to $0.20. You normally do something like $0.02 to $0.08 per gallon. What did you do in this quarter? Well, actually if you got that out of us I don't know how you did. We don't really talk about cents per gallon in general. It's truly been all over the board during the quarter. It was a little better than average. Okay. Can you talk about currency now and currency trends? Obviously against the pound and against the Canadian dollar and the impact that had on earnings? And what's your outlook for that? Well, slightly negative against the pound and about flats with the Canadian dollar. Recognizing that's big improvement in both. My guess is as good as yours. If you look back two or three years ago, I think there was one month where FX improved our reported comps by 300 basis points. And all of last year I think it was 135 basis points, or 130 basis points. So, again, it was -15 or -20 this past month and still up slightly for the quarter. Jeff? And so if you look at that, my guess is we'll still show some slight negative trends year-over-year for a few quarters here. Okay. And then the final question is on pharmacy, Medicare Part D. Obviously the people that care a lot about how much prescriptions cost are people that have to pay for it themselves, which tend to be folks who are considering enrolling in Part D. Is that going to have an effect on the amount of people using the pharmacy at Costco? First one. And do you have a moral hazard in suggesting to people that they shouldn't sign up because you're just so cheap as you are? In some cases that's the case. I don't think we're going to go out of our way to show them that or to try to talk them into it, to be accused of anything here. We're happy to provide them the cost of what they buy from us and they can do their own comparison. Having helped my parents, having somebody in our pharmacy business here help my parents try to consider what they want to do with the Medicare prescription drug programs, you need to be a Ph.D. at something in mathematics, to figure this thing out. It is the most convoluted, complicated system. And I guess technically, and legally pharmacies are not allowed to tell or recommend one program over another. When you do all the numbers and all the machinations. In one case one of my parents, who is spending about $600 on prescriptions drugs at Costco's prices. The worst of the 12 alternatives that they have under Medicare will get it down to $4,600 or $4,800. And the best about $4,400 or $4,500. So, nobody is going to necessarily really wrong with any of these programs because of how this Medicare program works. On average it's a slight negative because it's an alternative. And under the Medicare program, you're essentially going to be paying the same on some of those items here versus Walgreens, as an example. So on the one hand it's a negative. On the other hand, we've got great loyalty. We've seen a pick up in business to us offering third party plans to be a source for them. There are instances where we've had large employer groups come to us. And this is a relatively new phenomenon over the last six or nine months. Come to us and actually, because we're so cheap, that they actually incent their employees that if you get your drugs at Costco, it's a lower copay because they're saving money. The company who is writing the check. So we're seeing, arguably Medicare is not a net positive for us. But we don't think it's a big net negative because some of those people are still going to come to us, a lot of them. And we're finding ways to continue to grow that business. We think our business is solid and will continue to grow. Hi. I just wanted to double check what your comment about the comps in all the regions were stronger this year than last year. Is that including the Southeast region? That obvious was hit by the hurricanes. No. I'm sorry, I thought I mentioned that. The Southeast was slightly lower. Recognizing that Southeast has been in the low double digits, So, it's still a decent number. But I think it was 2 or 3 percentage points lower in the quarter. And again, if you took out Wilma, it was as good as it had had been. Richard in your comments you mentioned that you're comfortable with the competitive landscape and what's going on out there. But just last month we obviously saw Sam's comp better than Costco. Probably the first in a long time. And we had heard they were pretty aggressive on blitzes and that was probably the first time they had engaged in some doorbuster activity. Can you just give a sense of what's been going on there since the holidays? Yes. Getting back to pricing we feel very good about our pricing. I can't tell you anything else. As it relates to their number, I think they should be happy with it. I don't know about your newspaper but in many national newspapers around the country they had an eight-page full color insert that looked like something from Bergdorfs. Very nice looking ad. But I'm sure, and they opened at 5:00 a.m. I think, on Friday. So, they did some things. And as we all know, and as Jim has told us in the past, it's arguably some of our marking, while it's direct marketing, not advertising. And advertising works. It works the first time and it works a little less good the second time. We like it when our competitors do national print ad advertising. Okay. And then can you just talk about post holiday, it sounds as if a lot of new merchandise coming into the stores shortly after the holiday winds down. We're hearing a big push across furniture, particularly in Thomasville categories. Can you talk about that and what you're doing this year versus last year? Well, I think needless to say we have two Costco home stores now. We'll have another one near the end of the fiscal year, early into '07. We're learning from it. And certainly that's a category that we like and we think we can do some things with. I don't think specifically Thomasville, by the way, but just in general. And again, it's both furniture and home furnishings. I can't really tell you anything more specific. We'll be mailing shortly, the winter wallet that will give you some idea. I think that comes out in a couple of weeks. And everybody here has been sworn to double secret probation secrecy. Hi. Good morning. Can you talk a little more about the components of the higher than expected tax rate that you saw during the quarter? And also the outlook for the year? I think part of it is under Sarbanes-Oxley and everything else in life today, we're all a lot more conscious of not only looking at all kinds of accruals annually but quarterly. And this is not a change. This is more of an evolutionary change over two years. And also I think, I know that there was one specific item as it relates to some state tax audits. Not necessarily income but property sales use taxes, excise taxes, things of the like. And where, based on audits, the threshold for being deemed likely has lessened, or strengthened. Meaning that things are more, things that weren't deemed likely yesterday and we still, again, our opinion of the particular claim hasn't changed. But you actually put something on there. And so, I know we took in Q1 just on what I'll call the more likely category, again, and again nothing, the circumstances haven't changed, just kind of the rules of engagement have changed a little bit of how you account for it. We had about a $4 million tax hit to the income tax line. 4 million on pretax, yes. And offsetting that there was a couple million going the other way but it was a net negative. So, I think what you're going to find is, is that not only with us, but with all companies, you're going to see, if we get direction of something in the mid 37's for the year, it, frankly, will range up and down a little bit from that number each quarter. I can track that to last year. And again, taking all the truly one-time benefits that we had. Because we had some very big benefits in taxes from some appeals and what have you. If you look at last year, a part of what I'll call normalized was what we call state apportionment. You don't know until the end of the year what each state income tax is because every state does it differently. Some do it based on the profits in that state. Some do it as a percentage of certain ratios. Fixed assets to total company fixed assets. Payroll to total company payroll. Income in that state to total company income. And then some averages. We're now doing that on a quarterly basis and fine-tuning it more. So, even something like that, which had it, actually at the end of last year had 1 full percentage point boon to us for the year, we won't see that this year. And so, I think there's really nothing more than that. Good morning. Thanks. Richard, I'm wondering on the fourth quarter for this year, do you think that we could see a full reversal of that, those 24 basis points of merchandise margin erosion that you experienced? Because I think most of that probably was gasoline, wasn't it? A good chunk. But again, if you look to the four core categories, which is 80% of our sales, in Q4 year-over-year they were up a little. In Q1 year-over-year they were down a little. And I do mean a little in the aggregate. Single digit basis points here. But, and again, some of it was, we had about 3 basis points higher markdowns in apparel versus our budget. We're definitely getting a little more what we call D&D, or damaged and destroyed when we're getting some of the, Some of the boon to our electronic sales is also a little bit of a bane, if will you, that's coming back. But that's again planned. We knew about it. We expected it. But it hits us. The other question I have is just with regard to your long-term 4% pretax margin goal. First of all, are you still comfortable with that? Second of all, one of the ways you get to that is through gross margin improvement. And so, I wanted to ask you about private label and kind of where that was, and is that going higher? Well, private label is going higher. I don't think we've really changed our direction. 10 years ago it was 5% of sales and last year it was 15% of sales. We would expect it to be in the low 20's five years from now. Certainly, taking $100+ million out of branded diaper and putting it into a private label typer where we can provide the customer a 20% savings compared to the branded. And actually make more gross dollar margins per unit because everybody and their brother football diapers out there. So those are the kind of things that help you. And again, while it's a tough competitive landscape our there right now, as Jim said a couple years ago we're smart enough to figure out how to do both. I guess the one change I would make, yes, do I feel comfortable with 4%? Yes. Good news and bad news was; is for the first five fiscal quarters after we said that we did exactly that or even did a little better than that. Then, of course, we've had a couple quarters where we did about flat year-over-year. So, we didn't see that kind of 20 basis point pick-up. I think you have to adjust it for stock repurchases because we have changed our view on that versus two years ago, needless to say. So, maybe you need to look more at the operating income line. And we haven't gone through that process, But recognizing, to the extent that pretax comes down a little because stock option exercises. Earnings growth goes up a little because it's accretive. So it's actually a net positive wash. But philosophically, the answer is exactly yes. And I asked that to Jim last week and that's what he said. And if it takes seven years instead of six, so be it. We're running our business. We feel good about our fundamentals. And again I look at this quarter, recognizing relative to our guidance for the year, three months ago and for the quarter, we feel we did just fine. Got there a little differently. Not a lot differently. And-- Are you seeing any changes in how the executive members purchase? Is there any change to their basket size or their traffic trends? Well, we don't disclose the exact amount. But clearly if you take two pools of existing members, call it the pool of members that are five to eight years and tenure with us and spend X to Y in dollars each year. And if you look back over the last two or three years, each of those groups, 50, each of those groups spent the same amount every year and grew the same amount every year on average. And then half of them become executive members. In that first year as an executive member their comp dramatically increases. In the second year, it's slightly less than the other ones. But still for the two year aggregate it's still a decent good increase. And then it stays at that level going forward beyond that. That's what we see. So, it does work. What's particularly nice and gratifying is, is for those of you who have followed us for a number of years. Four years ago when we first initiated this, 2% reward, what we saw in the first year was adverse selection, and we felt it cost us I think 16 or 18 million pretax. Because who is the first person who is going to sign up? It's the small restaurant owner or small business owner that's already spending 25,000 a year with us. And they say, "hey, for 55 extra dollars, or at the time for 60 extra dollars, I'll get a check for $500 at the end of the year". That's a no-brainer and it doesn't change their buying habits because they're already there. But there were a lot of members that were 10,000. That were maybe buying 10,000 from us and 10,000 elsewhere and they're now buying 18 of that 20 from us. The difference now is that big influx of people we had now, there's a higher percentage of those people that are either a little below or a above break even on this thing. In other words, they're spending, to break even technically on $45 versus $100, you've got to spend $2,750. We have people that are spending 1,800 to 2,200. Affinity programs work. They see their sales go up because they want to get there. We see more people today in the 2,700 to 3,500. They, too, go up relative. So, it does work. It's not without risk,. We're beyond the risk now and we're pleased with the report. It certainly has helped our comps and our renewal rates. Okay. A question Richard about the membership fee. I know you're not going to comment obviously on the timing of it. But Sam's they announced theirs in October and with that announcement they said they would be reinvesting the additional fee income in lower pricing around additional services. So, I wanted to know have you come up against this in the past? And there a risk that if you do end up raising your fees you'll end up having to give a lot of it back to the members in order to remain competitive on pricing with Sam's? So that we may not see the same improvement to the bottom line that you have gotten in the past? We don't look at our membership fee, we don't look at our membership fee increase that way. Recognizing money is fungible. We talk about the fact that we have roughly an 11% gross margin, which is the mark-up on goods. And roughly a 2% membership fee. We have a total gross profit margin of 13%, which pays for everything. All I can tell you is we will continue to remain competitive irrespective of membership fees. We don't look at membership fees per se as something giving us the ability to do anything other than that the value, when we were at 45 and our competitors are at 30, 35, and 40, we still think that we're the best value out there as evidence by sales per unit that are 2 and 3 x our competitors. And we will remain competitive. If that's the way they choose to use it, good for them. I don't believe for a minute though, that they're doing everything to be fiercely competitive, as we are, before that increase. So, money is fungible. They'll do with it what they want. We don't look at it the same way. Okay. And then I have another question. What kind of foreign exchange outlook and gas price outlook is factored into your guidance? because the beneficial impact of sales from the weak U.S. dollar seems to be diminishing as the Canadian dollar's appreciation has slowed. You Mentioned some of this, I think currency was actually negative in November. So, how should we think about comps and earnings for the rest of the year? Could there be a slight drag just from these factors? It's really not going to have a major impact. Maybe it's 100 basis points. But when our original budget was on comps was I think we said 5 to 7 originally on the call and it was right in the middle there. And so maybe if the middle was 6, it's 5.5 versus 6.25. We really don't look at it that way. We're just trying to drive sales. And I don't mean to be simple and stupid about it but that's not a big concern of ours. Frankly a little you know a little inflation helps us. So, while we hope for the economy we don't have any. A lot of inflation doesn't thrill us because other things happen to multiples and what have you. But a little inflation would be positive for us. Could you tell us if you have any programs in place to better control utility costs given the expectation that they're probably not going to come down to a great extent any time soon? Well we, back when the energy costs were a topic du Jour about two or three years in California when all the scandals happened with the providers of energy and what have you. We did a lot back then. We benefit, of course, from a lighting standpoint that we've got lots of skylights. And that helps us a lot, in terms of controlling energy. But we also have a lot of refrigeration and frozen. And of course, in the summer in L.A. and Phoenix, you have air conditioning. In the winter in the east and the north, in Montana and New York and Boston you have lots of, and Canada, you've got lots of heat. I don't see this doing a lot to mitigate it right now. We have three or four dedicated people that were actually put in place three years ago when that first tranche happened. And I think we've done a lot over the years to mitigate costs. It's not just energy management systems. It's the materials we're using to build our buildings. The RF factors of the metal building walls that we're using. So, we're doing a lot of things to improve that. So. I think we've done a very good job of mitigating it. And what I call the three basis point increase year-over-year right now is just that. It's, there's not a lot more efficiencies to wring out of that stuff. Good morning. If I look back to my notes from last quarter, gasoline had a negative impact to gross margin of 35 basis points. Mix was 20. And lower gas margin itself was 10. Could you give us that overall and that breakdown for this quarter? I don't have that level of detail in front of me. I would say gas was higher but not by as much as the hit last time. And as I mentioned, the core business which was up a single digit amount of basis points was down a little bit, a like amount, in this quarter. So that's, that was a decent chunk of it but it wasn't nearly as dramatic as Q4. Okay. So just so we can walk away with some sort of thought around it. If there was, forgetting the freight costs, which were the highest, there was 30, should we think of that combined impact as something like maybe half of that? Is that kind of the way--? That's a pretty good estimate. I don't have the detail in front of me. And freight I know which was -5 in the Q1, in Q4 I think it was like -2.5 or -3. We expected that. We said it would diminish in Q1. And I suspect it will be a little less even in Q2. Hi, Richard. Just on share repurchase, it seems as though you're about a third of the way through the new authorization. Would it be fair for us to assume that there will be more, at a continuing pace from now on? Well, again, Terry, we'll take every day at a time. I think our message, at least what you've seen in the tea leaves over the last six months is; is that we'll we seem to be buying on a somewhat regular basis. And would be opportunistic if the event arose. Although, we don't want to have necessarily that opportunistic event. Meaning stubbing our toe in a big way. But in terms of, we still have about 800 million left because the additional 87 of that was from the other program. Okay. As I mentioned to you, you can hear this again if you'd like on costco.com. As well we'll post on to costco.com within the hour what we call additional first quarter information, which talks about LIFO detail and opening schedules, balance sheet cash flow and how we calculate EPS with all the convert and the treasury stock and options and everything. Thank you very much. Good night. 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_233970

Here’s the entire text of the Q&A from 24/7 Real Media’s (ticker: TFSM) 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 gentlemen, congrats nice quarter. A question on the Search margins. They have come down significantly over the last year. Can you kind of go through the dynamics related to that? Thanks for the question, Joe. As you can see, we continued to see stellar growth in our Search division during Q3. Regarding Search, the blended gross margins in the segment did decrease as we experienced a significant out performance in our lower margin full-service SEM business. As we have stated previously, gross margins in the segment will mathematically be lower if our search engine marketing business performs better than expected as it did during Q3. And as you can see over the overall performance of the Company, we did outperform both on the top and bottom line. So overall I think we were quite happy with how the overall business performed. So going forward, we should see this as long as Search continues to do well, should continue to drip down to a certain level. And where should we see that level out? Is there a point where you are comfortable where it would not drop below? Well, going forward right now we expect gross margins in the segment to be stable, unless we once again experience better than expected growth in our lower margin full-service SEM business. Okay. And then just lastly with the Dentsu coming up, you are saying those margins should be consistent, but being that that's the lower margin business, that could also negatively impact margins because they don't have the they have got over to 100% feed? Good morning and congratulations on a nice quarter. Jonathan what was your organic growth rate this quarter, and what percentage of revenues were international? And then kind of moving forward, what is your implied organic growth rate for the fourth quarter and next year? As I look at the fourth-quarter guidance, it looks like -- maybe I'm wrong, but it looks like the Media segment -- the implied growth rate is close to 10% year-over-year. Thanks for the question Steve and we once again appreciate your observation that it was a strong quarter. Our organic growth rate for Q3 was 59% year-on-year. As everyone remembers, we acquired Decide Interactive in mid-August 2004. Going forward since Decide was acquired in Q3 of 2004, all our guidance for Q4, as well as 2006, incorporates this into it and will represent organic growth. In terms of international operations for the quarter, once again they did edge up. So international operations during Q3 represented 56.3% of total revenue and U.S. operations represented 43.7%. Once again, this is significantly different than most other competitors in our space and represents what we believe is quite a strategic leverage going forward in the years to come. Sure. Within the quarter, we did see strength across the board, but particular strength from Continental Europe. And I think that when you look forward, our international operations will continue being a very important driver for growth for this Company. And then one final question. What do you consider as your Search line becomes more of an agency business, just reporting that net revenue I know you have some elements in there that are reported net and some gross. And so it could be a little bit it sounds to me a little confusing as the gross margin moves around, but if you reported at all net, then there would be more clarity there. Would you consider doing something like that? Hi guys congratulations on a nice quarter. Jon, I was hoping you can break out the CapEx for the quarter and perhaps give us some guidance looking into '06? Sure. Thanks for the comment, George. CapEx for the quarter was $1 million, and as we cited, we did frontload CapEx during 2005. So it did trail off from what was a run-rate of about 2 million a quarter in Q1 and Q2. Cash flow from operations, as I stated, was 4.9 million, which netted a positive $3.9 million in cash, net cash per operations for the Company, strengthening our balance sheet. Going forward CapEx should remain at this level, and we feel that we have the systems and infrastructure in place to support our growth. Okay. You certainly have a lot of strength now with your Search product and a comprehensible offering between Technology and Media. Are there any other areas that you might look to expand your services into? And do you -- can you consider a scenario where you would be interested in acquiring proprietary traffic for your business? At this stage of the game, we have not looked at acquiring any proprietary traffic. We see our niche as essentially being neutral, particularly in Search and Technology, and then, of course, in online advertising we represent all of our sites equally. We are still in the market for acquisitions. We always are. But we will focus on acquisitions that are technology driven. We are not going to be spending money to buy people and customers. Congratulations on a good quarter. A couple of questions. One, can you give us an indication as we enter 2006 how much of the Search growth do you expect to draw from new versus existing clients? And as to the Dentsu relationship, should we be expecting additional agency relationships as we head into next year? Thanks for the question Aaron. Regarding our '06 growth in Search, I think what you will see is a good blend, say, half/half of growth from existing clients and the wins from new clients. Regarding our Dentsu relationship, which is a very important strategic objective that we achieved for the Company, Dentsu is one of the largest dominant advertising agencies globally and they are obviously the dominant advertising agency in the Asia-Pacific marketplace, which itself will experience phenomenal growth over the years to come. Our first priority is to work with Dentsu on a number of different projects, which we have a good relationship with Dentsu, and we're continuing to execute for them. And obviously as the entire market evolves, that additional global advertising agencies will look to leading technology and services providers in the Internet advertising market like 24/7 Real Media for partnerships and other solutions. Good morning gentlemen thank you for taking my question. A quick question on the Media and Technology side. CPMs obviously slipped during the quarter, even year-over-year. Growth rates were much lower. Can you comment on that and how do you see that -- do you see that coming back up, or if not, what sort of declines should we be expecting? Thanks for your question. Our Media and Technology divisions performed very well during Q3. Media revenues year-on-year were up 29%, and Technology revenues year-on-year were actually increasing and were up 26%, and both of those significantly outpaced the overall growth of the sub segment. Impressions on both the Media and Technology side greatly increased during Q3. Therefore, as we ramp up those impressions, CPMs did decrease a little bit. But net our revenues on both Media and Technology increased significantly, and we anticipate that to continue going forward. Okay and a question on your operating margin. Now that Search has -- obviously margins have declined, are you still sticking to your operating model of 30% incremental gross margins in Media and Search? Well, our target operating model, which is reflected within our financial guidance for 2006 which we just raised today, does incorporate and is consistent with what we believe will be the case for Media, Search and Technology. I would also like to just say that when you look at our overall business model right now and the overall robust streams of the advertising marketplace, you definitely see a case where there are the haves and have-nots within the overall marketplace. And companies like 24/7 Real Media, which has this diversified business model, is capturing fully the robust growth and the secular shift to the Internet advertising business we are seeing in the market. So I think that we are in the right place at the right time with the right model. Okay. One quick question. When do you expect GAAP profitability? Is that something we can expect next quarter or maybe the first quarter of '06? Regarding profitability and metrics, obviously we believe that pro forma operating income per share is the right way to look at the business, and it reflects very accurately the cash costs and performance of the overall business. Regarding GAAP, we have not provided any guidance regarding GAAP income per share. That will be influenced by a number of variable factors, including the final regulations regarding expensing of stock options. Yes thanks. Regarding the competition in the search engine marketing space, can you go into that a little bit, and is that potentially a reason why some of the margins were down? The competition, of course, is fierce, particularly in the United States. However, I think as we have indicated earlier the different types of business that we do with our search engine marketing business have different margins and not as a result of the competition, but as a result of the type of search business that we have a decline in the margin overall, which, of course, is offset by a much better performance from a revenue perspective. Over in the Continental Europe Pan market, the competition varies on a country by country basis. It is considerably less. And, of course, over in Asia, we see a Greenfield marketplace. So to sum it up, competition did not affect the margin overall. It is the type of business that we chose to accept, but it is no question about it a competitive marketplace, particularly in the U.S. And, Joe, when we take a look at the future of Internet advertising and particularly in Search, more and more so advertisers will look for global provider of these types of services. And based on our footprint today with 19 offices in 12 countries throughout the three major regions, we are the only provider right now that can address some of the largest advertisers globally. So I would think that when you look forward to the next several years it will be more and more global deals being put in place, and there are not any providers aside from 24/7 Real Media that can accomplish those types of deals. Most recently, in Dentsu, you could see that we were the only choice to provide a double-byte enabled technology platform for Search within the Japanese market. Okay. Could you give us like how many new searches and marketing customers you signed in the quarter, and would you classify these guys as all Enterprise customers? We don't break out the number of clients that we won in the quarter. Obviously the pace of wins continues to be brisk for us as evidenced by our more than tripling of Search revenue in the quarter. In terms of the types of clients that we are attracting, we are paying to attract those who provide us their entire search budget, and we put those search budgets to work for them either on a regional or a global basis currently. Hi Jonathan, not to beat a dead horse here on the Search margin, but I guess just coming to the quality or type of business you're accepting, I don't know if I ever seen a situation where revenues increased by 18% and gross profits actually go down. I mean that would suggest even if decide is adding customers, your organic business is rolling customers off, and you're having to accept new business at much lower gross profits. Can you just kind of help me reconcile how gross profits could be down 100,000 on a $2 million increase in revenues? Thanks for your question, Jeff. As we stated, our gross margins in this business are affected by the types of lower margin full-service SEM business that we except. And, as you saw in the quarter, our overall revenue for Search did increase explosively by over 234%. Anytime you have that type of explosive growth there will be some short-term variability in the gross margins as we ramp up customers and drive to optimize their campaign. So even within the one quarter, and I encourage everyone to take a longer holistic view of this, you know we are experiencing explosive growth here in the Search business, and within it we're winning larger and larger clients that we are serving globally. Well, if I just look sequentially and I think everyone appreciates the explosive growth, if I just look sequentially, you guys saw a $2 million plus jump in revenues. And I cannot remember who asked before, but the net versus gross reporting, your net revenues actually declined by 100,000. Isn't that a better way to look at it given the fact that you are reporting gross on the top line and that is what you're referring to as explosive when your net revenues are actually declining? I think that when you take a look at the year-long trend and what you'll see in the fourth quarter and beyond is continued step-up in gross margin, as well as increased growth on the top line for Search. So once you stretch this out a few additional quarters, obviously baked into our guidance will be increased revenue and gross margin across our three business segments. And you have to remember that when we secure a client on our search platform and we achieve their return on investment goals within a couple of months of that client being on the platform, we have got that client for the life of that particular product lifecycle. So that while we may suffer in the short-term a little bit by securing that client, over the long-term we're able to build up the business, the spend, as well as the margin in a manner that makes that client very profitable. Then how could revenues go up by 2 million and gross profits go down?. Do you know what I mean? I am having a hard time reconciling that, guys. The existing clients that we have optimized roll off their campaign, and then we bring on new clients that replace them and more. But during the ramp-up phases, they are at a lower gross profit margin, but they ramp up over time ago. That is how it mathematically would work out. Okay. Well, thank you for joining us this morning. 2005 has been a breakout year for 24/7 Real Media. As we exit this year and enter 2006, everyone at the Company is optimistic about our prospects. We will continue to deliver results for our clients, partners and shareholders. I look forward to speaking with you again during our next call. Thanks for joining us. Thank you. Ladies and gentlemen, that does conclude today's teleconference. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000 or 1-800-405-2236 and then followed by the access code of 11041517 and the follow-up at the #. Once again those numbers are 303-590-3000 or 1-800-405-2236 followed by the access code of 11041517 and the follow-up at the #. Once again, thank you for your participation in today's conference, and at this time you may 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_233971

Good afternoon. Thank you for joining the Sun Microsystems Quarterly Conference Call. With me today is Scott McNealy, Sun's Chairman and Chief Executive Officer; Jonathan Schwartz, Sun's President and Chief Operating Officer; Steve McGowan, Sun's Chief Financial Officer and Executive Vice President, Corporate Resources. The purpose of today's call is to discuss the results of Sun's Fiscal Year 2006 Second Quarter which ended on December 25, 2005. During the last hour, we published a copy of the operations analysis data sheet with nine quarters of financial and operations information, including the quarter just completed. If you have not received the earnings announcement or the detailed financial datasheet for any reason, or you wish to hear a live broadcast of this conference call, you may log on to our website at www.sun.com\investors. We have posted slides you can view on the web which accompany our prepared remarks. These slides may be viewed at the same URL, www.sun.com\investors. Simply click on the link marked "Earnings Releases." Finally, we will also post a transcript of our prepared financial remarks on our website after the conclusion of this call. The prepared remarks of our call today will last about 30 minutes with the remaining 30 minutes devoted to the Q&A session. During the course of this conference call, we will make projections or other forward-looking statements regarding expected future financial results and business opportunities. Such statements are just predictions and involve risks and uncertainties such that actual results may differ materially. I would like to refer you to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005, and the company's quarterly report on Form 10-Q for the quarter ended September 25, 2005. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to, and not in lieu of comparable GAAP financial measures. Please refer to the earnings call financial slides and the operations analysis posted in the earnings release section of our website at www.sun.com\investors for the most directly comparable GAAP financial measure and related reconciliation. Please note that unless otherwise indicated, all reported results include the impact of the StorageTek and SeeBeyond acquisitions for the full quarter ended December 25, 2005. I will also mention we will speak to a number of noteworthy items during the call this quarter. These items include StorageTek and SeeBeyond purchase price accounting impact to Sun's operating results and net loss per share in Q2; the impact of FAS 123R, stock-based compensation expense to Sun's net income and net loss per share in Q2; the impact of restructuring charges and related tax benefits and gains on equity investments; and the reclassification of certain geographical regions in the discussion of revenue and bookings by geography. Now, let's get to the financials. Sun's total revenue for the second quarter of fiscal 2006 was $3.337 billion, an increase of 17% as compared with the $2.841 billion in revenue reported for the second quarter of fiscal 2005. We had an unfavorable currency impact on revenue of approximately 3% year-over-year, and an unfavorable impact of approximately 1% sequentially. Total gross margin was 42.6% of revenue, an increase of 0.4 points over the gross margin for the second quarter of fiscal 2005. Total R&D and SG&A expenses were $1.597 billion, an increase of $424 million year-over-year. In the second quarter of fiscal 2006, we recorded a $76 million tax provision. GAAP net loss for the second quarter of fiscal 2006 was $223 million or a net loss of $0.07 per share as compared with a net income of $4 million or breakeven earnings per share for the second quarter of fiscal 2005. With respect to the accounting for the acquisitions completed during the first quarter of the fiscal year 2006, we've estimated the value of certain tangible and intangible assets acquired and liabilities assumed. Some of these estimates are subject to change, and adjustment for these estimates will be included in the allocation of the purchase price which under normal GAAP rules are allowed for a period of 12 months following the close of the transaction. GAAP net loss for the second quarter of fiscal year 2006 included approximately $145 million, or approximately $0.04 per share in purchase price accounting adjustments and intangible asset amortization relating to the acquisition of StorageTek and SeeBeyond. The impact of purchase-accounting-related items associated with our acquisitions of StorageTek and SeeBeyond are reflected in the following areas of the income statement. A reduction of revenue of approximately $24 million compared to $14 million in the first quarter, primarily the result of adjustments made to reduce the acquired deferred revenue balances of StorageTek and SeeBeyond to fair value; a reduction in gross margin totaling approximately $84 million, compared to $43 million in the first quarter, principally resulting from the impact of deferred revenue adjusted adjustments, fair value adjustments to inventory, and a full quarter of amortization for acquisition-related intangibles related to development of technology; and an increase in operating expenses of approximately $61 million compared to $20 million in the first quarter resulting from a full quarter of amortization on other intangible assets established on acquisition. For the quarter, total stock-based compensation expense was $55 million, or approximately $0.02 per share. This expense was included in the following components of the P&L. $3 million is charged to cost of sales for products; $7 million is charged to cost of sales for services; $18 million was included in R&D expense; and $27 million was included in the SG&A expense. GAAP net loss for the second quarter of fiscal year 2006 includes restructuring charges of $10 million and a related tax benefit of $3 million and a gain on equity investments of $14 million. Now, back to revenue metrics. Q2 products revenue totaled $2.108 billion, an increase of 14% year-over-year. Within products revenue, computer systems products revenue was $1.438 billion, a decrease of 5% year-over-year. Data management products revenue was $670 million, an increase of 100% year-over-year. Q2 service revenue totaled $1.229 billion, and was up 23% year-over-year. Within services revenue, support services revenue was $953 million, up 23% year-over-year. Revenue from client solutions and educational services totaled $276 million, an increase of 22% year-over-year. As part of our ongoing disclosure improvements, in the second quarter, we've adopted the following change to our geographical presentation of revenue and booking. We will present disclosure for the U.S.: the United States; EMEA: Europe, Middle East, and Africa; APAC: Japan, China, Southeast Asia, and Australia; and International Americas: which is Canada and Latin America. In the past, we've disclosed Europe, U.S., Japan, and rest of the world. By geography, U.S. revenue was $1.373 billion, up 22% year-over-year. EMEA revenue totaled $1.239 billion, an increase of 20% year-over-year. APAC revenue was $531 million, an increase of 4% year-over-year. International Americas revenue was $194 million, an increase of 18% year-over-year. With respect to the balance sheet, DSO was 62 days. Excluding acquisitions, ending sales channel inventory was $366 million, or less than three weeks of supply, which is within desired levels. We ended the quarter with a cash and marketable debt securities balance of $4.276 billion, and cash flow used in operations for the second quarter was $191 million. Great, thank you, Bret, and welcome everyone. Let me start with a high-level summary of the quarter. From the demand perspective, we saw a very positive trend in bookings and backlog growth across numerous server and data management product areas. These trends indicate to us solid customer acceptance of our recently introduced products, more about that a little bit later. Gross margin performance was 42.6%, up 0.4 points, which continues to be strong and reflect the competitive advantage that we have with our product offerings. And we came in directly in line with our R&D and SG&A expense guidance of $1.6 billion. From a balance sheet perspective, we again improved our working capital management by driving the cash conversion cycle down to 31 days, and we finished the quarter with a cash and marketable debt securities position of approximately $4.3 billion. For those of you who are able to follow the slide deck, let me now turn to slide four, we can talk about some demand metrics. Our Q2 product bookings were 2.430 billion, an increase of approximately 23% as compared with a year ago. And although most of this increase can be attributed to our acquisition of StorageTek, our traditional Sun business experienced an increase in product bookings of approximately 4%, which is the first such bookings increase since Q4 '04. Much of this increase was driven by our UltraSPARC IV+ products, as well as recently announced Niagara and Galaxy products. In fact, demand for UltraSPARC IV+ drove an increase in our ending backlog of approximately $100 million. Turning to slides five and six in the metrics and revenue, total revenue grew 17% year-over-year as a result of our acquisitions of StorageTek and SeeBeyond. These acquisitions drove the revenue increases across many businesses. And I will discuss those in just a couple of minutes. And for clarity, the remarks I'm going to provide here are going to focus on the other key factors that contributed to our performance. Let's start with product revenues. They totaled $2.108 billion, an increase of 15% year-over-year. And within the product revenue, computer system products revenue was $1.438 billion, a decrease of 5% year-over-year. Year-over-year decline reflected both an unfavorable currency impact and an inability to fulfill UltraSPARC IV+ demand. In line with recent quarters, approximately 75% of server revenue in Q2 FY'06 was derived from our one- to eight-way offerings. The important message here is that we continue to generate solid product gross margins as we move our server sales into the larger, more rapidly growing one- to eight-way market segment. During Q2 '06 we shipped approximately 83,000 computer system server units with almost 20,000 being x86/Opteron servers, an 87% year-over-year increase in Opteron server shipments. From a software perspective, Java Enterprise Systems subscribers climbed 15% sequentially, and we are delighted to report the cumulative JES count is now up to 1.105 million subscribers. Looking now at our new data management products revenue, it was $670 million for the quarter, an increase of 100% year over year. StorageTek products contributed $368 million to this total. Although these data management results were solid, they were negatively impacted by some weakness in demand for the entry-level storage offerings and, to a lesser extent an unfavorable currency move. And finally, we are seeing a mix shift towards our midrange and data center arrays as well as strength in the entry-level SMB tape market. Turning to our services business, overall, our services organization has continued to deliver solid performance in a very competitive environment. In Q2, we've made excellent progress in improving productivity and in driving cost efficiencies with a more variable cost model. Services revenue was $1.229 billion, an increase of approximately 23% year-over-year, including an unfavorable impact of currency. StorageTek services contributed about $228 million to this total. Within services, the support service revenue was $953 million, up 23% year-over-year. And we are seeing a shift towards multivendor site support and managed service contract offerings and away from our traditional spectrum service contracts. We believe this trend will have a long-term positive impact on our service margins. Client solutions and educational service revenue was $276 million, an increase of 22% year-over-year, and a bright spot in this growth was the growth of Solaris 10 training, an indication of the broadening acceptance of Solaris 10 within the marketplace. Now, taking a look at revenue by geography, on slide seven, U.S. revenue was $1.373 billion, up 22% year-over-year. The modest decrease in the Sun standalone business was more than offset by the increase that was attributed to the addition of StorageTek business. We did, however, see products booking growth in Sun standalone business of 15% year-over-year. This is the highest bookings growth level since Q1 '03 in the U.S. Sun's standalone product backlog grew $131 million, which is approximately 80% growth year-over-year. And then looking at the industry verticals in the U.S. for the Sun standalone business, we saw strength in the Telco Sector offset by some weakness in the financial services sector. In EMEA, revenue was $1.239 billion, a year-over-year increase of 20%. UK grew their revenue significantly, and was primarily driven by strength in Financial Services, government, and Telco. Eastern Europe and Russia continued to see growth with strong high-end server business, particularly in the Telco and financial service areas, while Italy grew year-over-year with strength in the financial services and government sectors. And finally, our International Americas, revenue in International Americas was $194 million, up 18% year-over-year, primarily driven by solid performance in the Latin American regions led by Mexico. Now let's take a look at the margin story. If you look at slides eight and nine for margin, the total gross margin was 42.6%, an increase of 0.4 points year-over-year. Product gross margin for the quarter was 42%, a sequential decrease of 1.3 points, but if we look at the underlying components, those are like this, we had a favorable impact from cost reductions of 1.8 points due to decreased costs for material, primarily processors, disk, and memory, as well as reductions in supply chain costs primarily in the freight and warehousing areas. Secondly, a favorable impact in volume and mix of 1.6 points due mainly to a higher mix of software. And that was offset by unfavorable impact of pricing and discounting, which was 2.4 points, and unfavorable 1.9 points due to purchase price accounting, which Bret described earlier. Services margin for the quarter was 43.6%, a decrease of 1.8 points quarter-over-quarter, and the components of this decrease were a favorable impact due to mix of 1 point, offset by unfavorable impact from costs of 1.7 points, purchase price accounting of 0.7 points, and pricing and discounting of 0.4 points. Let's move onto R&D and SG&A expenses, and some productivity and efficiencies on slide 10 and 11. Total R&D and SG&A expense for Q2 were as we guided, $1.597 billion, an increase of $424 million year over year. However, of this increase, $332 million is from the recent acquisition of StorageTek and SeeBeyond, and $45 million is from the inclusion of FAS 123R, stock-based compensation expense. Let me just say a few more words on purchase price accounting and stock-based compensation expense. Due to the size of these charges in Q2 and their ongoing impact, we've shown on slide 12 and 13. GAAP net loss for the second quarter of fiscal 2006 included approximately $145 million, or approximately $0.04 per share, in purchase price accounting adjustments relating to the acquisition of StorageTek and SeeBeyond. Now, going forward, purchase price accounting related items are expected to affect our results of operations by approximately $75 million per quarter for the next 3.5 years. And for the second quarter, total stock-based compensation expense was $55 million, or approximately $0.02 per share. Going forward, we expect FAS 123R stock-based compensation expense to be approximately $60 million per quarter in Q3 and in Q4. Moving on to the balance sheet, some of the core balance sheet items in slide 14 -- I'm pleased to say we ended the quarter with approximately $4.3 billion in cash and marketable debt securities and our cash flow used in operations was $191 million. Now, our cash generation is typically lower in the second quarter of the fiscal year, driven by increased working capital as a result of a sequential increase in revenue from quarter-to-quarter. Q2 cash flow is not an indication of a trend moving forward. Although we used $191 million in Q2, our cash flow from operations was positive for the first half of FY '06. And we are planning for positive cash flow from operations of the full year, I will talk more about that when I get to the guidance section. The overall cash conversion cycle in Q2 was 31 days, and excluding the cash conversion cycle attributed to our acquisition, our cash conversion cycle was 20 days, which is eight days better than Q2 '05, and three days better than Q1 '06. We are very pleased with our performance in effectively managing our working capital needs. In line with our guidance last quarter capital spending came in at $102 million. Now some comments looking forward. The first comment I want to talk about acquisition integration update, and we will be doing this on a regular basis going forward. The piece I want to address on this call is to make a few comments on the progress and integration in the area of cost improvements. We are proceeding with our real estate field office consolidation, and we planned to close 160 redundant field offices by the end of calendar year 2006 with an annualized benefit of approximately $20 million and that's annual. Secondly, we are underway with purchasing initiatives to leverage our buying power across the company with particular focus on direct materials and service delivery. We look at Q3 in terms of R&D and SG&A, we anticipate that expense to total approximately $1.6 billion or the same level as Q2 FY '06. Now included in that 1.6 billion as a reminder, expect amortization of StorageTek and SeeBeyond will be approximately $75 million. The components of this expense will be $35 million in COGS and approximately $40 million in R&D/SG&A. Secondly, we expect total stock-based compensation of approximately $60 million in Q3 '06, with the components of that being $10 million in COGS and $50 million in R&D and SG&A. Again, both the amortization and stock-based comp are in that 1.6 billion. We anticipate interest income of approximately $20 million. We continue to forecast the full-year tax provision to be between $200 million and $250 million. We're targeting a cash conversion cycle combined of 36 days by the end of the fiscal year. We expect capital expenditures to be approximately $150 million in Q3. And finally, we anticipate positive cash flow from operations for the full year '06, and remind you that we goal our management team on being cash flow positive from a free cash flow perspective for the year. Thanks, Steve. And to reiterate very quickly, again, stable performance in revenue, good improvements in gross margin, and a solid cash position with nearly $4.3 billion in cash. But the big takeaway here is a resurgence of demand as evidenced by the strong bookings in backlog growth and deferred revenue. We haven't witnessed backlog this high in years, I do have a New Year's resolution, we just underestimated how attractive and popular the UltraSPARC IV+ product line would be, and we shipped above our plan and all the rest of it, and TI is executing well to our order. We just didn't order enough of it so the leadtimes are longer than we would like to be. Yields are solid, and we expect to get caught back up hopefully by the end of this quarter. And certainly at the beginning of next quarter, we should be back to a normal lead times, it's a high-class problem but our New Year's resolution is to not underestimate the popularity of some of our new products moving forward. To detail the demand is a little bit more, x86 server unit shipments up 87% gave us some fantastic customer wins, NewEnergy, tough U.S. technology, USC, the University of Alberta, have all chosen the product, and we just launched it in September. The x64 workstation business was up 337% year-over-year. Services revenue up 23% year-over-year. And that combined with good solid gross margin improvement of 43.7% for service year-over-year. Software delivered nicely. The Java Enterprise System subscriber numbers are on the rise, up 15% sequentially. A big win with American Express, they are going to deliver a new integrated software environment for their global IT infrastructure. That brings the total users of JES to 1.1 million users throw-in Northwest University, Equifax, we've got a ton of -- we've got an all-star list of subscribers to the Java Enterprise System. Solaris 10 has now been up on the net for almost a year. We have registered downloads reached 3.7 million at the end of Q2, and we're doing tens of thousands of downloads each week. The most advanced operating system is literally flying off the web shelves these days. And I think if you go look now, we are pretty close to 4 million downloads registrations in less than a year, so pretty stunning volume there. In terms of products, the $2.2 billion or so of R&D continues to crank out to completely revamp the product line. The big highlight of Q2 is obviously the UltraSPARC T1 chip. Some people still call it like our CFO still call it Niagara, but it is the new Sun Fire T1000 and T2000 servers using our CoolThreads technology. They are off the charts, kind of exciting, and the benchmarking and the evaluations that are going on are making us very, very excited about the prospects of this product. And with power usage - I'm not talking about power performance, I'm talking wattage being the number one issue in so many data centers, we think this is going to be very exciting. The UltraSPARC IV+ I mentioned is backordered right now and that's a high-class problem. What has happened is that this chip has put us on par or ahead of the game. For the first time in a while, we've actually caught and leapfrogged the competition in the midrange and high-end markets. And we're seeing some very, very interesting demand, we are going to be cranking -- we've got TI working overtime to try and deliver us more product there, so that's a good step forward. We also continue the march towards free and open source software. You see our software revenues are growing nicely. Our strategy of three is working, and we are finding some very effective ways to monetize that. On November 30, we introduced the Solaris Enterprise System, which integrates the Solaris 10 operating system with the Java Enterprise System with our N1 Management software, our tools, all into a single software distribution. It's the only comprehensive and open infrastructure software platform available today. And again get this, we made it available at no cost for both developers and for deployment to drive volume and reduce the cost of entry. And with open source, we reduce the cost of exit. We expect to monetize the growing community around Solaris and Java Enterprise System in the coming quarters through support contracts as customers deploy products built on this platform. We also announced that we've incorporated into the Java Enterprise System open source Java database, so there should be no doubt about our commitment to the open source community. We are basically open sourcing the bulk, if not all of our middleware software. Early in the quarter, we had SunForum, an event we hosted on the East Coast with 1,000 Sun customers, partners, media, and analysts as we introduced the new Data Management Group, which combines Sun's storage environment with the StorageTek folks. And we rolled out a new enterprise capacity tape drive, the T10000. There will be more news, there will be a heavy product calendar here on the storage side as the Data Management Group really kicks into high gear. We've got a great product lineup today, lots of new stuff coming, and a wonderful team now to go carry the ILM story out there in the marketplace. Other big news in Q2 is we have set the bar for eco-responsible computing. We had a summit on 21st century eco-responsibility, and rolled out the new T1-based CoolThreads servers high-performance eco-responsible. We refreshed our products for our partners, in fact, at a recent show of support 40 ISVs, including BEA, Oracle, and Symantec all demonstrated an unprecedented endorsement of the Sun Fire T1000 and T2000 systems at our quarterly network computing event. And most recently, just a few weeks ago, we kicked off the next phase of a 20-year partnership and alliance with Oracle. Oracle reiterated that Solaris is its preferred x64 development platform, endorsed NetBeans as its development environment of choice, and recommitted to Java for another 10 years along with IBM, so pretty stable and compatible non-fragmented environment for Java over the next 10 years. And that's not all there is to that deal. As an OEM, Sun is bundling the server, the storage, the licensing and support into an Oracle database package at an unbeatable price, effectively allowing you to get a Sun computing environment with Oracle at effectively no extra charge, and no IBM Global Services required, pretty cool deal, and that really brings down the effective cost of delivering the Oracle database platform on UltraSPARC IV and IV+ technology down significantly, and our field is so excited about that. We've got the Google partnership, the Oracle partnership, we've got IBM shipping Solaris on BladeCenter. And I even saw a little leak of an internal HP memo that they're supporting explicitly, I don't know if it that's true, it's just a rumor but they are supporting Solaris on their Opteron products. So we've got partnerships we don't even know about out there but anyhow, we will continue to partner like crazy, offer choice and innovation like never before. Two, customers, I thought I'd run through some of the customers in the financial services. Obviously American Express is the biggie with the Java Enterprise System. But we won or expanded contracts in Q2 with Equifax, the Philly Stock Exchange, and Ping An Insurance in China. In the government space, the Mexico Ministry of Education, we have -- the team in Mexico did a great job closing a $400 million contract to provide the Ministry of Education with Sun Ultra 20 workstations with a five-year services contract for their public schools. The province of Nova Scotia is adding Sun Fire T2000 product running on Solaris 10 to its efforts. Guangdong Mobile and NingBo Bird are two excellence wins in the communications space that shows we are experiencing momentum in the Asia-Pacific market. Retail, we had a big presence at the most recent national retail show. Harrods, for those of you who haven't been to London, you might not know about this but if you have been there you have probably been to Harrods. The London department store selected the Java Integration Suite to enhance its multichannel retail operations. NewEnergy in the energy and utilities space chose Sun Fire servers for its good computing processing for performance and power savings. And in education, we got a couple of big wins. The one I am very excited about is the Tokyo Institute of Technology, TITECH awarded Sun the contract to build its supercomputer campus grid infrastructure system. We are back on track and back in the game in high-performance computing. Japan takes supercomputing very seriously, and Tokyo Institute of Technology is a lead dog in that hunt to be the fastest supercomputer out there. And they've chosen our products to go drive that. Big wins with Scripps Florida, UCLA, USC and again, we're gaining traction in our core markets. We're getting new design wins and getting other traditional customers to re-up. So with all of that we've got the integration going along. It's going along very well as planned if not better. We are realizing at least as many synergies if not more on the cost front, and we are starting to see the revenue synergies flow through, but there is a lot more to come and you know, we’re really going to need the next two to four quarters to execute on all the costs and revenue synergies. But again, we are on plan from an execution perspective, both on cost and revenue synergies. You will hear more as we go forward here. We've got a strong product calendar from an R&D perspective. You will see more initiatives on January 31st. We're going to partner with the EPA to host the global conference on enterprise efficiency and the data center. We will be talking about what customers can do to improve data center efficiency and major power consumption. Next month on the 1st and 2nd of February, we have the Annual Analyst Conference, that’s a highly informative event for the analyst community, and set the tone for how to think about and measure Sun's progress moving forward. And again, lots of new products which I can't share with you right now but we will have a heavy product calendar here in Q3 and Q4, so Bret, back to you. Ladies and gentleman, we will now begin the question and answer portion of today’s call. If you have a question please press “*” “1” on your telephone keypad, you will be announced prior to asking your question, if you would like to withdraw your question press “*” “2”, please wait a moment for the first question. Your first question comes from Laura Conigliaro with Goldman Sachs. A couple of things please, so based on what you said with the backlog and a lot of emphasis on that, that would suggest that your March quarter should be non-seasonal, since much of it is already booked. Can you comment on that? Also, it would look from the numbers you gave us that StorageTek missed based on the kinds of progressions they typically have. Can you tell us what's going on there, and what you would expect as far as the business picking up, and the kinds of patterns you would expect from them? Could you also give us the percentage that software represents right now? So with respect to Q3, we are, again, just not in a position to speculate as to we're trying to share with you as much as we know. Anecdotally, the business center is full, the pipelines are solid, and there is a lot of positive activity and we're getting a lot of good positive buzz from the customer. We've got to translate that into revenues, though, and that's the challenge. I would not - Scott, Scott, I mean, if we can't use the things you missed in revenue, and a lot of the other metrics that we could see on the P&L, if we can't use the visibility coming from backlog or bookings as a guideline for how business is likely to develop, what should we be using? You can use the data we've given you. I'm just not going to interpret it for you. That's why we share what we know. And backlog is up, deferred revenue is up. We had a 1.1 book-to-bill. And Laura, the other thing I would add to your question around the StorageTek is, I mean, we certainly don't view it as a miss. A couple of things to keep in mind with the StorageTek results over the last quarter, and the reason we broke them out and the reason we broke out purchase price accounting so clearly is, as you know with purchase price accounting, we had to, we take down the deferred revenue. We did that over the stub period and we did the remaining portion this quarter so that's not in the revenue numbers according to GAAP. And the second thing is, obviously, the intercompany eliminations so and currency also had an impact there as well. So we don't view the numbers with StorageTek, because of those situations as a miss. And for software, Laura, right now with the actual revenue numbers for software, we're not going to segment report that yet. We continue to look at that in terms of as the size gets larger, we will continue to break out JES, the numbers of subscribers. We will breakout on the downloads, this time we are breaking out training on Solaris 10 that we're seeing in our training part in the service organization. But as the software business grows and its overall size and reaches that materiality level, we will actually break it out in addition to these other software metrics that we are providing. Yes, well it hasn't gotten to that stage of materiality yet. You know the thing, with the discussion we had in terms of our software at one stage, it was quote combined with our systems solution that included the, you know, the server, the chip, the SPARC chip, the software, the whole, you know, was a system sale, and it was really hard to break that out. We now are offering the Solaris on a whole multitude of different architectures. It’s widely adopted. We do provide it, as you know, for free, and then as Scott mentioned earlier, and we are starting to get some nice revenues on the contracts to follow that. As that becomes material, absolutely going to look to break that out. And as we've said before, I think it’s big enough, we are probably going to break it out, we'll even start looking at platforms it may be on. But right now, the disclosure for that is basically staying wrapped up in that sales figure we have in terms of revenue for products. Thank you. A bit of a follow-up on supply constraints Scott, you mentioned that UltraSPARC IV+ leadtimes were too long. How long are they, and where should they be when they're normal? And then, more broadly, for the Galaxy and the Niagara product lines, to what degree you think you had supply constraints in those in the December quarter? And what could have been revenue in the December quarter if you hadn't had those supply constraints? The leadtimes on the T1 and the Sun Fire x64 servers are pretty much on target with what we want them to be. So I think we are in pretty reasonable balance there. We've built about $100 million worth of backlog on the UltraSPARC IV+ last quarter that, had we had enough chips, we probably could have shipped the bulk of that. We expect to get back down to the normal two to four week kinds of leadtimes on those kinds of servers at the low end, it might be shorter but one to four week kind of leadtimes by the end of this quarter, early next quarter. In general, on the bottom end of the product line, we can get the systems to the customers as soon as they want them, from everything overnight to the one to two weeks. On the higher-end systems, that you can obligate but two to four weeks is kind of the standard leadtime. Thank you. And then on Niagara, thinking about the comparative position, now you've had a chance to sell a fair number of the boxes, when you look at, what customers are choosing Niagara over, in other words, what's the next nearest option, either in the case of a competitive box or within your own SPARC and Galaxy portfolio, what are you finding that customers are substituting out of to go into the T1 boxes? And what is that suggest about the potential for cannibalization as people adopt the T1? So a couple of big pools of demands certainly, the biggest pool is the kind of the dead UNIX platforms so the end of life HP PA-RISC platforms, customers that are still running IBM POWER on the web tier, the economics just don't solve there. And so there is really a migration away from the UNIXs that don't run on volume industry-standard servers first and foremost. And that's been kind of a global trend to move toward open source. Given that Solaris is open source, it runs on Niagara or it runs on Opteron. That's really a consolidation platform for the older UNIXs. Secondly, there was a big buildout of Linux running on Intel. And frankly, given the price performance benefit we can deliver for WebLOADs, you know, Niagara is really targeted at that tier, again if you are running a single instance of an OS that's single threaded on a single-threaded chip, you are wasting a lot of physical real estate, electricity and manpower, and we can not mention money and so we can really go consolidate the web tier back in. So given the performance metrics, we are seeing kind of 5x the performance at a quarter of the price. You know, that obviously represents a pretty significant consolidation opportunity on the Intel side as well as back again into the legacy UNIX has been really at this point kind of fading away with no unit volume. Within your own base, what do you find for the customers that would have purchased an UltraSPARC box now are choosing a Niagara box, what's the average selling price comparison of what they would have purchased, but now are going with Niagara? So on the low end Niagara is a $3,000 entry-level box. And they are not exchanging like for like, because in all likelihood if they are moving to Niagara because they are seeing a huge upsurge in pre-shopping or video streaming, then they need the infrastructure. So for the most parts, you know, the migration from the older UltraSPARC systems has frankly occurred. And what we're looking at doing is really displacing those segments to the marketplace that didn’t have an option before, like the older UNIXs, as well as going after the Xeon and Linux on Intel crowd. We are pre-cannibalized. Now, in the database space, this becomes a very, very interesting database engine, and with some very aggressive 0.25 license fees per core for Oracle, for instance, you get a very, very cost effective Oracle engine, or using the open source Sun VB, you can have some very powerful database environments. We see some opportunities to cannibalize not only our own database position, what we say very strong, but also again, the dead UNIXs, as Jonathan calls them as people move off to HP-UX and AIX onto Oracle on Solaris 10. Thank you. Just one more very quick follow-up on that if I could, Jonathan you mentioned the shopping and video streaming workloads if you think about the workloads that are out there in the server market, as they pertain to these new products? And particularly with Niagara, you know, how would you size that workload today, you know some version of web serving without floating point map, I suppose. And how fast do you think that category of workload is growing relative to others? So if you go talk to Google or eBay or Amazon, you will find they don't have any floating point at all. And so the fact that we are light on floating point performance in the UltraSPARC T1 platform really isn't an impediment in the marketplace. I mean you're not going to go simulate a bomb on a Niagara system. The market that we are really targeting is database transactions, Web serving, video streaming and frankly, that's the side of the market where we see really aggressive growth, because, again, the simulations marketplace, the marketplace for high performance computing is relatively small compared to the marketplace for the Internet, and so all the workloads that you see being driven to the front end of a financial institution, whether it's transactional workloads or web serving, we see them, you know, voice-over-IP, video-over-IP, all of this is really contributing to the next wave of the internet buildout, that's where the UltraSPARC T1 systems are really focused, and that's where we see the belly of the opportunity. We announced for instance, eBay as a new customer and every eBay trade can be handled by an UltraSPARC T1 thread. So it's a very nice application. Hi guys, I have two questions if I could. Steve, start with you, I just want to make sure I understand the quarter in terms of trying to normalize the data for growth. Steve, I think you said that StorageTek was 368 million, was that product revenue or was that both products and services? Yeah, we've got a schedule in there, Keith, that is going to break that out in the earnings the excellent of… Yeah, so we've got a slide in the deck there where we've provided the more specific guidance on the revenue. Let me just ask my team right there, total revenue? Can you tell us what the magnitude of the impact was for SeeBeyond, just so we could normalize to try to understand the growth trajectory? Yeah, that’s a very, you know their business was not that materially even in total before so the quarterly number is very small. Okay, Jonathan to you if I could, or to Scott. In terms of the Opteron-based systems that have been out had pretty good, very good growth this quarter. I was wondering where if you could help us understand where the growth from those particular systems is? In particular as it relates to the potential for cannibalization of your own low end we are seeing that in some of the installed base, but just I was wondering if you could tell us give us a little bit more color about the cannibalization there versus the organic side? So again, I think the cannibalization that occurred, it's, you know, we look at it as we are pre-cannibalized. What we're doing now is going back into the PA-RISC end of life install base, which is a $100 billion plus install base. We're going into the IBM POWER base especially with Galaxy, and just blowing away based on raw floating point performance and computing performance and winning deals like the TITECH deal. So this is not to us about how do we cannibalized our installed base? This is about how do we grow the market to get into the installed bases that are frankly more vulnerable. I think you're beginning to see very significant customers move off of HP-UX now, because their only route forward is to adopt Itanium. And Itanium, frankly, is so fragile in the marketplace right now that it is leading to instability in Hewlett-Packard's PA-RISC installed base, because that's their only route forward. So that's where we're targeting both the UltraSPARC T1 systems as well as the Opteron systems, and leaving it up to the customer to figure out how they have architected their system, to pick whether they want a Galaxy box or a Niagara box. And Jonathan, just to follow-up, if I could, what I’m also interested in your perspective on the Linux dichotomy, could I think a lot of those systems on the low end are potentially targeted to Linux and how are you finding that, how are you finding that competitive markets versus Linux on something x86 versus Solaris on the Opteron side? So a couple of things one, we're going to be running Linux on Niagara systems as well as VSE, so they will be multi-operating-system systems. So we're going to go after the same marketplace. It's going to be up to customers to figure out how they architected their apps. Secondly, on the Opteron side, we're seeing about and I’ll have to check the numbers, about a third of the units ordered with Solaris and the remainder ordered with either Microsoft Windows, Red Hat Linux, or no OS specified. So that is actually good news from a couple of vantage points one, we're seeing the adoption of Solaris on Opteron grow quite aggressively. But the second is the growth of the overall Opteron business exceeds the growth of the Solaris opportunity, which means we're getting into the Windows base and the Linux base, which again is just more revenue and opportunity for everything else that we ship and sell. You know, I think that's the point I was going to make, is that we are playing, we've never before played in the Windows marketplace, and we are now. The other point I would make is that there was a low barrier to exit from Solaris over the last five years to Linux and in fact, you talk to any of the customers, they were able to move very smoothly and without hardly breaking a sweat in getting to the Linux environment. I can tell you the barrier to exit from Linux back to Solaris 10 is even lower than the original barrier from Solaris. And as we put the Linux libraries into a Solaris container, where you can actually run your Linux binaries native and add all of the features, capabilities, and carrier-grade secure and less expensive characteristics of Solaris 10 with a really, really wonderful Opteron product line, we think that that's there for the taking as that stuff comes off of lease or gets fully depreciated, we think it’s there for the taking. Hi guys, thank you. I have a couple of questions as well, please. Maybe you can just help confirm or refute some analysis. My sense is that if you look at Sun plus StorageTek plus SeeBeyond last year, collectively, those companies delivered 3.55 billion in revenue. That would suggest that year-over-year, as a integrated Sun revenues were down more than 6%. If I give you full credit for the backlog increase of 228 million that you’ve experienced this year versus last year, and I add that back to your revenues, the revenues for integrated Sun would be perfectly flat year-over-year. So one, can you confirm that Steve? And secondly, given that that's the case, even backlog adjusted, you are at flat revenues year-over-year, and you are down non-backlog-adjusted. How are you confident that there is a resurgence in demand occurring, as opposed to uneven demand in the quarter, and you've got a lot of demand at the end of the quarter, and accordingly your backlog is up, but fundamentally when you make the adjustments, it’s unclear, even adjusting for backlog, if the growth rate has materially changed. So maybe you could help me with that, please? Yes, I’ll just start, and then turn it over to Scott and Jonathan. So yes, your analysis is correct. The one piece that you could add to that is, as I mentioned to Laura earlier, is to keep in mind the impact to the purchase price accounting on the reduction in the deferred revenue that we are required to take, and also the elimination of some inter-companies that we had between Sun and StorageTek, but that analysis you've come up with is fundamentally accurate. And then as far as demand, let me turn that to Scott or Jonathan and see if they want to comment on the demand picture. By the way, on revenue, there was a little head win this quarter on currency too, which would change the numbers a little bit also. Yeah, I think from the overall demand perspective, we are definitely seeing an up-taken demand and especially on the core UltraSPARC systems and the high-end systems. So, you know, I think in aggregate, after purchase price accounting and the elimination and the currency effect, you know, our view is we are seeing an increased competitiveness and you are seeing that reflected in an increasing gross margin line. So the fact that we are able to price the products and, you know, certainly revenue were flat but again, you are seeing a fair amount of bookings growth to show you that the demand is there, and the margin shows you that we’re able to compete and win the business without having to go dive on products. But, Jonathan, that brings me to my second question on margins again, you know, StorageTek margins typically in this quarter are extremely high and accretive, and you can see it from Steve's mix calculations. I think if you back out the impact of StorageTek being added to the business and the margins were down year-over-year to spend, they were certainly down sequentially. Your discounting was also quite high, which seems incongruous with the fact that you have products that are really hotly in demand, and that you have refreshed a lot of your line. So again, can you reconcile if you normalize for StorageTek, are the margins not down on a year-over-year basis? And then secondly, given how significant a discounting was in the quarter in terms of your gross margin attribution, why would that be the case, if ultimately you know, US IV seems to be booming, and obviously, you have the new products, Niagara and Galaxy, which one would think wouldn't be discounted at all? So, first of all, the mix shift was towards software and look, when we sell, we don't sell piece parts. When Dell goes in and sells a box, they just sell the box they don't own any of the intellectual property inside it. When we go in, we're going to sell a total systems picture. And so the discounting on a particular part may not be reflective of the overall margin of the total deal. So the increase in software, you know, the software is not being sold standalone. It's being sold as a part of a total systems package. That’s where we're able to get higher margin, because we've got the complete portfolio. Again, you know, there's nothing out of the ordinary in the discounting. If anything, we saw a little bit less of that, because we've got far more competitive products now. And I think that, Tony, with the discounting, you know, the impact of 1.9 points unfavorable on price for products and 0.4 points unfavorable for services probably it does again reflect the competitiveness that we have I mean that would almost go against an argument that we would be holding prices high to get these margins. So I would say despite that kind of aggressive pricing that we take, we went to be a price leader. We're still getting good margins. Tony, one other thing just to keep in mind when you do a comparison on the margins in Q2 and there's a schedule on the deck I think it's page 18 is $84 million of purchase price accounting in the gross margin line. So 24 of it, by the way, is revenue related to the deferred revenue. So keep in mind that that's and you heard the guidance on how that's going to drop in Q3 going forward that's why I was very explicit on how much purchase price accounting. So any comparisons with a year ago, that anchor was not being dragged a year ago. Okay. And then finally, if I may, it looks like the StorageTek business overall was down 10% year-over-year, and down 13% on the product side. Scott, I heard you in terms of integration plans but was there really the expectation that revenues would be down double digits, and should investors be expecting that kind of decline while the integration is taking place? So, I think that, you know, I don't know where you got your numbers. But that's not the numbers that we have. We're not breaking out StorageTek. We are at Sun now, and we've got the data management practice. We are breaking that out, and the teams are jointly selling but, there's a lot more work here with purchase price accounting and eliminations and currency and other factors here. We could spend all day long and our whole life talking about classic Sun versus StorageTek versus SeeBeyond. At this point, you know, we're presenting the storage business as a whole and I stand by my statement that we are very comfortable with how the integration is going, both on the revenue as well as the cost synergies perspective. Tony, this is Bret. I would just point you back to the slide in the deck that refers to purchase accounting impact. If you look at the Q2 '06, there's $24 million of impact on the revenue line, and $84 million of impact on gross margin. So when you're looking at the margin percentages, when you're looking at the revenue growth, take those into account. Okay, thank you very much. Thanks for joining us today. The Investor Relations personnel will be back in their offices shortly to respond to any further questions. And you may contact us through our Investor Relations main number at 408-404-8427.

EarningCall_233972

Here’s the entire text of the prepared remarks from Google’s (ticker: GOOG) 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. Eric Schmidt, Chief Executive Officer George Reyes, Chief Financial Officer Larry Page, Founder and President, Products Sergey Brin, Founder and President, Technology Omid Kordestani Senior Vice President, global sales and business development Jonathan Rosenberg, Vice President, Product Management Analysts: Paul Keung at CIBC World Market Heath Terry with Credit Suisse First Boston Safar Rashtchy with Piper Jaffrey Anthony Noto, Goldman Sachs Christa Quarles, for Thomas Weisel Partners Robert Peck with Bear Stearns Marry Meeker of Morgan Stanley Imran Khan of JP Morgan Marianne Wolk, Susquehanna Investment Bank Mark Mahaney, for Citigroup Jeetil Patel with Deutsche Bank Securities Scott Kessler with SMP Equity Benjamin Schachter from UBS Presentation [Operator] Good day everyone and welcome to the Google Inc. Third Quarter 2005 Earnings Conference Call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Kim Shevel Google Finance Director. Please go ahead. Thank you, good afternoon. Welcome to our Third Quarter Earnings Call. On the call today are Eric Schmidt, Chief Executive Officer, George Reyes, Chief Financial Officer, Larry Page Founder and President Products, Sergey Brin, Founder and President, Technology, Omid Kordestani Senior Vice President, Global sales and business development and Jonathan Rosenberg, Vice President, Product Management. This call is being webcast from our investor relations website. Additionally our press release issued few moments ago, is now posted on our website. A replay of this call will be available within a few hours. Some of the statements we will make today our forward-looking, including statements regarding expected capital expenditures for 2005. Our operational performance and margins the prospects of growths in online advertising are continuing ability to grow and innovate. Our expected traffic growth, the growth patterns of our AdSence network and our Google websites. The potential for the services we develop to benefit our users and partners. The expansion of our China operations and other international operations, our expected investments in our business and our expense growth, our future provision for income taxes and our effective tax rate. Our plans with respect to providing, wireless internet access to San Francisco, our expectations with respect to our print ad business and strategic relationships and our potential development of land at Moffett Field. These statements involve a number of risks and uncertainness that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainness include a variety of factors, some of which have beyond our control. These forward-looking statements speak as if today, and you should not rely on them as representing our views in the future. We undertake no obligation to update forward-looking statements to reflect events or circumstances that occur after this call. Please refer to our SEC filings including our report on Form 10-Q, for the quarter ended June 30th 2005, for more detail description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the investor relation section of our website. Also, please note that certain financial measures we use on this call, such as EPS, net income, operating income, research and development expense, adjusted EBITDA and free cash flow will be expressed on the proforma non-GAAP basis and have been adjusted to exclude charges related to Stock Based Compensation or SBC and In Process R&D or IPR&D. Beginning this quarter, we will report our GAAP results as well as provide non-GAAP operating income, net income and EPS on a supplemental basis in our earnings release. Reconciliation’s of all non-GAAP financial measures to GAPP financial measures are also included in the earnings release which may be obtained by visiting the investor relation section of our website. And with that I would like to turn the call over to Eric. [Eric Schmidt, Chief Executive Officer] I would like to thank everybody for joining us on our third quarter 2005 conference call. It is a great to talk with you after our very successful second year and a very strong quarter. What I will do is I will give you a couple of introductory comments and then we will have George will take us through the number as he always does Larry and Sergey will join us with the some comments about what we did in the quarter. And we’ve also asked Omid and Jonathan, previously introduced to join us as a part of Q&A to provide you more depth into our business corporations. As you probably are seeing from the press release, we had another strong record-breaking quarter in terms of both revenues in profits and we are very, very pleased obviously. This is traditionally a slower season for Internet properties. But this momentum shows at least from my perspectives that we are effectively connecting with our users and our customers in a relevant and meaningful way with all of our existing and new products that we brought out. As you said from the beginning our focuses is still in the long term, results we’ve achieved, may or may not, of course reflected any forward quarter. In the near term we are attracting a lot more business fortune 500 companies and continue to build our index. We believe the Research and advertising industries remain in the nascent stages of growth with great forward potential. We are going to continue of course our policy of no forward guidance, as you all would expect, so George why should go ahead and take us through the numbers. [George Reyes, Chief Financial Officer] Thank you Eric. Before we dive into our Q3 results, I would like to discuss our new reporting format. For the first time this quarter we are providing non-GAAP proforma earnings as a supplement to our earnings reported on the GAAP basis. This quarter, non-GAAP earnings excludes charges related to stock based compensation and IPR&D as Kin suggested earlier. We believe that these and other non-GAAP measures will provide meaningful supplemental information, regarding our performance and our liquidity. In our earnings release we will include reconciliation’s to GAAP for all of these measures. So having said that, let’s get started. We are extremely pleased with our results for Q3. As we’ve said before Q2 and Q3 traditionally are slowest quarters and we are quite happy with the 14% sequential revenue growth we were able to achieve this quarter, as our top line grew to $1.578 billion from $1.384 billion, last quarter. Year-over-year revenues nearly doubled with an increased of 96%, compared to Q3 ‘04. GAAP operating income in the quarter was $529 million this compares to GAAP operating income of $476 million in the second quarter, an increase of 11%. Non-GAAP operating income for the third quarter was $596 million this compares to $523 million in Q2 of 2005, an increase of 14%. GAAP net income for the third quarter of $381 million as compared to $343 million in the second quarter, an increase of 11%. Non-GAAP net income for the third quarter was $437 million as compared to $381 million in the second quarter, an increase of 15%. GAAP earnings per share for the third quarter was $1.32 and 290 million diluted shares up outstanding, compared to $1.19 for the second quarter on 287 million diluted shares outstanding. Non-GAAP earnings per share for the third quarter was $1.51 and 290 million diluted shares outstanding compared to $1.33 for the second quarter of 2005 and 287 million diluted shares outstanding. Non-GAAP operating income, non-GAAP net income non-GAAP EPS were all proforma measures, net of stock based compensation and IPR&D charges. This quarter is the stock based compensation charge was $46 million as compared to $47 million in the second quarter of 2005. The IPR&D charge was $21 million in this quarter with no IPR&D charge in Q2. The IPR&D charge relates to an acquisition in the third quarter. GAAP tax benefits related to stock based compensation charges had been excluded from non-GAAP net income and non-GAAP EPS. The tax benefit related to stock based compensation totaled $11 million in the third quarter and $9 million in the second quarter. Net cash provided by operating activities was $647 million for Q3 compared to $625 million in Q2. Adjusted EBITDA and by adjusted we mean net income before interest taxes depreciation, amortization, IPR&D and stock based compensation increased 14% to $672 million a roughly 43% of revenues in Q3, up from $590 million were again roughly 43% of revenue in Q2 of 2005. Capital expenditures for the third quarter totaled $293 million compared to a $157 million during the second quarter of this year. We are now at the estimating over $800 million in capital expenditures for 2005. Let us now dive into more of the details around those revenue and cost. Let’s start with revenues. As I mentioned total revenue grew to just under $1.6 billion this quarter. Our own Google sites again continue to grow faster in the Google network, showing sequential growth of 20% as compared to 7% sequential growth for the partner network. Revenue from our own sites increased to $885 million in Q3, from $737 million in Q2 and represented 56% of total revenues this quarter, as compared to 53% in Q2. Revenue from the Google network the third party sites to display ads provided by Goolge increased to $675million in Q3, from $630million in Q2. The network represented 43% of total revenue compared to 46% last quarter. On the international front our key area of investments for us will continue to make study progress. This quarter international operations contributed 39% of total revenue, compared to 39% last quarter and 35% in Q3 above Q4. The UK contributed 15% of the total revenues this quarter as compared to 14 % of total revenues, last quarter. As we’ve discussed in the past Q4 and Q1 are the strongest quarters for the online advertising industry and for an Internet usage, while Q2 and Q3 are traditionally weaker with Q3 being generally the weakest. This years Q3 revenues came in stronger than we originally expected, due primarily the product improvements. This growth more than offset the expected seasonal slowdown in the traffic. As you might imagined, it has been difficult for us the forecast the rate of product innovation and the impact it will have on our revenues. As you consider future estimates, bear in mind, that we will continue to release product improvements with varying levels of impact on revenue and that impact will continue to be difficult to predict. Many of our product improvements are intended solely to improve the user experience and may or may not be accretive to revenue in the short-term. Let us shift gears and then talk about cost and expenses. At Google starting with the cost of revenues, cost of revenues is comprised of traffic acquisition cost, credit card processing charges, the cost associated with the data centers, amortized expenses, which includes purchasing licensed technologies. In the quarter this cost increased to $654 million from $597 million in the second quarter but, decreased as a percentage of revenue to 41.4% from 43.1% in the previous quarter, primarily due to our reduction in TAC as the percentage of revenue, which I will discuss next. TAC with the revenue share with Google partners increased to $530 million Q3, from $494 million in Q2. TAC as the percentage of web of advertising revenue, decreased from 36.1% in Q2 to 34% in Q3. The decrease is related primarily with the continued shift in our revenue mix from the Google network revenue to Google site revenue. In Q3 of 2005, R&D spending increased to $152 million from $96 million in Q2 or 9.6% of revenue, as compared to 6.9% of revenue last quarter excluding IPR&D charge of $21 million non-GAAP R&D total $131 million or 8.3% of revenue. The increase in R&D is due primarily to our successful engineering recruiting efforts. As we have stated for the last few quarters you should fully expect to see growth in this expense line for the foreseeable future. On the sales and marketing front, sales and marketing expenses decreased from 7% last quarter to 6.7% this quarter expressed as the percentage of revenue. In absolute dollars spending increased 8% to $105 million from $97 million last quarter. This increase in spend reflects natural growth of headcount and expenditures as we grow our business globally. On a G&A front, G&A increased $92 million in Q3 and $72 million in Q2 of 2005, an increase of 29%. On a percentage of revenue basis G&A increased to 5.9% from 5.2% last quarter. This growth primarily reflects headcount increases in IT operations, human resources and recruiting and finance and legal, which continue to be necessary to support the scope and scale of the business growing at our current phase. With the respective of the stock based compensation, stock based comp charges fell slightly this quarter to $46 million from $47 million last quarter, this number includes the smaller amount of stock based compensation related to stock option rewards issued previously but, now a growing component of stock based compensation, associated with grants of restricted stock units, what we call the GSU’s. Our non-GAAP results are net of these charges. Turning to operating margins, non-GAAP operating margins in the third quarter was 37.8% of revenues compared to also 37.8% of revenues in the second quarter. Increases in R&D and G&A spending as a percentage of revenues, were balanced by growth in higher margin google site revenue resulting in steady state margins, quarter over quarter. Please know that as we have said in all of our publics filings and as Eric has mentioned earlier, we intended to invest aggressively in our business, when see opportunities we believe will pay of in the long-run, regardless of the short-term characteristic of the business. Our investments will be made in a thoughtful and measured manner. Let’s now move to the income tax line. Our effective tax rate remains steady at 31% this quarter and continues to reflect the mix of business generated in the US and the business generated through our IR subsidiary. A provision for income taxes was not materially affected by stock option activity, although we did realize a $105 million reduction in our income taxes payable as result of this activity. We expect our effective tax rate to be approximately 30% for the full year of 2005 and we believe we should be able to maintain or reduce this rate in the long term. However in the future earnings recognized by our IR subsidiary are not as proportionally greater as we expect or our effect tax rate will be higher than our expectations. In terms of foreign exchange we experience the $23 million unfavorable impact to our revenue line from Q2 to Q3, as a result of an increase in the value of the dollar, the US dollar primarily against the Euro. Turing to liquidity front, net cash provided by operating activities for Q3 totaled $647 million as compared to $625 million for Q2. Free cash flow another alternative measure of liquidity is defined as cash provided by operating activities less capital expenditures. This quarter we generated $354 million in free cash flow. Our capital expenditures in the quarter were $293 million compared to $157 million last quarter and primarily reflect acquisition of additional land and office space to support our headquarters in Mountain View, California, as well as the purchase of production services and networking equipment. As I suggested previously, we are now estimating capital expenditures for 2005 of roughly $800 million. Our cash, cash equivalents and marketable securities balance of just over $7.6 billion at September30, up from $2.9 billion at the end of last quarter. The increase is primarily attributable to our follow-on equity offering in which we raised $4.3 billion, to support the future growth of our business. Under DSO front, DSOs increased slightly to 31days from 28 days last quarter. This increase reflects the growth of our international business where credit terms tend to be longer, as well as extended credit to certain customers in United States. On a worldwide basis we grew to 4,989 full-time employees, as of September 30th as compared to 4,183 as of June 30th and 2,668 as a of September 30th 2004. Before turned it over to Larry, I would like to update all of you, with respectable Google foundation. We have pledged a $90 million cash contribution to our foundation in the fourth quarter. As this is a non-recourse, non-refundable donation, it will be recorded as an expense in Q4 and presented as a separate line item on our P&L. We don’t expect to make further donations for the foundation for the foreseeable future. Over the next 20 years we plan to donate or invest roughly 1% of our equity as of the IPO date, this equates to 3 million shares. These shares are the cash equivalence will be donated/invested overtime in the Goolge foundation. The $90 million cash contribution in Q4, equates to roughly 300,000 shares. Therefore, roughly 2.7 million shares of the 3 million allocated will remain available for investment in the foundation. In addition we plan to donate or invest 1% of our profit on an annual basis. We may also make investments in four profit enterprises with a social objective. These equity investments will be recorded on our balance sheet, to the extent they become impaired we will have to recognize the appropriate write downs on those investments when and if they occur. And with that I would like to turn the call over Larry. [Larry Page, Founder and President, Products] Thank you George. Last quarter we gained a lot of momentum in our goal to make the world’s information universally accessible and useful. We are very happy with our progress interjecting quite a new number of new products and services. We celebrated our 7th birthday in September, by launching a significantly expanded search index about a thousand times larger than the index, when we started. That makes Google three times larger than any other search engine, by our estimates. We’ve also done more work to personalize Internet experience, with freely downloadable application like Google Desktop-2 and Google Talk. Desktop-2 as the Desktop Outlook Search, and a sidebar that is always there and gives you a snapshot of personalized information, like email, weather and photos in real time. Google Talk is an instant text and voice-messaging toll based on the open network. Google Local and Maps have been combined so, people can get a local search mapping information at one place. Google (2023) gained popularity since it came out in June and in September we updated with data the index stories and images from national geographic. We announced enhancement, to Google Video and Blogger. Google Video is now available on more platforms for better viewing windows and controls without having to download any special Google software. And now we have Google Logsearch, a new service based on Google search technology that lets users search for blogs and post. We introduced some new enterprise level of products and services, companies can offer Google desktop search on their employees computers and we lower the price of the Google mini, as small businesses can get a enterprises global search solution, at a better price. Getting people corrected information wherever they are continues to be a focus area for us. One highlight is a bid we’ve submitted to offer free WiFi wireless Internet access to the City of San Francisco. This is an opportunity to make services growth touch counts for new location based technology. Finely we continue to work hard on Google Print. This is an effort to create a giant card catalogue of books online. Google Print searches and stores snippets of the book and mostly have the publishers or author’s permissions to show more. This effort will ultimately help authors and publishers, to sell more book and users everywhere find the information they are looking for. Now I will turn the call over to Sergey. Thank you Larry. I have a few things to cover, including updates on our advertising programs some key hires and industry collaborations and an update on Google.org and the Google foundation. Advertising continues to drive most of our business and will continue to expand our advertising products. The site targeted at advertising program we launched in Q2 has been widely adopted. More than 25% of the Google’s top 100 advertises have run a site-targeted campaign and the feedback has been positive. We are continuing to test the placement of adds from our vast advertising network into select US print publications to connect publishers and advertisers. Ads from this program are currently running in PC Magazine and Maximum PC and 100s of other publications have expressed interest in participating. Internationally we launched Picas International and we extended our advertising sales and operation forces into several new territories. We’ve opened our sales office in Stockholm and plan to open offices in Tel Aviv and Poland. There were number of announcements from China including an new authorized reseller program and Google Local for China, as well as Google University Search and Google Public Search. These services offer free access to search for Universities. In Q3 we completed over 20 new deals including Univision.com and Sun and renewed over 20 of partnerships to distribute AdSense and search services round the world. Our agreement with Sun will allow millions of people who download the Java runtime environment to get the Google toolbar and we look forward to working with them to find more ways to extend our mutual technologies. Our recent announcement with NASA Aims Research Center, to collaborate on four areas of technology, also includes provision for Google to develop up to 1 million square feet of land at Moffett Field. We are working on our preliminary plans and will keep you updated as things progress. . We also look forward to working with a number of other projects. You may have seen some coverage on our initial investment into Google.org, philanthropic effort effort we discussed in our annual report. Under the umbrella of Google.org, we’ve created the Google foundation and have funded that with $90 million. As George mentioned this doesn’t hits the books until Q4, but we want to mention it because this is an important first step in our commitment to donate 1% of our equity and profits towards philanthropic efforts. This commitment is going to reflect the broader Google.org structure we have created in which the Google foundation in just one part, although that part is one that received $90 million right now. I would also like to highlight several editions to our team in the past few months. Dr Kaifu Lee has already started working on our new R&D center China and we welcome Dr. Vint Cerf one of the fathers of the Internet as our Chief Internet Evangelist and Dr, Shirley Tilghman, the President Winston University is our newest board member, Eric, over to you. Well thanks very much you all. So, let’s finish up here and get your questions and we had another exceptional quarter beside our expectations going into it. We are very much sticking to what we said in our original founders letter about continuing to focus on users and the quality for information and advertising that they all need. What I am particularly happy about this, we are happy about this is how well its working at this scale. Internet access is becoming so ubiquitous, so practical our lives are continuing to move online and changed the way we’ve been doing business. We focused on accesses to the information as much as the search itself, because you need both. To reach this reality people are increasingly demanding more intrusive personalized technologies and we are building them. We believe that the most direct way to access walls of information is and will continue to be through Google. I encourage you to view our results as driven by a business model, for instant and seamless access to the world information, driven by the most relevant and complete set of information and that’s people really care about. And we are obviously have been able to innovate because we built quite a talented team and enough computing power to enable it. Thank you for continuing to travel this road with us, if you excuse the metaphor, actually, we are to become the leading provide of access to the world information. If you look our US operation, international operations, you can see us really working very well. So, with that Larry, Sergey, Edward, Jonathan, Omid and I would like to take your questions one at a time. If there is time after everyone had a first chance we will of course come back with any follow up questions. So, operator can you begin the first 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.

EarningCall_233973

Hello, and welcome to the STMicroelectronics Fourth Quarter Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. Operator Instructions For your information, this conference is being recorded. I would like to turn the call over to Stan March. Mr. March? Hello, Andrew. Thank you and welcome to STMicroelectronics fourth-quarter and full-year 2005 results conference call. And thanks to all of you for joining us. Hosting today's call is Carlo Bozotti, our President and Chief Executive Officer; and joining Carlo on the call is Alain Dutheil, our Chief Operating Officer; Carlo Ferro, our Chief Financial Officer; Philippe Geyres, our Executive Vice President responsible for the HPC sector; and Andrea Cuomo, our Executive Vice President responsible for strategy. Just a bit of housekeeping before we get started. Some of the comments we're going to make today are forward-looking and therefore covered by the risk factors, which were enclosed in the press release and our most recent regulatory filings. If you have any questions about those, please refer to our website for clarification of these important risk factors. I would now like to turn the call over to Carlo Bozotti for some introductory comments, before we open it up to your questions. Carlo? Thank you, Stan. Thank you for joining us today and for your interest in ST. We continue to improve the financial performance of the Company. Our fourth-quarter results were on target with our goals, and the top-line revenues were solidly in line with our objectives. From a profitability perspective, gross margin came in about the middle of the range we shared with you at the time of the third-quarter release. Looking more broadly at the financial performance, we're seeing progress across our most important financial metrics and will share with you shortly. As we look at the full year in review, 2005 has been a year devoted to strengthening and reshaping ST into a stronger and more competitive industry leader. We have undertaken a number of important initiatives, and we have made progress on them. Overall, we are moving in the right direction with the right plans, and I believe that our constant quarter-over-quarter progress through 2005 demonstrates this. Importantly, we are executing according to our timeline, and we are utilizing ST's significant assets and resources to drive our progress. Now let's turn to a more in-depth review of the fourth quarter and summary highlights for the year. Net revenues in the fourth quarter increased 6.3% sequentially, compared to our objective of 3 to 9%. Wireless applications were the primary drivers of this growth, increasing double-digits sequentially and year-over-year. We experienced growth, reflecting strong volume in the wireless end market and an expanding customer base. By product group, Application Specific Product Groups accounted for 55% of the net revenues in the fourth quarter. On a sequential basis, sales increased 3.4%, reflecting wireless growth. Application Specific Product Groups attained double-digit operating margins over 10%, a 69% sequential increase in operating income. MLD sales rose approximately 5% compared with the third quarter, reflecting a higher level of term business in distribution channels. The group was able to maintain a nearly 14% operating margin, which was similar to the third-quarter levels. MPG results improved further from the third quarter. Our progress in MPG comes from our significant internal efforts to minimize the impact of the ongoing difficult pricing environment in flash. Looking at our results, total MPG sales increased 14.4% sequentially, with flash memory sales up 24%. We were able to post an operating profit in our memory book, in comparison to the third-quarter loss of 17 million, due to higher sales and a richer mix for our flash products. This higher ASP reflects the migration efforts well underway in flash, despite the continued quarter-to-quarter decrease in prices. We have reached our fourth-quarter objective, with 2-bit per cell representing about 80% of our wireless production, progressing from 60% in the third quarter and 25% in the second quarter. Gross margin continues to move in the right direction. Gross margin was 36.5% in the fourth quarter, improving about 240 basis points sequentially. Volume, announced product mix, and manufacturing performance accounted for about half of the improvement, with more favorable currency representing the other half, as we had anticipated. These two positive factors in combination more than offset continued pricing pressure. On the expense front, we also made progress. As stated, we have targeted to have operating expenses under 28% of net revenues. We were moving in that direction over the last few quarters, and with the fourth quarter we have achieved that goal on a quarterly basis, with combined SG&A and R&D expenses totaling 27.7% of net revenues. Wide sales growth and more favorable exchange rate were also positive factors, our cost initiatives were key contributors to the sequential quarterly improvement, as we have absolved about 12 million of higher stock-based compensation costs and pension accruals. We are also making further progress in increasing our net operating cash flow, with an increase of $290 million in the fourth quarter, up from $173 million in the third quarter, and $23 million in the second quarter. At year end, our financial position has improved, with a move to a net cash balance of over $200 million, compared to an 8 million deficit one year ago. Better utilization of our capital is one of our key priorities. We are being careful in reviewing our capital expenditures. For 2005, our capital expenditures totaled approximately 1.5 billion, down significantly from over 2 billion last year, and also well below the $1.85 billion depreciation costs. We have completed our initial capital expenditure plans for 2006. We have several major objectives for the year. Looking specifically at our major projects, the majority of this amount is for expanding our 300-mm leading-edge capacity and our advanced proprietary 8-inch technology. We also need to expand our back-end assembly and test operations due to volume growth. Inventory turns were 4.3 times in the fourth quarter. As we indicated last quarter, we will not reach our targeted range this quarter. I want to emphasize, however, that we are committed to improving the inventory turns to a targeted range of 4.5 to 5 turns during the second half of 2006. Moving to our outlook for the first quarter, we expect to see our typical seasonality and therefore anticipate the first-quarter 2006 sales may decrease between 1 and 7% sequentially. Based upon the seasonal mix and volume impact, we expect the gross margin to decrease sequentially to about 35%, plus or minus 1 percentage point. From a revenue perspective, our objective is to increase first-quarter revenues between 7 and 14% year-over-year. From a gross margin perspective, our objective is substantially better than the figure, which we reported in the first quarter of 2005. Since our underperformance at the outset of 2005, we have redoubled our efforts, developed action plans, and moved forward with an aggressive roadmap to improve the business and financial performance of the Company. There are three major phases for this plan, from a timeline perspective. First, 2005 has been a year of restructuring and refocusing. We have sharpened our considerable R&D investment, where we have redeployed approximately 10% of our engineers, a substantial effort involving over 1,000 research and development engineers. We have been focusing our efforts to reduce costs and improve our manufacturing. On the cost side, we can confirm that we have been able to reduce our cost structure by $100 million compared to the year-ago period, by our initiatives in purchasing, centralization, and increasing efficiency. Our 6-inch restructuring program is on track from a timetable perspective. We expect to see the valt of the positive results commencing in the third quarter of this year. Our headcount rationalization program continues to move forward, and at the end of 2005 we were approximately 40% completed with our plan from a timetable perspective. Our second phase is underway. After the significant lock-in phase in Q1 2005, we have in the past nine months on a cumulative basis gained market share; and we intend to accelerate this improvement in 2006. I would point out, however, that this recent recovery of our market positioning is coming from applications such as wireless, up 20% in 2005; datastorage, up 17%; and automotive, up 80%. Our goals are to build upon these strengths, as well as recover where we lost ground, notably in consumer products, where we are positioned to accelerate our improvement this year. The third phase of our roadmap, therefore, is the development of a stronger, more consistent pipeline of new products, which by this measure takes more time. Our significant R&D efforts underway are targeting in MLD advanced analog products for industrial applications, which are instrumental for our success in broadening our customer base and enhancing the margin dynamics of that business. In memory, there is a wave of new products for both NOR and NAND on 70 and 65-nanometers, with a strong focus on 2-bit per cell. In this area, let me share a few additional points. We have done important work on internal manufacturing and our cost position with our memory operation. ASP increases over the last two quarters are clear indicators of this progress. However, the dimension of scale is a critical element in the memory business. Therefore, we continue to be active in strategic discussions, and we expect to obtain queue in a reasonable period of time. In automotive, as I have stated before, our technologies perfectly address the needs of this market. We are well positioned to add new attractive opportunities, and we have seen some highlighted in our press release. In computer peripherals more specifically the storage and printers, new applications are driving growing volumes. In addition, we have an opportunity to expand our positioning due to these drives industry consolidation. Importantly, in consumer, our new products are beginning to ramp up production for set-top boxes, and we will see the positive effect of our digital TV offering in 2006 as well. Finally, new products in wireless, in 3G, and in particular multimedia and connectivity, where we want to secure and expand our higher-dollar content position and benefit from the increased sales in the markets. Our R&D focus and emerging design wins are the engines driving the new products that we will launch, particularly in the second half of 2006, moving into 2007. In closing, we have a good deal of work ahead of us, but we are confident in our plans underway, our resources, and our people. We look forward to reporting on our progress as we move through 2006. Andrew, before you take the first question, just I would like to make two points. First, to all you callers with questions, we look forward to answering them. However, please limit yourself to one question and one follow-up in the interest of moving through the queue as appropriately fast as we can. Then I just want to make one, indicate one point. Carlo was mentioning the sequential, the year-over-year growth rates in wireless, data storage, and automotive. And understand some people thought that number might have -- the correct number is 8% for automotive, 17% for data storage, and wireless 20%. So with that brief clarification, Andrew, let's please answer some questions. Hi this is actually Brian Lee calling in for Tim. I just had a couple of quick questions regarding your CapEx plans for 2006. First off, what sort of linearity can we expect in your CapEx plans as we progress through 2006? Are you expecting first-half load, or more towards the back-half of the year? Any color there would be great. And I have a quick follow-up. This is Alain Dutheil speaking. Yes, of course, as Carlo was mentioning, we are expecting the second half of the year, in terms of market, to be in higher growth than in the first half. Therefore if we want to be ready, what we need to do is to front-load our CapEx in the first half. So this is what our plans are today. We are going to spend a little bit more during the first half than during the second half. Okay, is it going to be heavily skewed towards the first half? Or are we talking like a 60/40 or something like that? Okay. And second question I had was, how would you characterize the breakout between equipment and facilities in your 2005 CapEx spend? And what sort of CapEx split can we expect in 2006, equipment versus facilities? So 2005, most of the CapEx was on equipment. In fact, the facilities were built already, on a strong front-end point of view. Rousset, Singapore, Crolles, the building and the facilities are there. So most of it was on equipment, and this year is going to be about the same. Now I think it will depend also on when we start our companion facilities. But this anyway is not going to be a big number. So most of this, I would say 90% of our capital investment, will be on equipment. Good afternoon gentlemen. Maybe a question for Carlo Ferro, I guess. I think this morning on the analysts meeting you made some Sorry about this; calling probably from a hidden place. Just a question on your OpEx for 1Q '06 and for 2006 if possible. If we strip out the restructuring cost for 4Q and the one-off pension cost that you recorded in Q4, should we assume that the OpEx are flat? Is that what you basically said this morning? Back on the OpEx, which is favorite subject today, I would say that you are gunshot. It looks a little bit aggressive to me on that number. Usually from Q4 to Q1, we experience some increase in costs, the absolute dollar and the OpEx to sales ratio. So on this basis, for Q1 '06, we may expect a number which in terms of OpEx to sales ratio I would say should be much more mitigated than the 32% experienced in Q1 2005; but would not reach our 28% threshold target. With some dollar dynamic problems in Q4, that which is driven basically by less effect of the vacations on our costs in Europe. Brilliant, okay. And just a quick follow-up on maybe the model for '06 and on the balance sheet. I mean given that the restructuring program will essentially really kick in massively in the second half of '06, it would be fair to assume that the gross margin, I imagine, will increase substantially throughout 2006. Is that a fair assumption? And second, can you maybe talk about how you are going to refinance the convertible, I think, which is maturing in August? Is that only through internal cash resources? Okay, on gross margin, I would say it is good enough, but we expect gross margin to improve on the second half of the year. And actually we see for, individually each of the 2006 quarters opportunity to force a gross margin better than the one of the similar quarter in 2005. The second of your questions is on the refinancing. I guess you are making reference to the probability that our 2013 bond will be redeemed in August, due to the put option to not hold this. First of all, we don't know yet if this bond will be put back. You see the level of available cash in excess of 2 billion. We continue to have a plan for generating net positive net operating cash flow. So the obligation to redeem it, if it will occur, first of all, is well backed by available cash and the cash flow plan. However, we continue to monitor the market, and should market conditions be favorable, as usual we may consider, not consider, any possibility to have affected the market to refinancing one way or another way, or in any event whatever may be appropriate in order to optimize our cost of financing, and in order to continue to run the Company with the appropriate level of liquidity. Hi. You've talked about your plans in terms of R&D and new product development for '06. Can you give us an update in terms of Next Generation wireless technologies, including 802.11 and ultra wideband products, or anything else you may want to talk about in terms of connectivity technology? Yes, it's Philippe Geyres. For connectivity, it is one of the areas where we have been focusing R&D activities. Bluetooth and 802.11 are things that are now ramping up in volume, so they were not during 2005; they will be significant in the first-half 2006. This is encouraging us to move forward. In wireless LAN, as you know, we are focusing on the wireless phone. So we are currently developing an 802.11 APG and later N solution, but specifically addressed at the wireless phone, so for low power consumption. We have also an internal program on ultra wideband that, for which we have not yet announced precise product plans; but we have an active R&D program. In addition to that, we are putting a big R&D effort towards moving the RF to digital, to be able to offer all those functionalities in the standard CMOS process, either with multiple RF solutions on one chip or with integration of the RF (indiscernible). So we have a very important program on RF CMOS and 65-nanometer for which we are going to do the first product about, at the end of this year. Okay, thanks. And also you mentioned in the press release somewhat tougher market conditions than expected in the MLD Group. Is that low-end competition from China? And if you can talk about some of the competitive trends you see in this segment for '06 and your response to those trends. Yeah, this is what we have experienced somewhat in Q4. But I think the pattern is now different, and we see good opportunity for growth in MLD. I think one of the problems that we had in Q4 was stronger demand, particularly from our distributor network in Asia, at lower margin. But today, the demand is strong, and MLD is one of the sectors of products where in Q1 we can partially compensate for the seasonal decline of the wireless portion. Yes, hi again gentlemen. Two questions, one is a clarification on one of Alain's comments this morning. I think, Alain, you said that utilization rates will go up to 90% on average from 85 in Q1; this is Q4. You are guiding revenues down midpoint 4% in Q1. Could you help us reconcile both, and whether effectively you plan to build inventories in the current quarter, potentially ahead of expected strong demand in the second quarter? And the follow-up will basically be again on MLD. You reiterated that MLD will deliver sequential growth in Q1, which is normally a seasonally down quarter. Is this probably a function of distributors increasing their own inventories? Are you seeing as a consequence leadtimes expanding for these products? Okay, as far as the utilization rate of our wafer fabs increasing, this is quite easy to understand. Because of course we are preparing Q2, and of course the reason is just the cycle trend. So we need to increase our production from then to be ready for Q2. Frankly, today it's too early to talk about Q2, but we are not expecting a sequential increase in Q2. So therefore we need to be ready. Yes, leadtimes are expanding. Leadtimes are expanding. I think as we said, the demand is stronger. It is very much driven from Asia. But I think despite the seasonal pattern, we expect to grow MLD in Q1 this year. No; I think there is a good demand overall. I think that, but of course the ways of distributors in the MLD business is very significant. I know that the demand from our Asian distributors is pretty strong. But more recently we had signs of upside also from the Western distributors. Okay, great. And leadtimes you would characterize as being particularly stretched or still normal to, or bit more than normal, basically? If you could give any color on that? Yes, thank you. My first question, I guess, if you could focus a little bit on, one, MLD. Can you help us understand what areas you expect to track growth more throughout 2006? What specifically we can look forward to? Yeah, I think that’s, we expect a significant growth in MLD in 2006. And I think there are two blocks of things. One is, as you know, last year was in terms of overall market growth very modest and much lower than what we had in 2004. And I think that with our more standard products, we are definitely below what was our peak in terms of revenues that in fact was in Q2 2004. So we expect that with the color here, with the growth on those standard products, discrete standard linear, etc. But I think there is another block that is even more important for us. It is all the new initiatives, the new products, the new advanced analog, the new microcontrollers. I think that it is a significant effort, particularly in analog. We have in MLD three different analog and media divisions focusing on various aspects of these products and applications, and is a stronger focus on new microcontrollers. So I expect that this second block of things will also contribute significantly in 2006. And can you talk about a little bit more about your RF CMOS plans? I think you mentioned that a little bit earlier. Is this targeted toward specifically for a specific market of handset? Yeah, so this is Philippe Geyres speaking. The RF CMOS effort we have, of course can be used in any application; and the technology will be applied to many applications. But the number one objective driving us is the wireless phone. Both RF for the base end of the cellular and RF for all the connectivity. Okay. And if I could, just last question. Can you tell us how comfortably you are with inventories in the channel? Are your distributors telling you that it is too low at the moment and they need to stock up a little bit more? Can you just give me a sense of that? Yes, I think that, as I said, we believe that this is an opportunity for short-term growth. Because the visibility is that the distributor inventories are very much under control. They are okay. I think bookings is increasing. Hi thanks. Question on gross margins, Carlo. You had mentioned that you believe that margins will increase sequentially in every quarter, Q2, Q3, Q4. I am just wondering, is there a currency store of proviso in that statement? Because you mentioned yesterday morning the currency was at 1.23. Are you confident that if it is at about 1.23 to 1.24 into the second quarter and you will have to hedge at that level, you will still be able to maintain that level, that progression of gross margin? A - Carlo FerroGood point and good question, which frankly helps me to tune the message. I think it is obvious that when talking we always assume some constant trend on the currency dynamic. Also having made significant progresses in mitigating the currency they produce, our gross margin remains significantly still closer to the currency dynamic. Our financial hedging strategy covers basically a portion of the currencies on the next quarter; and very limited one on quarter plus two; and none on quarter plus three. So of course, any kind of future dynamic of the currency may affect our gross margin even from a how significant it is. So please take my prior statement based on, I will say, a Euro to Dollar rate similar to the one of our guidance for Q1 '06. Okay. Just two clarifications on comments made before. One is to Philippe Geyres. When you say you're going to integrate RF with baseband on the RF CMOS program, I suppose you are talking about the 3G ASIC baseband that you have coming out soon. No, I would think that the goal, the reason for this shift towards digital RF and CMOS RF is of course to have cheaper RF functionality; and also to integrate it with the baseband. This is true in general, and you can apply that to Bluetooth, to wireless LAN, and to the cellular connectivity. The RF architecture and technology we are developing will allow to integrate RF with the baseband also for the 3G baseband. Okay. And last question is you mentioned Catania. Can you clarify whether Catania, a ramp is definitely part of this year's CapEx? Or it is still under consideration? That is what I understand. I understand very well, and I was sure what you had written for Catania what we call M6, which is going to be our future 12-inch fab. Catania, you know, we are just completing a building and facilities to be ready to start whenever we need. Frankly, we don't think that we will need Catania up and running in 2006. So this is going to be more 2007. We have not decided yet exactly when it is going to be. So what we are doing, we are spending some money quarter after quarter, but it is a small amount for the time being, just to finish up building and facilities. And of course, it is part of our CapEx, yes. Okay. And Carlo, when you said that OpEx will rise into Q1, is that both R&D and SG&A or is that just SG&A? This is an overall view on both of the two ingredients, eventually. We are continuing to keep cost control quite severe in SG&A. In R&D there is a little bit more room also, according to some objective of expanding our base and supporting the acceleration of developed innovation. Good afternoon. When you guys look at the revenue contribution, the percent of revenue that is coming from new products, however you care to define new products, can you tell us how that has trended recently and how you see it trending in the near term? My impression is that we may see a bump up. But given what is going on with some of the restructuring, etc., that may be a while out before we see that. Can you address that? Yeah, I think of course we are monitoring this. It is a very crucial element of our strategy, and we have seen some nice improvement during the last few months in this respect. Our expectation is that this will continue to improve. In fact, I would like to mention some major new waves of products. NAND is a major new wave of products. Digital consumer at 90 nanometer is a major new wave of products. All advanced ASICs in telecom what for telecom infrastructure and also for wireless cellular phone applications is another wave of products. The new system-on-chip at 90 nanometers for computer peripherals, particularly for disc drives, is a new important wave of products. So all of this will, and of course we have more. I did mention all the integral of course, the connectivity is another group of things. And I am not mentioning MLD; MLD is introducing four new products for working days. So is a very significant number of new products. Now these are major waves; and in fact, digital consumer 90 nanometer has started, is in full production. The NAND has started and now significant. The connectivity is starting now and will become very significant, and then we expect that in the second part of the year, all our major new programs in Telecom, Nomadik, ASIC, etc., will contribute significantly. And then, of course, later in the year, beginning of next year, also a new wave of products in computer peripheral. So it is a major, major effort and is a very important element on our driving the Company towards excellence. It is a very strong focus in the Company to improve the effectiveness of what we do to accelerate the R&D products. That helps. A follow-on question for Carlo Ferro. Carlo, how should we see the decline that I think we're anticipating in depreciation flow in? Is that reflected in the gross margin guidance, given the assets that are coming off of the depreciation base at the end of '05? Yeah, easy as the decline is confirmed, as this morning, they have confirmed a plan of 1.7 billion of depreciation that is basically currency exchange rate for the fiscal year '06. In terms of their impact on the gross margin dynamic, please consider that Q1 '06 depreciation are going to be very similar to those of the fourth quarter 2005, while they will accelerate the reduction, etc., in the second half of the year. Our current visibility at similar exchange rate of today is that depreciation will be in the range of $400 million for the Q4 '06. Hi there. Just, sorry to ask this again, but on the 240 basis points increase in gross margin, did you say the adverse effect of price was 180? It's split basically, I have two categories, not that - I have two categories. That unfortunately we do not control, which is the exchange rate impact and internal performances. What we said is added to the 250, approximately 100 of negative effect from pricing; and these approximately 150 basis points you can count by two basically similar pieces. One is the favorable impact of the exchange dynamic. The other one is the favorable impact of the internal initiatives that are reduction of manufacturing costs, thanks to the restructuring, improved efficiencies, and enhanced product mix, coupled with some positive effect of higher volume of production in the quarter. Understood, that's very clear. Then as we look into Q1, obviously, the changes are somewhat different. Would you be able to give us any indication on how you would think the 150 basis point contraction would be composed? Okay, of course, the level of detail on the actual is much easier than the one on the forecast. Say more qualitatively. There are more qualitatively in the forecast. We still foresee price pressure. Also considering that we enter a new year with some contractual price adjustments on certain customers. So I would say that we expect the negative price impact of the margin is as large even larger than the overall contraction of the margin. On top of that, we have some moderate negative impact from the currency; and we have some recovery from product mix and efficiencies. Understand. Thank you. Then as a follow-up, on the very impressive performance in the Memory Products Group, would you speak to a target of maintaining profitability in the weaker seasonal quarter of Q1? Of course, you know, target, our target is to remain profitable. I think we need to foresee that on the level on the negative side. And I did mention that there are blocks of products where we have good opportunities to grow in Q1. I did mention MLD. We have consumer; consumer is an area where we have good opportunities to grow in Q1 comparing with Q4. We have automotive, where we believe that we will grow. Wireless as an application will decline, I believe, is the expected seasonal decline in this business. And as you know, the memory also, an important element in terms of products when one is sell to wireless customers. So but despite this decline our target is to remain profitable in Q1. And also, I would like to mention that last year was a year of the 2-bit per cell very much in NOR. But we have other important blocks of potential improvement in NOR, moving to full 90 nanometer at least in wireless; in NAND, the 70 nanometer; in NAND again, the 2-bit per cell. So there are other initiatives to reduce our costs in this area. Good afternoon gentlemen, quick question on memory, because basically its performance was pretty good. Could you tell us how, maybe with not too many details, but how the margins evolved for NOR on other products? Because maybe you got some good results in EPROM as well, which could have helped? As I already said this morning not only the Memory Products Group overall, of course, the $27 million profit. But each of the number of dial (ph) families within the Memory Products Group where above the key vending this quarter, so of course, there are different dynamics, but I can confirm that addressing your question I guess the Flash memory, Flash NOR and NAND were above the key vending report. Yeah, but there is, there are blocks of NOR also that are very, very strong. I mean, I think that all, as Carlo said, all the (indiscernible) were profitable in Q4. Okay, thanks. Now, in terms of consumer, we had quite a strong consumer holiday season. You did not maybe benefit as much as some others did. What happened? In consumer we see a seasonal effect that is less than in wireless, for instance, in Q4. In consumer it's maybe more Q3 than Q4. Then now what we're seeing in 2006 is a relatively good situation today in Q1, because of the soccer world something in July or June. So this is helping. Also, there are the younger, the retail consumer, you have the dynamics of the operators. What we are seeing, in Q4 we started to see deployment of the new generation of set-top boxes, high-definition, H264, PDR. But not as strong in Q4 as we had expected, as some operators, especially in the U.S., were late in introducing new boxes. So this is why in Q1 we are seeing in consumer a sequential growth compared to Q4, because now all those new products are ramping up in big volume. Thank you very much for taking my questions. Two quick ones, two housekeeping questions. First of all, could you give us the utilization rate by 6 and 8 inch? And then Carlo probably you could remind us what the actual status of the restructuring, is that means in terms of costs, what can we expect in restructuring spend in 2006? Yeah, about the capacity utilization rate, I was mentioning this morning that the overall utilization rate is about 85%. It's a little bit more 6-inch; in fact it was 86. And it was 84 in 8-inch. So you see it is very close to being a rate of 85. What I said, also, is that we are going to increase at this year utilization rate to about 90%; 89% to be precise, and both 6-inch and 8-inch will be about the same. And just a comment on the 12-inch, where here we have as you know very limited capacity in Crolles too. Here of course the plant is fully saturated. Thomas, on the restructuring charges for the 6-inch initiative, you will remind that the anticipated amount was $350 million. So far, 294 million already occurred on our P&L in various quarters. So approximately 55 now remains to completion of the plan. On the new plan, we have still visibility on this range between $100 million to $130 million, out of which 41 have been posted so far. So the balance between 60 to 90, 6-0 to 9-0 remains. Okay, and this will be spent in the first half of the year? Also let's say the first restructuring plan, that means the 55 remaining, will be in the first two quarters, and then the 60 to 90 we will see will be spread over 2006? Well, I will say that this is very, very significant from below that based on the execution of the plan. Frankly, on the timing allocation of some of these items is not even that easy to the visibility of your assumption may have spent as any other possible. I would like to add one word on utilization rates which I did not mention, but I feel it is important. Probably you remember that when we are talking about utilization rates, we're always comparing ourselves to what we call standard line capacity, which is a kind of five-year situation; and not all semiconductor companies are doing the same. So just to mention that. Hi guys, I was wondering if you could comment at all on sequential performance in the Flash segment for Q4. What kind of ASP unit sequential performance you saw, or if you could give some type of color on that? In Q4, we saw an improvement of the product mix that allowed us to have an increase in the ASP. So we had growth both in ASP and in volume. From the technology point of view, we saw in Q4 the NOR Flash continuing the evolution to 2-bit per cell. We reached 80% of the wireless NOR built with 2-bit per cell technology, so this helped to increase the margin on those products. There is still price pressure, so the prices continue to be pressured and continue to decline regularly. Today I would say we see a price pressure in line with the cost improvements on the industry. So I would say the normal trend in the price evolution. Unfortunately, the normal trend is channel itself(ph). I may have missed this earlier in the call. Where do you think you stand in terms of disposal of the Flash business or JV you are partnering with it? Can you give any color there? Disposal, I think we will not dispose. In terms of partnering or venturing, I think we have concrete opportunities that we will, that we are proofing. And I think, of course, we're not yet in the position to disclose this, otherwise we would have done. We have opportunities internally, as I said before, to continue to improve in terms of chip size reduction, technology migration, and a reduction of manufacturing costs. On the other hand, because the size, the dimension of scale, is a very crucial element in memory, I think we are discussing on potential venturing. Of course, with the objective to increase the dimension of scale. Now I can say that these discussions are very concrete, and they are moving on. But we're not yet in the position to make a disclose and to give straight information. Otherwise we would have done it. Yeah, hi a little out of left field, but can you give any color as to the ramp-up in the trusted computing market? I guess last summer you launched volume production of your first TPMs. I am just curious if you can give any follow-up there. I think, Jeff, the way to characterize that is yes, that is of course an important product for us. The trusted computing platform market. But we're not going to update every quarter the number of units that we have shipped for this space. But we of course did indicate the threshold. But we continue to ship, and it's just not one of the products we break out on a quarterly basis in terms of our shipment dynamics. Andrew, do we have one more out there or we. Because it sounds like you have polled pretty well and I think we have pretty much run the table. Well, I think before I offer Carlo Bozotti the chance to wrap up, we should let the historians note once again we were able to answer all the questions of this conference call in the allotted time. So we appreciate everyone working with us to keep it to one question and one follow-up. Carlo, would you like to provide some? Again, thank you for your presence, thank you for your interest in ST. I think we were pleased about the Q4 results. We were pleased about the $0.20 of earnings per share that were above the consensus of the market. But of course, we look forward to reporting on our progresses while moving on, moving forward in 2006. I think as we have described to you, we have let's say significant opportunities in terms of new product introduction and better efficiency in manufacturing. Something that we have not mentioned during this meeting that I think is also important to underline is that with the Board we have decided to propose to an Assembly General the distribution of dividends in the year 2006; and the proposal is to be at the same level we did last year, which is $0.12 per share. So this will be proposed to our Assembly General soon. Thank you again, thank you very much, thank you for your interest in ST.

EarningCall_233974

Here’s the entire text of the prepared remarks from ConocoPhillips' (ticker: COP) 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. Ladies and gentlemen and welcome to the third quarter Conoco Philips earnings conference call my name is Jane 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 answers session towards the end of today’s conference. If at anytime during the call you require assistance, please press “*” followed by “0” and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’s conference Mr. Gary Russell, General Manager of Investor Relations. Please precede Sir, Thanks Jane. Good morning and welcome to the Conoco Philips third quarter earnings conference call. I’m here today with James Mulva, our chairman and CEO and John Carrig EVP finance and CFO. During today’s call we will be referring to presentation material which will help us more fully to discuss our third quarter financial and operating performance. This presentation is designed to give you a better understanding of the factors that have a significant impact on this quarters results and could be found on our website conocophillips.com. On page two you can see and read our safe harbor statement. It says among other things that in response to your questions and in our prepared remarks we will be making forward looking statements actual results may differ materially from those we expect today. A list of items that could cause these changes to occur can be found in our filings with the SEC. With that said, I would like to turn the call over to our chairman and CEO of Conoco Philips, Jim Mulva. Garry, thank you and I also want to thank every one for joining us today in our third quarter earnings conference call, we all appreciate your interest in our company and I am going to start my comments page 3. You can see from the highlights side commenting at another strong quarter. We generated $3.8 billion net income, $6.1 billion cash flow from operating activities and with the strong result we were able to fund the capital program and improve our financial strength flexibilities. We reduce the debt level at $516 million to$13.5 billion. Therefore our debt to capital ratio was down 1% from 22% to 21%. During the third quarter, our U.S. Gulf Coast operations were significantly impacted by the hurricanes Katrina, Rita and Dennis. During the third quarter of ‘05 our E&P production missing excluding the LUKOIL segment was 1.52 million BOE a day. And this 1.5 million BOE a day is consistent with our interim updates that we provided to you earlier this month. Our estimated share of LUKOIL’s production in the third quarter of 266,000 BOE a day as during the third quarter and reflects our increase equity ownership position. As done in past quarters we report net production and earnings using the equity accounting method under a separate LUKOIL’s investment segment for financial reporting. Earlier in the quarter we finalised our DEFS restructure into our ownership about 50%. And refinery and marketing including hurricane impacts our refineries ran at 95% approved processing capacity that’s down 2% point from the last quarter, this is essentially relates to the impact of the hurricanes. Our average diluted shares outstanding compared to the last quarter was flat at 1.42 billion shares and our adjusted return on capital employed continues to be very competitive with the largest companies in the industry. We have a lot of Slides now we’ll go through to support all these numbers for further comments. So I am going to move out to page 4 which is contribution in capital employed, we put these in all of our past quarter presentation in the pie chart in the next side of this Slide illustrates proportionate of operating income that our business segments generated during the first three quarters of 2005. On the right hand side of this page it shows percentage of total capital employed with each segment as of the end of September 2005. You can see E&P generated 59%, the companies first three quarters income from continuing operations well represented 56% of capital employed. You can see the LUKOIL’s segment on the pie chart, more than half of that LUKOIL’s capital employed relates to E&P. So if you would separate that out, our E&P adjusted in our capital employed would be right at 60 to 61%. Refinery and marketing generated 32% of our income from continuing operations and had 29% of the companies capital employed. Chemicals generated on a combined basis generated 4% of income represents 5% of capital employed. Then for LUKOIL’s the first nine months earnings were 5% of our income and represents 7% of capital employed, we’ll talk about capital employed in this Slide. I’ll just give you a few numbers, our E&P segment Capital Employed is about $35.7 billion, Midstream 1.7 million, Refinery and Marketing, $18.6, Chemicals $1.8 billion and the LUKOIL segments $4.7 billion. That is the ending capital employed. Now I am going to move on to Slide # 5 which talks about total company net income and compares with the third quarter of ’05 to the previous quarter in 05. So you can see this sequential quarterly comparison, income from continuing operations. Higher worldwide realize all gas prices along with stronger worldwide refinery margins partially offset by the impact of high natural gas prices on inventory position, were the major sources of improvement which totaled $854 million in earnings compared to the previous quarter. You can see our earnings were impaired by the impact of hurricanes on our volumes, we’ll see this in more detail as we go to the presentations. During the third quarter our DD&A were $48 million higher than the prior quarter. In addition, the impact of asset sales were $32 million lower this quarter than the previous quarter because the gains from the sale of certain assets in the second quarter didn’t occur in this quarter. We incurred early debt retirement premium of $42 million in this quarter, other impacts to our earnings for the quarter include lower turnaround cost which were more than offset by higher taxes and utility cost as well as impairment associated with the discontinuation of our marketing incentive program in the downstream. Result incomes from continuing operations was $3,804 billion, with this continued operations quite small amount generated loss of $4 million during the quarter, decreasing income quite high rate. So I am moving now to Slide #6 which shows the total company cash flow in the third quarter of this year. As you can see cash from operations was $6.1 billion and we benefited from working capital changes approximately $2.4 billion in the third quarter mainly due to the timing of domestic, international tax payments, we make some domestic international tax payments for early part of the fourth quarter, so we expect this significant portion of this benefit will be offset in the fourth quarter since these payments were made. The capital expenditure and investments amounted to $3.6 billion during the quarter. Included in these numbers were the acquisition of approximately 2.2% of LUKOIL shares and that represents a 838 million represents the increased ownership and restructuring of the Midstream DEFS. We paid $430 million in dividends, and that reduced to 516 million, and was at 588 million repurchased in 9.4 million shares of a common stock. Year-to-date we have repurchased now 20.9 million shares of our stock for $1.2 billion. Now after including other sources, our cash balance increased approximately $1.3 billion during the quarter. Now I am going to move to the Slide #7 total company cash flow in September year-to-date and the pie chart will show you the sources used in the cash flow for the three quarters, hard on the left, total cash available was very close to $30.6 billion, 96% was generated from operations. On the right hand side of the chart, it shows that 63% of our cash generated about $8.6 million used to fund our capital investment programs, it shows that we continue to reinvest a significant portion of our cash flow right back to growth and development of all our business. The remaining 37% or about $5 billion in cash sources were spent from the dividends made on debt repurchase stock. So now I am going to go to Slide #8 ratio improvement, with the strong earnings cash flow, continuing to improve financial positions strength and flexibility our debt capital ratio throughout all these quarters for last several years. The bar chart of the left shows the equity grew to $51.1 billion at the end of third quarter so for the nine months of this year our equity is up $7.2 billion or about 16%. The balance-sheet debt is down to $13.5 billions so the ratio is now 21%. I am going to Slide #9, we are going to start talking few slides on exploration and production. Our worldwide realized oil prices went up 21% from the previous quarter, the total up was $56.64 a barrel in the third quarter. Our realized global gas prices up 16% to $6.38 per MCF. E&P production in the third quarter was slightly lower than previous quarter down about 1% and that is 16,000 BOE a day and I’ll talk more about that in a moment. The hurricanes Katrina, Rita and Dennis were the major contributors to oil production in the third quarter. I’ll go through this more in subsequent slides, our exploration expenses were somewhat higher but has been constituent with our plans. I am going to go now to Slide #10 which just goes into total company production and compares the third quarter of ‘05 to the previous quarter, second quarter. And you can see the sequential variance, compared to this past quarter we saw reduced production in the Lower 48 as a result of the hurricanes as well as oil production in Alaska and the United Kingdom due to planned and unplanned downtime. For information purposes in Alaska the planned and unplanned downtime was about 10,000 barrels of oil equivalent a day, about 7,000 of that was planned and about 3000 was unplanned. In the U.K we had about 34,000 BOE a day that was down primarily attributed to Britannia. About 30,000 BOE a day of the 34,000 BOE was planned and 4000 was unplanned. Looking at the slide the reductions were almost offset by higher production from what we realized in the Timor Sea, Vietnam and our offshore Gulf Coast production Magnolia. And then you have the 266,000 BOE a day of LUKOIL production to our E&P segment reporting production and you can see the total ramp for the company is 1.79 million BOE a day. I am going to the next Slide #11, we compare sequentially the net income for E&P. And you can see in the third quarter it had increased $359 million dollars over the previous quarters so we are up at $2.3 billion. To the benefit of higher realized commodity prices partially offset by the impact of higher natural gas prices. Our inventory positions and increased production taxes as a result of a high commodity prices. All of this will improve this quarter’s income $487 million. Putting this in perspective, the higher crude oil prices accounted for nearly 80% of this improvement to one quarter to the next. A higher DD&A reduced our E&P income about 48 million and our Lower productions as a result of the hurricanes further reduced our EMP income by $21 million. Other factors that reduced our third quarter E&P income as compared to the higher quarter or higher taxes and utilities as well as the absence of favorable settlements in gains on asset sales that we had in the second quarter that did occur in the third quarter. I am going to Slide #12 we are now moving to refining and marketing. We benefited this quarter from higher worldwide refining margins. In the U.S. our third quarter realized spread rose $3.38 a barrel to a $14.61 a barrel and our international crack spread rose $1.65 a barrel to $10.44 a barrel. In the U.S our refining system ran at 93% of stated capacity that down from 98% previous quarter. It’s a century old as a result of the impact of hurricanes in our Gulf Coast refineries alliance by Charles Sweeney. Our international refining system ran just a little bit over stated capacity. U.S. wholesale and international marketing margins were significantly lower than the previous quarter and our turnaround expenses amounted to $53 million before tax during the third quarter. And this is in line with our expectations and are $53 million lower than we realized and with turnaround expenses in the previous quarter. I am going to Slide #13 which is with comparison of refining income, net income the third quarter and over the second quarter. And you could see we generated $1.4 billion net income during the third quarter, that’s up 25% from the prior quarter. The higher oil worldwide crack spreads partially offset by oil worldwide marketing margins that I spoke about earlier, resulted or contributed $339 million of increased net income from the second quarter to the third quarter. The volume impact of the hurricanes on our U.S. Gulf Coast refineries decrease our net income by $103 million. The rest of our refining system ran quite well, running higher volumes than in the previous quarter and this led to an increased net income sequentially about $81 million. There are a number of other facts to the sequential earnings, they include oil turnaround costs which are more than offset by higher taxes and utilities, impairment resulting from the discontinuation of our marketing and incentive program. In the absence of gains on the sale of assets in the second quarter that did not reoccur in the third quarter. Now I am going to Slide #14 which shows a little bit more information on refinery and marketing earnings sequentially. You can see the relative contributions of refinery marketing’s business segments during the first three quarters of this year, you can see essentially all of our earnings are coming from refining. As I mentioned earlier, our refineries are round the world were not impacted by the hurricanes, ran very, very well, it’s reflected here. In the third quarter of ‘05,our U.S marketing margins were significantly impaired and international marketing margins were lower than the previous quarter. I am going to give you some numbers that give you an indication of just where the earnings come from associated with this slide. If you look at just refining, in the United States, our income was $1,296 billion, international refining income is $270 so that adds up to $1,566 Billion. On marketing in the United States we’ve lost $209 million, a positive income in marketing and international about $20 million so from marketing the net worldwide is a loss of $189 million. If we add refining and marketing then the total refinery and marketing in U.S net income was positive of $1,96 billion and international it is $294 million. So that total of U.S, and International is a $1,390 billion. These numbers do not add up perfectly because included in our refinery marketing business, we have some other businesses. Smaller impact, our specialty business is included in our downstream results as well as we have some cost associate with the headquarters associated with the operation of our downstream business. I am going to Slide No.15, which is a LUKOIL investment. Earlier we increased our equity ownership by 2.2%, we are now up to 14.8% ownership. As a result our average ownership for the third quarter was 14.2%. Our equity earnings for the third quarter from this segment $267 million dollars, up from $148 millions in the second quarter. I am going to Slide #16 which is kind of a consolidated side of our Midstream chemicals emerging business segment. You can see the earnings from the Midstream business is $88 million in third quarter, it is up $68 million in second quarter. The sequential increase in earnings is primarily due to higher natural gas liquids prices and increased ownership and DEFS. This was partially offset though by the volumes that related to oil volumes that related to the disposition of the Canada Empress System. In our chemicals joint venture with Chevron our earnings fell $30 million in the third quarter from $63 million in second quarter. The decrease in chemical earnings in the second quarter is slightly due to lower margins fro olefines and polyolefines and the effect of hurricane related shutdowns and higher utility cost. If you look at the decline in income from the second to the third quarter, nearly 80% of this decline is attributed or associated with the impact of the hurricanes in the Gulf Coast. Emerging businesses results were slightly positive compared to the second quarter and it is primarily due to stronger financial performance from our domestic and international power operations. I am going to Slide #17 which reviews the corporate segment. And you could see its impact on continued operations was a loss $242 million in the third quarter compared to a loss of $179 million in the second quarter. We did have slightly lower interest expense in the third quarter as compared to the previous quarter, but we occurred an early debt retirement premium of $42 million dollars in the third quarter. We had some higher benefit related charges and unfavorable foreign exchange impacts to the third quarter. The losses from discontinued operations were $4 million, its mainly related to the marketing assets held for sale. I am going to Slide #18 I’ll just include this in our conference calls Return of Capital Employed, you can see that if the numbers are not available for the third quarter for the peer group. When we talk about the peer group we are talking about public trading companies that are larger than Conoco Phillips. You can see our return on capital employed continues to be very competitive with the largest companies in the industry. In the third quarter of ’05 our ROCE adjusted for purchase accounting was 35%. Improvements in pricing commodity price and margin environment, it was good operating performance, continue to have positive impact on return on capital employed. If you look at the third quarter and you analyze return on capital employed in the third quarter by segment, associated with combine 35% and the numbers for E&P are 42%, Refining and Marketing 43%, the combined Midstream chemicals is 14%, LUKOIL 25% and when you look at the total as you see on the slide is 35%. So now I am going to the last file that we have on our opening comments in our presentation Slide #19 which is the outlook. Our overall strategy objectives, financial goals we have laid out our operating plans, consistent remain unchanged. The hurricanes did have an impact on what we’ve achieved in the third quarter and what we expect to achieve then for the entire year of 2005. We expect our fourth quarter E&P production in barrel of oil equivalent be higher than the third quarter and anticipate our entire year of 2005 production to be flat for 2004. And it would have been up if we did not have the impact of the hurricanes. This is not different from what we’ve indicated earlier several weeks ago in our interim update. Our increased production in the forth quarter versus third quarter will come primarily from the UK, Norway, Vietnam and Alaska. And if you include LUKOIL we expect total BOE production will be approximately 1.80 million BOE a day for the year. Turning to the refining side of business our efforts to restore our Gulf Coast refining operation continue, Sweeney Refinery returned to normal operations very quickly after hurricane Rita. And we expect our Lake Charles refinery to be at normal operations by next week in the process of starting up part of our operations. The Company’s alliance refinery is expect to begin partial operation in December and return to normal operation early 2006. As business conditions permit we plan to continue to repurchase company stock until we retire debt. The company continues to pursue opportunities to increase our domestic energy supply through our LNG gas projects, the Canadian Oil Sands projects and projects aimed at developing Alaska, Mackenzie Delta gas resources. Specifically, last week the company and the state of Alaska recently announced an agreement in principle on base fiscal terms for a natural gas pipeline contract that will progress the development of Alaska’s North Slope gas. Additionally, we are advancing our plans to expand our overall refining capacity and clean fuels capabilities. And all of these sites, all of these projects strategies and operating plans will be thoroughly reviewed with you at our November Analysts meeting in New York city so this concludes my prepared remarks and so we are willing to entertain questions that you might have. James? I’ll turn it over to you to start 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_233975

Here’s the entire text of the prepared remarks from Millennium Pharmaceuticals’ (ticker: MLNM) 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. Ladies and gentlemen, Thank you for holding. Welcome to the Millennium Pharmaceuticals Third Quarter 2005 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 taped at the Company’s request. At this time I would like to introduce your host for today’s call, Kyle Kuvalanka, Director Investor and Corporate Communications at Millennium Pharmaceuticals. Please go ahead. Good morning, everyone, and welcome to Millennium’s conference call to discuss the financial results for the third quarter of 2005 and the strategy refinement and restructuring we announced yesterday. 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. Bob Tepper, President of Research and Development, Dr. Nancy Simonian, Senior Vice President of Clinical Research and Regulatory and Medical Affairs, and Lisa Adler, Vice President of Global Corporate Affairs. Deborah Dunsire will open with a review of our refined strategy and corporate restructuring. Marsha Fanucci will then review the highlights of our financial results and update you on our financial guidance. Bob Tepper will provide an update on research and development activities. We will then take your questions. Before we begin, though, let me remind you that when we discuss our growth, science, products and prospects our 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 to differ materially from these statements. You can review a list and description of these risks in the reports we file with the SEC. During this call we will be referring to non-GAAP net loss and non-GAAP profitability. These financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A 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 yesterday and a discussion of why we believe these measures are useful to investors and of the additional purposes for which management uses these measures is included in the Form 8-K we furnished to the SEC last evening. The press release and the Form 8-K are also available on the Investor Section of our Web site. And with that said, let me now turn the call over to Deborah. Good morning, everyone, and thank you for joining us today. It’s been a very eventful quarter at Millennium. On the financial front we delivered 35% growth in Velcade sales in the U.S. and reduced operating expenses 16% relative to the third quarter of last year. In addition, we took significant steps to support our transition to a commercially focused operating company. Since joining Millennium a few months ago, I’ve been working very closely with the management team to carefully evaluate all our programs, our strengths and capabilities, and with that to define the right strategy to leverage these assets, to deliver profitability and preserve our ability to grow. The Millennium portfolio contains a wealth of assets from its discovery and development organizations. However, given our revenue profile as well as our commitment to building shareholder value, we do recognize the need to focus. We cannot continue to work on all fronts. Yesterday we announced our refined strategy based on this review. Importantly, the foundation of this Company has not changed. We remain focused on discovering, developing, and commercializing valuable medicines to improve outcomes for patients. We’ll continue to leverage proven capabilities in key areas than enable Millennium to deliver on this. With Velcade, we’ve already demonstrated our ability to accelerate full development, approval, and market uptake with a novel therapy and we intend to repeat that success with additional novel drugs. In addition, we now have four molecules from our own discovery engine in early clinical development, demonstrating that rare capacity to innovate. Key points of differentiation and discovery include our approach in transnational medicine, our highly integrated R&D organization, a deep understanding of disease mechanisms and pathways, as well as our leading expertise in biomarkers. What has changed is a narrowed focus within that foundation. We’ve narrowed to two areas in clinical development, inflammation and oncology, and to one area in discovery, that will be oncology. In clinical development, we have the opportunity to push forward seven exciting molecules within our pipeline. These have the potential to generate significant value for Millennium as we develop and market the molecules on our own or in collaboration. In terms of discovery, we had to make the tough decision to focus on one area given the financial constraints of the Company and our desire to be competitive at a leadership level wherever we participate. Oncology was the natural area for to us focus in. We have built considerable scientific strength as well as advanced tools and technologies to generate both large and small molecules in oncology. Our oncology team has already produced a strong discovery pipeline, which we can aggressively push forward, and in oncology, we can best leverage our biomarker and personalized medicine technology to achieve a competitive position. Our number one priority in driving our focused strategy forward is to grow revenues and target our investments. Those key priorities are firstly growing Velcade. We are the market leader in multiple myeloma in the relapse setting, but Velcade has tremendous ability to grow both within this indication and in the new uses in front line myeloma and following indications. Secondly, we’re focused on accelerating the development of our clinical pipeline of seven novel oncology and inflammation molecules. Third, strengthening our oncology discovery organization in order to ensure our ability to compete at the leadership level. And then fourth, engaging in strategic business relationships that enable to us move forward and capture the full value of our pipeline by sharing R&D risk and cost and also enabling us to commercialize globally. In order to achieve this, we’ve rebalanced our investments, in particular we’re expanding the oncology commercial organization including a 50% increase in our oncology sales force and increases in our medical affairs group. We’re significantly reducing overall discovery spending by rescoping inflammation discovery so that it can support the advancement of our clinical pipeline. Our announcement yesterday builds on the restructuring of our relationship with Schering-Plough and around Integrilin and the natural conclusion of the research phase of our very successful and productive small molecule inflammation collaboration with sanofi-aventis. Millennium and sanofi-aventis will continue to co-develop several molecules, which are part of the development and commercial collaboration. These molecules include our CCR1 inhibitors, 3897 and 701, and a new IKK beta inhibitor, 415, which currently in pre-clinical development. All of these molecules originated from our own discovery organization and are a testament to Millennium’s strength in innovative research. As part of our refined strategy, we have taken and will continue to take a series of steps, which together are expected to reduce operating expenses by 30% in full-year 2006 compared to full-year 2004. We are reducing the overall size of our Company from 1500 people, as we ended 2004, to approximately 1100 people by the end of 2005. That’s being done by carefully managing attrition, eliminating Integrilin sales and marketing positions, which we announced back in July, and reducing the number of positions in inflammation discovery and in our business support groups. In addition, we’re further consolidating the Company’s Cambridge-based facility. And importantly, we’re going to continue to realize operating efficiencies through strong fiscal discipline and aggressive management of expenses. From a financial perspective these actions have firmly positioned Millennium to achieve our goal of non-GAAP profitability in 2006 through organic growth and still be able to drive the business in the long-term. As Marsha will discuss in a moment, we are in a very positive financial position with a strong third quarter behind us. I’m excited by the prospects in front of us as we work to realize the potential of Velcade, advance our clinical pipeline of novel molecules in inflammation and oncology, and very importantly, continue to position the Company to create value for our shareholders long-term. Let me now turn the call over to Marsha for a review of this quarter’s financial results. Thank you, Deborah. Millennium had another strong quarter showing our ability to deliver on our financial goals of growing revenue and managing expenses. Our non-GAAP net loss was reduced substantially to $6.5 million compared to $55 million for the third quarter of 2004. Revenues were up driven by U.S. net product sales of Velcade and from the Company’s strategic alliances including several one-time payments from collaborators. R&D expenses were down as a result of reductions in discovery spending and a relative decrease in development investment in Integrilin and Velcade. These results, along with the strategy refinement and restructuring that Deborah just walked you through, allow to us revise our non-GAAP net loss guidance originally announced in January of this year, from under $100 million to the range of 85 million to $95 million. Let me provide some additional perspective on these results. First, starting with Velcade. Our results this quarter continue to show the product is performing well with sales for the quarter of $51 million, an increase of 35% over the third quarter in 2004, and a 16% sequential increase over last quarter. This quarter-over-quarter growth was driven by an increase in end user demand coupled with a 3.7% price increase effective July 1st. Based on our quarterly survey conducted in September with 75 U.S. oncologists who treat significant numbers of multiple myeloma patients, the increase in end user demand is attributed to increased penetration in the front and second line setting while we maintained our share in third line and beyond. We also continued to see modest commercial use in mantel cell and follicular lymphomas. As a reminder, Millennium only promotes Velcade for its approved indication of patients with multiple myeloma who have received at least one prior therapy. Going into the fourth quarter we’re not expecting to see as large an increase in net product sales as we did in the third quarter. Let me turn now to Integrilin. Effective September 1st our relationship with Schering-Plough around the U.S. development and commercialization of Integrilin was restructured from a co-promotion to a royalty arrangement. As a recap, under the new relationship structure, Millennium received a $35.5 million up-front payment, which will be amortized over several calendar years. We will also receive significant royalties on sales in the U.S. over the product’s lifetime, extending beyond patent expiry in 2014. This new relationship is financially at least equivalent to our previous 50/50 co-promotion agreement with Schering-Plough with the added benefit for potential upside given the structure of the royalty. We have also increased the near-term certainty of the revenue from the product as the result of a guaranteed royalty payment of $85 million in both 2006 and 2007. Due to the new relationship structure, our P&L this quarter included some changes and one-time transactions. I’m going to review these at a high level today but plan to go through them in more detail at our analyst and investor day on November 2nd. Effective September 1st we will no longer report co-promotion revenue. For the first two months of the quarter co-promotion revenue was $33 million. Also effective September 1st, we began reporting a separate line item for royalty revenue. Going forward, this line item may include royalties received for Integrilin sales in the U.S. and ex-U.S., for Velcade ex-U.S. sales and any royalties earned on their other alliances. For September, royalties were $12.5 million. We recorded a one-time sale of Integrilin inventory to Schering-Plough per the new relationship in the amount of $71 million. This sale was recorded in revenue under strategic alliances and was largely offset by an expense in the cost of sales line. Revenue under strategic alliances was $105 million for the quarter. This result included the sale of inventory just mentioned and several one-time payments from collaborators including milestone payments and expense reimbursement totaling approximately $10 million. As you think about this line item going forward it will be comprised primarily of reimbursements from our alliances with Johnson & Johnson and sanofi-aventis as well as reimbursement form Schering-Plough for Integrilin cost of sales in the United States. Regarding our expenses, we saw reductions totaling 16% in combined R&D and SG&A this quarter compared to the third quarter in 2004. For R&D, investment was reduced 19% over the third quarter last year to $81 million as a result of reduced spending in discovery and in development for Velcade, given the higher level of spend in 2004 for preparation of the SNDA filing for Velcade in the multiple myeloma second-line treatment setting. SG&A declined to $41 million for the quarter, a 12% reduction over the third quarter of 2004. This decrease was due to the accelerated impact of savings from the new relationship structure with Integrilin. Our GAAP net loss for the quarter was $74 million compared to 63 million in the third quarter of 2004. Included in the third quarter 2005 results were $59 million in restructuring charges. These charges include $31 million relating to revised sublease assumptions for facilities vacated as a part of our 2003 restructuring, and a $28 million charge from our 2005 strategic refinement. Let me remind you in that in June 2003 we announced a restructuring initiative that included the concentration of our research and development operations into a single location in Cambridge, Mass. with phase-out of operations in San Francisco and Cambridge, U.K. During 2003 and 2004 we recorded restructuring charges related to the ongoing lease obligations for these buildings we vacated. Significant judgments and assumptions were made as part of the original estimate and were validated through consultations with independent third parties. As a result of a soft real estate market we have adjusted our original estimates related to the expected time to sublease certain of these properties. We expect the restructuring charges resulting from the refined strategy Deborah described earlier this morning to be in the range of 75 to $85 million consisting primarily of facilities cost and employee termination benefits. Approximately one-fourth of this charge is non-cash. The majority of this charge will be spread largely over 2005 and 2006 including the $28 million recognized in the third quarter of 2005. Under both the 2003 and 2005 strategy refinement we will continue to monitor these real estate assumptions. It’s possible that we will have to adjust these estimates again resulting in additional restructuring charges. Our original estimate for the total restructuring charges was $250 million with approximately one-third of this charge being non-cash. Our revised estimate of our combined restructuring efforts now brings us to the range of 350 to $385 million, of which $292 million has been recorded. The majority of the remaining charges of approximately 60 to $90 million will be recorded through the remainder of 2005 and 2006. We clearly had a solid quarter financially on all fronts. As a result we’re updating our non-GAAP net loss guidance to 85 to $95 million for the year from under $100 million as originally stated at the start of 2005. I do want to provide a moderating perspective on our results this quarter. As I mentioned today, Velcade sales are not expected to increase in the fourth quarter at the same rate as seen in this quarter. In addition, we received several payments from our collaborators, which we do not expect to be repeated next quarter. That being said, we are narrowing our guidance for Velcade sales to between 190 to $195 million, the upper end of our original guidance range. Due to the restructuring charges I mentioned earlier, we’re increasing our 2005 GAAP net loss to the range of 200 to $215 million. The original guidance was a GAAP net loss of $155 million. Finally, we’re increasing our cash guidance to greater than $600 million compared with previous guidance of greater than 500 million. This increase reflects the cash payments received from Schering-Plough as a result of the new relationship structure with Integrilin including the up-front payment of $35.5 million, and $50 million received for the inventory sale on September 1st. I’ll now turn the call over to Bob for an R&D review. Thanks, Marsha. Today I want to review at a very high level the molecules in the pipeline and some of the advancements this quarter. First let me focus on inflammation. We continue to advance five novel molecules in our inflammation pipeline. MLN02, an alpha4beta7 gut-specific leukocyte targeting antibody, MLN1202, an antibody to the chemokine CCR2 receptor, as well as three novel molecules that are a result of our successful small molecule inflammation research collaboration with sanofi-aventis, all of which were discovered here at Millennium. These molecules include the small molecule CCR1 inhibitors, MLN3897 and 3701, and the small molecule IKK beta inhibitor, MLN0415, which is expected to enter the clinic next year. With MLN1202 this quarter we initiated two additional Phase to a proof of concept studies to determine safety, tolerability and biological activity in relapsing and remitting multiple sclerosis as well as in atherosclerosis. These studies are part of our strategy to test MLN1202 broadly in several inflammatory diseases including rheumatoid arthritis. In oncology we continue to move forward our proprietary molecules MLN518, our receptor tyrosine kinase inhibitor, MLN2704, our anti-PSMA antibody, and MLN8054, a small molecule aurora kinase inhibitor, which also originated from the Millennium discovery engine. This quarter for MLN518 we initiated a Phase I/II trial in combination with cytarabine and daunorubicin in acute myelogenous leukemia frontline patients. This study builds on the successful trial we completed in 2004 in which MLN518 showed anti-leukemic activity as a single agent in relapsed AML patients. We will talk about our strategy and results today with all of these molecules next week at our analyst meeting. Together with our partner, Johnson & Johnson, we continue to develop Velcade in a number of promising areas including frontline multiple myeloma, non-Hodgkin’s lymphoma and non-small cell lung cancer. Currently more than 100 trials are ongoing, both company-sponsored as well as investigator initiated and cooperative group-sponsored trials. Data will be presented at ASH in December for Velcade including the updated survival data from our Phase III APEX trial in relapsed multiple myeloma patients and data from investigator-initiated studies in the frontline multiple myeloma setting. In total, more than 50 abstracts on Velcade were accepted at ASH including six oral presentations. So clearly there’s a lot of enthusiasm around Velcade at this upcoming conference. I’ll now turn the call back over to Deborah for closing remarks. Thanks, Bob. Today we have announced an important step in the evolution of Millennium. It’s never easy to announce a restructuring, but these actions are critical to the Company’s continued success. The actions position us well to grow revenue, continue to support research and development innovation, and achieve our long-term goal of delivering innovative therapeutics that change the outcomes for patients and deliver return to shareholders. I want to thank everyone at Millennium for their hard work and dedication. Millennium wouldn’t be where it is today without all the important contributions made by these outstanding individuals. We look forward to walking you through additional details of this refined strategy and restructuring next week at our analyst and investor day. I hope we get to see you all there. We’ll now open 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_233976

Here’s the entire text of the Q&A from Amerada Hess' (ticker: AHC) 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. Just on some of the production variances. It looks like third quarter, the variance, you have the hurricanes and the North Sea downtime and in the fourth quarter same thing plus I guess the JDA effect. It seems to us adjusting for that the production in all your other areas seems to be on track and doing fine. But maybe you can provide some comments on base production ex these impacted areas? And then just secondly, if you had any color or comments on the West Med development how you're thinking about development costs and timing of start up and that kind of stuff. Okay, Arjun, let me take that. I think you're right, we don't see any underlying unexpected declines or sub surface issues at all in any of the fields we've talked about. A little bit surprised perhaps at the extended duration of some of the turnarounds in the North Sea, but this is all surface equipment issues which can be obviously put right and we expect to see that. The pacing with which we bring back production in the Gulf of Mexico is also dependent on activities by others. And so we're being a little bit cautious as to the timing with which we can recover that production. But I think the most important take away is we're not seeing any impacts in the fundamental base production business. I would also, while I'm at it at the same time point to 2006 and remind everybody that we do have new production coming out with that property. That project is in the commissioning phase right now. The wells have been drilled, facilities installed and commissioning is occurring at the safe gas plant. Also of course the contract quantities for the JDA from January 1, 2006 will be 390 million cubic feet a day gross. As to West Med, obviously we're very pleased to have the opportunity to have the characteristics that that project will bring to our portfolio. Until the transaction is closed, and we expect closing to occur in the first quarter, I'd be remiss to comment on any specific detail on that. But I would point out again for modeling purposes, remember that we have traded current production in the Permian of some 6,000 barrels a day to access that long-term opportunity in West Med. That's great. Then just to confirm I guess, the hurricane impacts I think we can all see and we appreciate that those are clearly out of your control. Schiechallion we should probably get back next year, the JDA cranks up, we'll lose some Permian production, we'll get Atlantic Cromarty, that's plus or minus how we should be thinking about '06? Congratulations on solid results. My question has to do with refining and marketing. Specifically in marketing between higher stations and flat gasoline volume per station, it appears that gasoline volumes in Q3 were probably pretty similar to that of Q2 of 2005. And so my question regards monthly trends in demand during the quarter, specifically the trend in consumption on a same-store sales basis during July, August and September if you have it. And any quarter to date information for Q4 2005 would be appreciated as well. That's a good question. Actually our sales were up for our Company operated stations somewhere between 5 and 10% same-store gallon per site per month. In terms of the c-stores themselves I'd say that was sort of flat because the hurricanes definitely have impacted operations in some areas. So at the end of the day I'd say trending up we get our fair share of the business. When things like this go on we try to stay open later and open earlier and as a consequence of that I'd say they're trending up. There's no major trend there I'd say because of the higher prices. A couple of questions. First, to John Hess, just a similar question on the retail. Can you give us some feel as to how your pricing policy worked during the quarter? Was this negative swing on the marketing earn predominantly you guys holding your prices flat? Is that a fair assumption? I think the best way to say it is we always try to make supply available at a price that is a lower cost than our competitors. So we try to price slightly below our competitors and have the supply available. As the colonial pipeline was prorated and certain areas had supply problems we went to a lot of efforts and I'm very proud of all the efforts of all our supply and terminal and marketing people in this to keep our stations full while others were running out. So that's one of the reasons I think for the increase in sales quarter-to-quarter if you will versus last year and the improvement. And yet at the same time we want to make sure we price lower than the competition. So the combination of those factors I think are the reason the revenues were what they were. And I think it's important to know that on an arm's length basis the retail was profitable in the third quarter. But what happens is our supply operations, there were times when both hurricane Rita and hurricane Katrina were going on where the Gulf Coast let's say would be $3 and the posting at the racks would be $2.30 a gallon. And there were those periods and that's the reason you see the marketing margin erosion that we show in the third quarter. Second question is to John Rielly if I may on the balance sheet. John, I just want some clarity on what happens at the end of this year when the hedges essentially roll off significantly to the other comprehensive income line. Can you just tell us what the dynamics of that is going to be and the impact on your equity? Sure. In the press release it lays out the year-by-year contracts that we still have outstanding. So what happens is each quarter as it's been going in 2005 we are rolling off a significant amount of the hedges, the existing hedges that we had on. So the number of contracts have been going down each quarter and will continue to go down each quarter based on that information you see in the press release. So what happens with other comprehensive income, all else being the same meaning prices, the accumulated loss that's sitting in comprehensive income will reduce each quarter as the contracts come off. Now prices move around, if prices move up it may mitigate some of that decrease on a quarter, but if prices go down it will cause the accumulated loss to go down quicker. So that's the basic dynamics. Given the bulk of your hedge you'll roll off at the end of this year, will we see a disproportionate reduction at the end of this year on the other comprehensive income? You will see similar as the after-tax impact that I spoke about earlier in this quarter you're going to see that same type of impact with these kinds of prices coming off in the fourth quarter. Then it all depends on the curve going out to 2012 versus the contracts that we have outstanding which are listed out in that press release. But yes, I mean again, you're going to see a good chunk of it come off in the fourth quarter. Great. I guess my final question is to John O’Connor. John, there's obviously a lot of interest on the Pony prospect. Would you care to comment on any perhaps ongoing discussions to potentially unitize Pony with, or your block with the adjacent Knotty Head block? We always talk to partners and people with shared interests. I'm not personally aware of any substantive discussions going on, but there are always interactions between people operating in the same neighborhood, so to speak. So discussions will occur from time to time. I would think that there will be further discussions obviously depending on the outcome of the well once our Pony well reaches TD. I think that's more the time to look for discussions. Just a couple of quick questions, both on the upstream. I may have missed some comments I think early on when you talked about the Malaysian Thailand production being down 12,000 barrels a day. Could you go over a little bit more detail about that and if it will go into 2006? And then my second question will be on the swap, the Permian basin for Egypt. Can you kind of outline what the capital outlays will be? In either words, Egypt versus the Permian Basin, are you going to be spending more per year both on capital and exploratory expenses? And what will be the impact on per unit operating costs as a result of this? Okay, Bruce. A fairly comprehensive set of questions there. Let me first of all address the JDA. The actual 20-year contract term for the gas at 390 million cubic feet a day takes effect the 1st of January 2006. In advance of that, in negotiations with the buyers and just to remind everybody on the call, Amerada Hess has 50% equity in the production and Petronas Carigali, the EP arm of Petronas Malaysia, has the other 50%, and the producers are responsible to deliver gas at the rail, at the platform to the buyers. The buyers are responsible and have constructed a pipeline to shore and have constructed a gas plant onshore to treat the gas to make it sales ready. The buyers have asked for an additional roughly 200 million cubic feet a day for nine months of this year or all told some 73 BCF of gas to be delivered. This is to be delivered under take-or-pay agreements, meaning if they don't take 73 BCF, they pay us and Petronas Carigali for the gas not taken. That is the situation. They started taking gas in February this year. The rates were within the range of the 200 million cubic feet a day. They constructed the gas plant and they started commissioning it in August. This is a three-month commissioning period. So August, September and October are the periods that they may have planned, they the buyers, TTM, have planned to commission their plant. At the same time and overlying that take-or-pay for this early gas increased to 390 million cubic feet a day with effect from the 1st of September. So our expectation was that that 390, given it was contractual, would continue from the 1st of September through the end of the year. And it was with respect to that that we have reduced our forecast. So what we are saying is perhaps they won't take 390 million cubic feet a day. Right now, they are taking day to day between 100 million cubic feet a day and 250 million cubic feet a day, depending on their commissioning activities. If the commissioning activities can begin satisfactory at the end of October, then our projection will be too conservative. But at this stage, because we are not party to the plant construction, we do not have insights into the commissioning schedule. We simply respond as producers to the takes the plants ask for. We thought it was prudent to assume that through the fourth quarter. The takes will continue to be the same as those we have experienced in August and September. So that is the story on the JDA. As I said in my remarks, we are not economically impacted in any event by the production number. So I would just like to point that out. If they don't take at the contract rate, there will be cash payments, etc. As to West Med, certainly, first of all, in our press release on West Med we pointed out that contractually first gas production from the block will occur in 2009. So there's a period of time to go between now and then. Secondly, until we made the press release, we really did not have access nor the ability to put together a constructive integrated project team. We are in the process of doing that now. So estimations of capital requirements at this stage would certainly not be sanction quality. I would just say, however, that this is a growth project. We will have 55% equity in it. It is a substantial development, and we will have a significant call on capital probably not noticeable in 2006, but more likely in 2007, 2008. By comparison, the assets in the Permian have minimal call on capital. In terms of unit cost for the portfolio, this will be, certainly it will have the effect of reducing unit cost because of the type of development we will have. I don't think the absence of the small volumes in the Permian will cause a significant reduction, but the addition of 55% of the contract quantities for that gas in West Med after development costs that are likely to be incurred on the operating cost there will certainly be beneficial to unit cost going forward. Okay, great. So, in other words, what you just said, so the loss of the Permian, net-net your per unit costs are going to be the same up until the time production would start over in Egypt, correct? With respect to that swap. Of course, there will probably be other portfolio issues that will be affecting the cost too, starting up other production at the end of '06 prior to West Med. But the direct effect of the West Med addition to the portfolio, once it comes on stream, will certainly cause unit cost to come down. My question is on unit costs. If I adjust the lifting cost for hurricane related expense I still note on a unit basis a higher cost year-over-year and sequentially. Can you just talk about how much of that is related to inflation pressure and how much perhaps is changes in your production profile? Sure, Nicole. You did adjust for the production so you take out the $21 million from those production expenses and then you see the absolute costs are down from the second quarter. However, then when you're looking at the unit cost per barrel as compared to the second quarter, we have the volumetric issue in the third quarter being that we had the downtime from the North Sea maintenance and the extended shutdowns in the North Sea as well as the hurricane. So what ends up happening is you just have our fixed costs now being divided over a lower number of barrels, and that is going to drive up the cost of our unit cost per barrel. So it is a bit of an anomaly here in the third quarter. Now having said that, there is no question we are not immune to the cost pressures in the industry and the cost increases that are coming from the service companies in the industry. So we are having to deal with that just like every other company, but if you're specifically looking at the third quarter, it is a volume issue. It is difficult to do because you could look at individual contracts and you can see day rates on rigs and you can see numbers going up by a substantial amount, but then you have to factor in it is going to be a company by company type analysis of we had locked in some of our rigs for a good portion of time before really we saw the substantial cost inflation. So you try to average it all in, it is difficult, and it would just be a pure guess on what the inflation rate is for Amerada Hess, because you have to compare it from a capital standpoint and from our expense standpoint. What we try to do is look at it from a competitive standpoint. So we are going to look at the rest of our competitors, and we want to be in the first quartile as we compare to our competitors. So again, it's this kind of price environment, and with the cost inflation you're seeing, it is very difficult to just set an absolute target. So again, we want to be competitive with our peers. I guess this is a question for John O’Connor. It is a follow-up really to Nicki's question there about cost. Could you talk specifically about the Okume Complex, which is entering a fairly high spend phase right now; how much of those costs let's say are already dialed in or controllable, and how much of those costs, that capital cost there, will you feel inflation acting on over the next, say, 12 to 14 months? Yes, great question. All of the total project capital exposure, somewhere between $300 million and $350 million of that has already been committed to the fabrication and other material procurement issues. That is going to continue to step up through next year as the facilities construction is finished and they're moved out to West Africa starting in December and through the first quarter with installation to occur in April. The drilling rigs required, we have two rigs contracted to drill the production wells, starting in the fourth quarter of 2006. I would say that they have been contracted, one certainly before the most recent one up in rig rate, so it is very competitive; the other just at the cusp as rates were beginning to move. So I think we are pretty well covered with respect to the inflation pressure we are seeing on costs in the industry. I think as John Hess remarked in his opening, our major projects are still on schedule with respect to time and on budget. So while it is, overall license fee is a $1 billion development, everything was contracted for and controlled before the run-up in prices. Maybe I could just have a quick follow-up then. As you look forward into 2006 and you see costs rising, you mentioned rig availability impacting when you're going to drill one or two wells, is there anything at the edge of your portfolio that you are considering not doing because of cost pressures, or at least further deferral of the very marginal discretionary piece of spending? Great question. First of all, to give you some sense with respect to what John Rielly talked about, the primary driver I think that is going to significantly move the needle upwards in terms of cost exposure is in gen 5 deeper water drilling equipment. That is where we're seeing significant increases. We think we're covered through 2006, and that for the rigs we're starting to continue to use, the contract extensions will probably be negotiated late '06 into '07. And that is when I think we will see a significant increase occurring, depending on what the market is at the time, because they will be renegotiated at market prices. The equipment we are using now and next year, whether for our own purposes or whether in partnership with public operators, all of this equipment is being secured before the run-up to the $400,000 a day type day rates. So through 2006, I think we're not going to see the significant increases that are going to feed their way through in the industry over the next 18 to 24 months or so. I don't know if that helps. Given all the moving parts that we've talked about this morning, I wondered if you could give some guidance on fuel volumes for '06? We'd like to, but we're in the process of finalizing our program capital and our objectives for the year for '06, and we will give guidance in that regard as we normally do in our January fourth quarter conference call. Sure. I'm going to ask the traditional demand question. How is, so far in October and post-hurricane, how have you seen through your service stations oil demand holding up? I wonder if you could comment a bit on the Port Reading earnings? It looks like those numbers would have been close to 50 million versus last quarter of around 7 million. Just wondered if you could talk about what drove that, if it was anything outside of margins, and then also what the outlook is for that sector going forward? Sure. I mean, Port Reading did have a strong quarter. It really was marginal related, a clear expansion from the second quarter. You have to remember that the cracks are a little different if you're looking at Port Reading to Hovensa, it really is just a cat cracker unit there at Port Reading. So when you're comparing it to the second-quarter margins, they didn't move as much for Port Reading as they did for Hovensa in the second quarter. And in the third quarter, though, the margins really did expand, and that is what drove the significant increase in earnings. Okay. Then I think you may have mentioned this earlier; I just missed the comments. On the foreign tax rate, it looks like it went up quarter on quarter to 50% versus last quarter at 43%. I think you had quickly mentioned two items, though, that impacted that. I just wondered if you could just repeat that. Sure. Again, for overall E&P, we said at the beginning of the year that the rate we expected to be 43 to 45%. And what happens quarter to quarter, it is difficult to absolutely forecast the E&P rate because it is going to move around based on mix. So now in the third quarter, you had the hurricane, you were just talking on the foreign side, so you had the North Sea maintenance. So you're taking down our UK fields, which from an international basis have a lower tax rate than the rest of our production. And basically what happened is, especially with Norway, Norway became a much more significant component of our earnings overseas. And so from a mix standpoint, it just drove the rate up higher. But again, from an overall standpoint, we still are saying it will be 43% to 45%. Then one last question, can you just remind us what your insurance covers you for, given the damage from the hurricanes? Sure. Per event, so each hurricane is a per event, we have $400 million of property damage coverage. Each event has a $10 million deductible associated with that. So we were covered from a property damage standpoint. We do not insure for business interruptions in the Gulf of Mexico. John, over the past couple of months that we've seen a lot of the large E&P companies start making acquisitions on some smaller E&P names. When we're looking at Hess, you guys have a pretty nice profile there over the next several years. But on the other hand that your stock has gone up a lot over the past two years. And so one may argue that your currency, while it may not be perfect yet, but it's far more attractive than several years ago. When you're looking from that aspect, if acquisitions will play a role or a more meaningful role for you over the next two or three years, is there any particular area that you may think that that will be useful for you to quickly free up your present or that you're pretty satisfied with where you are, and you think the better course for you, at least for the next two or three years, would be organic? Paul, I wouldn't want to speculate in any way. I think the important thing about our company is we've worked very hard the last five years to position the Company to organically create value with our exploration and development program on a global basis, and it's creating a lot of value. So that's the best use of our money and the best use of our focus and we're not going to be distracted from that. We're just in the execution mode now and in the investment mode to grow our reserves the way we've outlined and grow our production in a very cost-efficient way, and we think that's the best use of our money. You always pay attention to opportunities on the markets, whether it's assets or companies. If things come along over the next several years that are accretive to our strategy, obviously we'll consider it at the time. But right now, we see better opportunities internal in the Company to grow our Company for the future. I think that this one is for John O’Connor. John, for Egypt I know that you can't really comment too much before you close the deal, but can you comment a bit in terms of what kind of physical regimes that we may be talking about? Do you think that's under a PSC or gas realization? Is it linked to a certain basket or portable, how does that work? You're right, Paul, it is premature, and our intention is once we have actually closed the deal because we should remind ourselves that this is subject both to EGPC and to ministry approvals, which we will go to seek next month, I would certainly be more comfortable at a fuller disclosure on the moving parts of this once we are party to the agreement, because we are not yet party to it. Okay. John, you gave a 320,000 to 330,000 barrel yield per day of production guidance for fourth quarter. Can you break it down by the three different regions, U.S., Europe, and others? That's pretty much made up Paul, from the comments I had in my opening remarks. What we have said is 12,000 barrels a day less than we had assumed for the JDA. And again, I would point out this is conservative. It assumes that the experience we have seen thus far in the commissioning of the gas plant will continue. And again, I will make the point if that turns out to be the case we are not economically disadvantaged because this is gas that is contracted for on a take-or-pay basis. John, how does the accounting work? You're not going to book the income, right? It's just become a deferred revenue, I presume? That's right, until the production is delivered. We don't record the revenue until that time. So economically, we will have the cash, but from a book standpoint, we will not book the income. What I also talked about Paul, was the impact of the hurricanes, that in the fourth quarter that might be as much as 17,000 barrels a day average for the quarter. So between Southeast Asia and the Gulf of Mexico, if you add those two together, together with our projection, then the Schiehallion turnaround which is going to be a full scale turnaround in the North Sea is going to have an impact together with perhaps some minor other operational issues, the total amounting to about 9,000 barrels a day in the North Sea. So that's roughly the breakdown. Will all of it happen? Who knows. That's why we've given the range for the outcome for the fourth quarter, because there are a lot of moving parts there. Will production come up sooner in the Gulf of Mexico? It's dependent on repair of major gas and oil transportation lines in the offshore. In the JDA, will the commissioning suddenly result in takes of 390 or even greater, because we have the well capacity to deliver above the DCQ. So it's really quite a range, quite frankly, of outcomes likely. At this stage, I would say that we have projections such that we will not be below that. When you're looking at it right now, Paul, we've got a start-up operation. And as John was saying, the nominations are moving around. I'm talking about the ones that went into next year, that when the contract is firm and you start delivering in the full production. I would say overall Paul, it's a general estimate it would be approximately a $7 DD&A rate. Again, that's from the acquisition costs associated with that rolling through on the DD&A. From an operations standpoint, it's a fairly low-cost type operation in the $3 to $4 range. So you're looking at a $10 to $11 overall unit cost. What we have with the JDA, again there is a basket calculation to it, and it's clearly north of $3, and that's really what we've been giving out. It does move with the basket, but it's a nice price right now north of $3. Yes, Paul, that's exactly the point. There is a 12-month lag effect with respect to recalibrating the index. So as we move into 2006, price will be recalibrated, taking kind of the higher commodity prices that we have experienced in 2005. So the price right now is not an indication of current commodity prices. The price next year will be. I had a couple specific things if I could. First, John O’Connor, where do we stand on the Shenzi sanction, and can you give me an idea on timing on that? Secondly, you may not want or choose to answer, but let me give it a try anyway. On the West Med gas contract, is that a warranty contract or a reserve dedication contract, and are there take or pay features? Thirdly, John Hess, maybe you could comment on Port Reading or Hovensa turnaround activities planned for the fourth quarter and first quarter? I will answer your second question first and tell you that in January, hopefully, fingers crossed once we've closed the transaction, we will give you full disclosure and all the details, and hopefully by then we will master all of the details. So I'm sorry, you are going to have to be patient until hopefully January. We will talk about that at that time. With respect to Shenzi, the operator and the non-operating partners are well along with the development plan. I still look to see Shenzi sanctioned around the turn of the year. Will it be in the fourth quarter this year or first quarter next year? That is really a function of the diligence we are now doing as a partnership with respect to the case for the platform in the wake of the experiences with respect to offshore facilities and their reactions to Rita and Katrina. So we are taking time to go back and recalibrate the engineering calculations in the wake of experience from those two hurricanes, Mark, but I don't think that is going to be an extensive re look. In terms of turnaround work, nothing major planned for the fourth quarter, Mark, either at the Hovensa joint venture refinery or Port Reading. As you will recall, we had major turnarounds in the cat crackers at both facilities in February and March of this year, so they are in pretty good shape on a run rate going forward. Next year not so much the first quarter, but next year there will be some work in the Virgin Islands on two of the different crude units. Pretty much everything has been asked, but I will throw some more West Med questions out for Mr. O'Connor. Apache was looking for kind of a $1 billion type development cost. Ballpark, are you still kind of thinking that range, or you'll answer it in January? Then my other question regarding that is laminated pay an issue at all at West Med or not? With respect to the capital, while I didn't have our own people as I said earlier give me their views on what the capital will be we do have an integrated project team at work now. They have visited in country. We do have to be somewhat circumspect, as I said earlier, because of the dependency on securing government approvals. I will say, however, that in relationships and partnerships with Apache in the past, they have got a pretty good pencil. And I think there is no reason not to assume that our work will come close to their cost estimates, whatever they may be. What was the other question, John? I think that the analog I would draw for you and one of the things that fit our pistol in terms of this acquisition is that the subsurface bears somewhat of a resemblance to the subsurface in Equatorial Guinea. We had a very, very able team of subsurface people, geologists, geophysicists and reservoir engineers, working that area now for a couple of years. We think we have very good insights into how to develop and manage fields of that nature. That gives us confidence that we will be able to bring a lot of expertise to the West Med development. I have a couple questions here. First of all, how will the production declines affect your free cash flow for the fourth quarter? Obviously, with the production declines, it will lower our cash flow a little bit as the production is reduced, but no significant impact. We can obviously fund all of our CapEx requirements through either existing cash flow in the fourth quarter or the cash we have on hand. Obviously, another piece of cash flow is the capital expenditures, and some of the deferrals that John O’Connor talked about should work in a supportive fashion to keep the cash flow strong. But obviously, there are moving pieces there in the CapEx for the fourth quarter. Second, will there be any impact in terms of your reserve replacement numbers or your reserve numbers at the end of the year based on all of this with these delays? No, absolutely not. This is all aboveground operational issues. If anything, we project that reserve bookings will be the same, and with production somewhat down from where we forecast, reserve life will likely increase as a consequence. So no, absolutely no negative impact on the reserves; no impact on reserves whatsoever. I guess my first one is for either John O’Connor or John Hess. Can you just give us an update on Equatorial Guinea, whether we're still on budget and on time? And then any latest color around the restart of Oasis in Libya? Paul, let me take the first question, and then John Hess will handle the Libya one. We are very, very pleased with the progress we have been making on the construction for the Okume Complex development. Part of that fabrication is being conducted in the Louisiana Gulf Coast and the Texas Gulf Coast. And fortunately, although the yards did receive some storm water, it was not significant, the impact to the fabrication. In fact, we're ahead of schedule. The fabrication in the Gulf Coast, both in the yards of Texas and in Louisiana. The TLTs are being fabricated at Samsung's yard in South Korea, and there again they are a couple percent ahead of the S-curve with respect to fabrication. We expect completion of those facilities early in February and flowed out and installation in April next year. Rigs have been contracted and will move to West Africa late in the third quarter to commence drilling in the fourth quarter. And as of this moment, essentially all of construction and materials and drilling and tubulars and linepipe, all of these materials have been contracted for. All are on budget with respect to the original budget developed 12 to 15 months ago. And how much remains to be, how much had been spent through the end of September, and what is left to go through the end of '06? The commitment, the spend earned by all of the fabricators and material suppliers through the end of September was about $300 million. I would expect a similar sum to be expended in 2006, but the shift will be towards installation contracts, transportation contracts, and drilling consumables. In terms of Oasis, our talks with the government of Libya are ongoing. Just to remind everybody, we and our partners, Conoco Philips and Marathon, as 41% owners of Oasis really worked with a national oil company and got a framework for reentry commercially and otherwise as of last December. And since then, it has been in the government's lap to give us approval, and discussions with the government are ongoing. Okay. Then just a couple of quick ones for John Rielly. I dropped off, so I apologize if you already answered this. Do we currently have a 2006 CapEx estimate? For the fourth quarter, we had previously said our CapEx program will be 2.4 billion to 2.6 billion. What I can tell you right now is based, we were speaking earlier that some of our exploration wells in the Gulf are being deferred a bit as a result of the hurricanes. So I would guide you to the lower end of that range, but we still have that range for our forecast. For next year, you should be free cash flow positive. Any update in terms of your thoughts around the use of that free cash flow between CapEx and buying back debt or shares? Again, and it's a very fair question, the exact numbers we won't be able to give you an update on until the January call. Having said that, we have been very consistent in this. The first call on our cash is to grow our reserves and invest wisely to do that. The next call will be further debt reduction, and the third call would be current returns to the shareholders in terms of either dividends or share repurchases. But first it is going to be investing organically to grow our reserves. One last quick one. Hovensa, can you just provide an update in terms of the cash distributions? I think August of this year, there was going to be a decision about a payout or an actual cash distribution. Yes. In August 2005, there was a cash distribution; on 100% basis was $325 million. So Amerada Hess' share was $162.5 million in the third quarter. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. 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_233977

Here’s the entire text of the prepared remarks from Brocade’s (ticker: BRCD) fiscal 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. Good morning. My name is LuAnn and I will be your conference facilitator. I would like to welcome everyone to Brocade's Fourth Quarter Fiscal 2005 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 session. Good morning. Thank you for joining us this morning. I am Shirley Stacy, Brocade Director of Investor Relations. Joining me today are Michael Klayko, Brocade's CEO; Tony Canova, Brocade Vice President of Administration and CFO; and Tom Buiocchi, Vice President of Marketing. Before we begin, let me cover some housekeeping items. Brocade issued a press release today detailing our fourth-quarter and year-end financial results via PR newswire and First Call. This press release is available on our website at www.brocade.com. This conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by 9:30 AM Eastern time through end of day Tuesday, December 13. To access a telephone replay, dial 800-642-1687 or 706-645-9291; and the pass code is 2525657. As a reminder, the information the presenters discuss today will include forward-looking statements including without limitation statements about Brocade's financial results, business outlook and guidance. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more detail in our Form 10-Q for the fiscal quarter ended July 30, 2005. The forward-looking statements reflect beliefs, estimates and predictions as of today and Brocade expressly assumes no obligation to update any such forward-looking statements. Certain financial information that we review on today's conference call is presented on a non-GAAP basis. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is provided in our Q4 '05 press release, which has been furnished to the SEC on Form 8-K and in the corresponding Q4 '05 slide presentation posted on our website. In addition, the presenters will discuss sellthrough information which provides a measure of OEM and channel partners' sales to end-users. Brocade does not record revenue based on the OEM's sellthrough information and this measure is not intended to be viewed as a substitute for reported GAAP revenue. Sellthrough is a measure of demand but is not a GAAP measurement of revenue, and therefore is not subject to the same level of internal controls as reported GAAP revenue. Please note that certain classifications have been made to prior year’s balances in order to conform to the current year presentation. Thank you, Shirley. Good morning everyone and thank you for joining us. I am actually speaking to you from Beijing where I am participating in the launch of our Brocade conference series across the Asia-Pacific region. We will be talking with approximately 3000 customers and partners across nine major cities in Asia between tomorrow and December 16th. Today I will briefly discuss our results for the fourth quarter, review our product performance and business trends, update you on our strategic initiatives and provide some insight into the opportunities we see as we enter fiscal 2006. Following my remarks, Tony will provide more details on our Q4 financial results and outlook for Q1. For the fourth quarter, revenue was 145.5 million and non-GAAP EPS was $0.07. Company sellthrough, a measurement of OEM and channel partners’ sales to end-users was approximately 160.2 million, the second highest level in the Company's history. These results are consistent with the preliminary Q4 results announced on November 16th and brings our fiscal year 2005 totals to 574 million in revenue and approximately 611 million in sellthrough. Overall I was very pleased with our performance this quarter. Our reported revenue and sellthrough were better than we had planned. Strong demand, solid gross margins, and some onetime expense savings led to increased profitability and helped generate 39 million in cash from operations. The strong demand was driven by a record quarter in directors, good growth in our embedded business and a solid quarter from our switch family. The SilkWorm 48,000, our new 4 gig director and our new 200E entry switch were both qualified by all of our major OEM partners during the quarter and our 4 gig products represented approximately 50% of our sellthrough, indicating a very strong transition to 4 gig in the industry. Let me spend a few minutes describing our performance in our SilkWorm SAN conductivity business. Similar to last quarter, given the OEM inventory dynamics, I will focus my comments on the sellthrough aspects of our performance, the actual sales through to end-users. Q4 sellthrough for our fabric switches increased slightly from Q3. During the quarter, sellthrough of our 4 gig 4100 was up double digits and our new 4 gig 200 E, which was qualified by all of our major OEM partners during Q4, began its initial ramp with strong early acceptance. In the embedded space, we saw renewed growth in sellthrough for our embedded fan switches for bladed servers and achieved strong double-digit sequential growth. Fujitsu Siemens added a Brocade bladed server module to their portfolio during Q4 and we also recently announced our second generation bladed server module for the IBM blade center. We continue to view this segment as a long-term high-growth opportunity. Sellthrough for the multiprotocol router was up single digits following a very strong Q3 performance. The router has become a fixture in larger enterprise opportunities and is a requirement in the majority of large director deals. This quarter we also announced the availability of the router to nondisruptively link McDATA and Brocade fabrics, providing customers a capability they have been asking for and facilitating a more seamless two-vendor strategy for customers in certain situations. In the enterprise category, sellthrough for directors increased significantly and represented a record quarter. Q4 demand for the SilkWorm 48,000, the industry's only 4 gig director, was very strong aided by some pent-up demand from its announcement last quarter. In addition we are finding that in many cases customers are utilizing both the 128 Port SilkWorm 24,000 and the 256 Port 48,000 in deployments, effectively configuring their San fabrics around our two distinct density and performance points in the director space. We are continuing to offer both products to meet the needs of our customers. Now the sales pattern in the enterprise space is lumpier than our fabric switches and the magnitude of large transaction varies quarter to quarter. This quarter we had several very large transactions we won in competitive situations. Some in our installed base and some not. Customer wins for the quarter include brand names from around the world, including China Netcom, Daimler Chrysler, Hynix, Nokia, Petronas, the State of California's strategic sourcing initiative, and Volvo. In a number of these cases, our FICON capabilities have opened new doors for us in terms of overall director opportunity. Overall, we feel very good about our position and momentum the director space. Our director sales funnel is larger than it has ever been. Our average deal size is larger than it has ever been, and we believe that the 48,000 has helped us increase our addressable market in the enterprise space. I would now like to turn to our strategic initiatives and discuss the progress that we have made with the new Tapestry product family and with our service offerings. We have often referred to the magnitude of our install base of SAN ports, which is now approaching 6 million ports. We also recognize that our customers have broader data center challenges beyond SAN conductivity. Our unique position connected to both servers and storage and providing the data path for mission critical applications affords us an excellent understanding of many of these challenges in and around the SAN and our Tapestry and service initiatives aim to help customers address these challenges head on. Our Tapestry family is really about bringing new functionality to the shared storage environment with a combination of innovative software and intelligent hardware. Last month we announced a third member of our growing Tapestry family, the Tapestry Data Migration Manager or DMM. Data migration is one of the most pervasive customer challenges in data centers today. According to the research from the Enterprise Strategy Group, 83% of data migrations exceed planned staffing time, 61% exceed planned downtime and 54% exceed planned budgets. In addition, 48% of data migration customers reported technical compatibility issues. Tapestry DMM is a system of Brocade developed software running on our fabric application platform, which allows customers to perform data migrations in a very fast, simple manner with two unique capabilities, predictable results and the ability to migrate data across heterogeneous storage devices. Recently a large IT services organization used Tapestry DMM to migrate 13 terabytes of data for a key end-user customer on a very tight weekend schedule. They not only were impressed at the immediate ease-of-use of the solution, but they were able to shave 40% off their planned migration time and get the customer back on line much earlier than anticipated. We look forward to many more successes like this with Tapestry DMM in upcoming quarters. We have also continued to make significant progress with the first two offerings in our Tapestry family. Tapestry Wide Array File Services or WAFS; and Tapestry Application Resource Manager, ARM, as they begin their initial customer acceptance ramp. When we first spoke to you about Tapestry in June of this year, we indicated that we believed it could be 5% of our revenue by the fourth quarter of fiscal 2006. While the current revenue for Tapestry is not yet material to our overall results, we believe that our early customer successes and feedback from late stage evaluation trials have us on track to achieve this goal. In Q4, Tapestry WAFS began shipping and we are very pleased by the initial customer interest and ramp. WAFS addresses some very extensive and difficult IT issues regarding branch offices and data files. During Q4 we enhanced our Tapestry WAFS offering in Q4, Tapestry WAFS began shipping and we are very pleased by the initial customer interest and ramp. I will repeat a little just to be clear. In Q4, Tapestry WAFS began shipping and we are very pleased by the initial customer interest and ramp. WAFS addresses some very extensive and difficult IT issues regarding branch offices and data files such as remote file access, backups consolidation, and centralized file management for better consistency, security and compliance. During Q4 we enhanced our Tapestry WAFS offering so that it now provides support for the most important branch office application, e-mail and e-mail attachments, as well as for network services that make it even more robust branch office solution. We believe that our WAFS solution continues to offer the highest performance in the market and is the only WAFS solution that delivers native integration with Microsoft products. Our working partnership with Microsoft in the field has been invaluable in helping to secure our very first large WAFS customers in Q4, including some well-known international banks and financial services companies. Given the enormous number of branch offices and straightforward value proposition of WAFS, we see very strong interest levels in this segment for quite some time ahead. We have secured our first two partners for Tapestry WAFS, Fujitsu Siemens and Nortel Networks. We are very pleased to announce that they have selected Brocade Tapestry as a key building block for their next generation of storage solutions. In addition, we are working with HDS on qualification of our Tapestry WAFS solution. Tapestry ARM is a technology that addresses the problem of how to quickly get operating systems, applications and the critical storage information to servers in a network storage environment. It is especially beneficial to bladed server environments, where there is often no hard drive on the server and where the relevant Software resides in the SAN. We are attached to almost 2 million servers in our install base and we believe that number will grow significantly as bladed server environments mature and grow. We are receiving very positive feedback from the brand-name customers that are currently evaluating Tapestry ARM, substantiating our belief that it is a very unique solution to a very large data center challenge. In addition, Tapestry ARM affords us the opportunity to engage in server and application discussions with both end-users and OEM partners, helping us to deliver significant value to additional parts of the IT organization beyond our traditional storage focus. Our services strategy is straightforward. In response to growing demand from our customers and partners for our technical expertise and thought leadership in the network storage, we plan to provide a full portfolio of services in this area. These services in combination with our SilkWorm and Tapestry products form solutions that are designed to better enable our customers to meet their mission critical business objectives through greater reliability, greater utilization, and increased functionality of their storage networks. In 2005, over 100 customers relied on Brocade to deliver key service components of their storage solutions around the world. Our SAN customers are undoubtedly not done building out or upgrading their storage networks and they typically don't have a surplus of the right resources to help them, so we strongly believe we can add a tremendous amount of value to complement their existing capabilities. In order to structure and grow our services business, we recently hired Ray Wolf, an executive who has built and run service businesses across two industries, most recently with Dell as our Vice President of Worldwide Services. Before I turn the call over to Tony, I would like to quickly summarize. During 2005, we identified significant growth opportunities in and around the SAN and within the data center; began delivering a new Tapestry family of products; and began adding service offerings we believe best address a number of customer needs. As we enter 2006, we believe we are poised to continue to grow and maintain a leadership position in SAN switching and connectivity with our SilkWorm family and innovate to help solve broader customer problems in the data center with our new Tapestry and service solution offerings. I would now like to turn the call over to Tony for review of our financial results and outlook for Q1. Then I will come back to summarize and address Q&A. Thanks, Mike. I will now turn to a review of our Q4 results, beginning with our income statement. Q4 revenues were $145.5 million compared to $122.3 million in Q3 '05 and 155.6 million that we reported in Q4 '04. Our total cumulative ports shipped were nearly 6 million ports, which is up 26% over Q3. Q4 sellthrough was approximately $160.2 million. This is an increase of 12% sequentially from sellthrough of approximately 143.4 million in Q3 '05 and an increase of 7% year-over-year from approximately 150.4 million in Q4 '04. Note that in Mike's earlier comments he referred to pent-up demand from Q3 that affected our director sellthrough in Q4. While it is not possible to precisely track every transaction impacted by this pent-up demand, we estimate that our director sales in Q4 included approximately 5 to $7 million in pent-up demand from Q3 for the 48,000. If you normalize our Q4 sell-through for that pent-up demand, it would have been closer to 153 to $155 million, still representing a healthy 7 to 8% increase in sequential sellthrough. In Q4, several of our OEM partners reduced inventory requirements during the product transition greater than we had expected, reducing inventory on hand by nearly one week across our switch and director product categories. This is attributed principally to the increased demand we saw toward the end of our quarter. We believe that we are now at about 2.5 weeks of OEM inventory, which is lower than the three weeks of supply we believed our partners would end the quarter with. As we have indicated in the past, the decision on the level of inventory to maintain rests with our OEM partners. Non-GAAP diluted EPS was $0.07. This compares to non-GAAP diluted EPS of $0.01 in Q3 '05 and non-GAAP diluted EPS of $0.08 in Q4 '04. Note that Q4 '05 non-GAAP EPS includes $2.7 million of tax expense adjustment which represents a benefit of approximately $0.01. Reporting on a GAAP basis, Q4 '05 EPS was breakeven; comparing to Q3 '05 GAAP net loss per share of $0.03, GAAP EPS for Q4 '04 was $0.08. Our effective non-GAAP tax rate in Q4 was a benefit of 8.6%, translating into an annual non-GAAP tax rate of 10.3%. Non-GAAP net income for Q4 excludes charges of approximately $5.2 million loss on investment associated with the defeasance of the companies 2% debt; $4.7 million for taxes and other fees in connection with the repatriation of $78 million of foreign earnings; $5.2 million related to the internal review and SEC investigation costs; and $700,000 for stock-based compensation; 500,000 in reversal of previously recorded restructuring charges; and a 2.7 million income tax expense adjustment. Non-GAAP gross margin for Q4 '05 was 55.3%, as compared to 51.1% in Q3 and 56.2% in Q4 '04. Q4 non-GAAP gross margin included a $1.8 million reserve for excess and obsolete inventory due to the faster than expected transition from 2 gig to our new 4 gig products. Excluding this additional reserve for excess and obsolescence, our Q4 non-GAAP gross margin would have been about 56.5%. Q3 '05 gross margin also included a reserve for excess and obsolete inventory of $3.4 million. Excluding this, our non-GAAP gross margin for comparability purposes in Q3 '05 would have been about 53.8%. The increase in gross margins from Q3 to Q4 primarily reflect the impact of higher volume and favorable product mix. Our underlying product margins in Q4 remain consistent from Q3 '05. ASP declines were mid single digits, slightly better than the prior quarter. Q4 non-GAAP operating expense excluding the items referred to previously were $67.1 million. This is below our target range of 69 to 71 million. Q4 included some onetime savings in sales and marketing relating to the year-end true-up of commissions and the timing of certain non-recurring engineering expenses that were originally planned for Q4 and are now falling in Q1 of '05. Our actual non-GAAP expense run rate excluding these items was closer to a 71 million, which is consistent with the guidance that we provided last quarter. Our non-GAAP operating margin for Q4 '05 was 9.2% compared to Q3 '05 non-GAAP operating margin of -1.5% and Q4 '04 non-GAAP operating margin of 15.5%. Now I'd like to turn to our balance sheet. Cash flow from operations in Q4 was $39 million, compared to 2.8 million in Q3. The increase in cash flow from operations is primarily resulted increased profitability as well as lower days sales outstanding. Our cash and investment balance at the end of Q4 '05 which includes restricted cash related to our debt defeasance was 764.4 million. Net cash excluding our convertible debt was $485.5 million, up from 454.9 in the prior quarter. Days sales outstanding in accounts receivables was a 44 days in Q4 '05. This compares with 59 days in Q3 '05. Our DSOs were below our target range of 50 to 60 days, primarily due to improved linearity of our business as well as improved collections from the prior quarter. Inventory levels of our on-hand inventory were 11 million in Q4 '05 compared to 13.5 million in Q3 '05. The reduction reflects the completion of our contract manufacturer consolidation which we have been discussing for several quarters. We expect now that we are complete with this that we would return to our historical levels of inventory, which have traditionally been in a range of 8 to $10 million. Capital expenditures for the fourth quarter were 8.4 million, which is consistent with our target range of 6 to $8 million but the slightly higher level of CapEx relates to the buildout of our software applications lab which support our Tapestry product family, and this is close to completion. Finally, deferred revenue increased to $45.5 million in Q4, compared with 43.2 million in Q3. The increase is primarily due to continued growth in service bookings, a portion of which is deferred and then recognized over the life of the service contract. Now for our outlook. As you compile your models and estimates, here are some factors to consider. Q1 is historically our strongest sequential quarter because it corresponds with several of our major OEMs' calendar year ends. Our average deal size in our business has increased with the enterprise products we now offer and this is making our business somewhat lumpier than in the past. 50% of our business is now 4 gig and we are confident in our competitive position and our product momentum across our product family. We expect the environment will remain competitive as our competitors begin to come to market with their 4 gig platforms. And while we have not seen the effects of their efforts, we have considered this in our outlook. Having said this, we are expecting ASP declines to remain in line with what we've seen historically, which represents mid single digit sequential declines. When we take all of these factors into consideration, our outlook for Q1 is as follows. On revenue in Q1, we expect it to be in the range of 156 to $161 million. We expect our Q1 gross margins to be in the 55 to 56% range, which reflects the effects of the buildup of our service and support organization, the initial mix of our new Tapestry applications, which are not yet shipping in volume. As I said earlier, we had some onetime expense savings in Q4 without which our spending level would have been closer to $71 million. For Q1, we are expecting total non-GAAP operating expense to be in a range of 73 to $75 million. We expect the majority of the increase to be in R&D as well as in sales and marketing. As Mike discussed earlier, we are investing in new technologies related to SAN related applications, services and support, and other growth initiatives. We are balancing these investments against our operating margin goals, but we realize that the long-term growth of the Company in expanding our total addressable market requires investments to realize growth in these areas. We expect other income and other expense to be in the range of 4 to 4.5 million in Q1. We expect our tax rate to be in a range of 20 to 25%, an increase from our previous guidance. Our tax rate is increasing as we consume our net operating tax carryforwards and thus are moving to a higher alternative minimum tax bracket. Before addressing EPS guidance, I would like to make a few comments on stock compensation. Effective Q1 '06, we're adopting FAS 123 R which requires us to include expenses related to stock compensation based on fair values. We're providing non-GAAP EPS estimates with and without option expense for comparability purposes. We're adopting FAS 123 R prospectively and as such we will not be restating prior period financial results. We expect the impact of FAS 123 to be approximately 3.9 to $4.5 million per quarter in fiscal 2006. We expect Q1 '06 GAAP EPS to be $0.02 to $0.03. Excluding stock compensation and other onetime items, we expect Q1 '06 non-GAAP EPS to be about $0.05. We expect capital investments to be in the 8 to 10 million range. We expect days sales outstanding will be back in the 50 to 60 day range. As I said earlier, we expect our inventory levels to be in the 8 to 10 million now that our contract manufacturer transition is complete. We expect to remain cash flow positive and expect to generate on average 20 million in operating cash flow per quarter. Note that some quarters will be greater than 20 and some may be lower than 20 depending upon the quarter. Historically Q1 and Q3 have been our lower cash flow quarters and Q2 and Q4 have been higher cash flow quarters. As you update your models for fiscal 2006, here are factors you should consider. Just as Q1 has historically been one of our strongest sequential growth quarters, Q2 has been our weakest sequential quarter and we expect Q2 to be down slightly from Q1. We expect our overall revenue to grow 8 to 10% in fiscal 2006. We expect Tapestry and services to represent approximately 5% each by the fourth quarter of fiscal 2006, with higher growth characteristics than our SAN connectivity business in fiscal 2007. We will continue to run SAN connectivity business based on the current long-term financial model, and expect gross margins for SAN connectivity to be in the range of 55 to 58% and expect operating income to hit 15% by the fourth quarter of fiscal 2006. We expect SAN connectivity to remain a healthy, profitable and cash flow positive business that will enable us to make incremental investments to transform the Company and its future growth prospects. To that end, we are looking to Tapestry and services to exhibit the following attributes in 2006. We expect Tapestry and service gross margins combined to be in the 40 to 50% range initially, improving in fiscal '07. As a result, we expect our overall corporate gross margin for fiscal 2006 to be in a range of 54 to 56%. Regarding non-GAAP operating expenses in '06, this area is new, so predicting the level of spending necessary to drive new products in new markets is not easy; however, we will evaluate the progress we're making on execution on our product plan and to the extent we see the opportunity, we may increase our spending in the balance of '06 up to 75 to $80 million per quarter. Finally we expect our stock buyback to benefit EPS in fiscal '06 by $0.02 depending on the timing of when we execute on the buyback programs. So in closing, Q4 was a strong quarter for Brocade and a great way to end the year. During fiscal 2005, we refreshed our entire product family from embedded to enterprise with the industry's only end-to-end 4 gig offering; significantly strengthen our competitive position in the director space; shored up our share in the fabric switch market; (technical difficulty) I will go ahead and close. We significantly strengthened our competitive position in the director space. We shored up our share in the fabric switch market, secured design wins at all the major bladed server vendors for embedded switches, and launched our new Tapestry product family and new service offerings. 2005 was also a year where Brocade bolstered and solidified its internal infrastructure and processes. We further optimized our business model and expense structure and locked down the most comprehensive product roadmap in our history. As we enter fiscal 2006, our products, our technology roadmaps, and our Company infrastructure is strong and we've establish the core foundation for our growth and diversification plans. Our strong position in SAN connectivity and the initial positive trends from our new initiatives gives us the conviction to pursue Tapestry and service opportunities and to drive additional growth from these complementary areas. We look forward to updating you on our progress as the year unfolds on our quarterly conference calls and at our upcoming analyst meeting which is targeted for late this winter. We'll have more information on the analyst meeting soon. That concludes our prepared remarks. Thank you for joining our call and for your interest in Brocade. 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_233978

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2005 Glamis Gold Ltd. Earnings Conference Call. My name is Nicca 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. At that time, if you wish to ask a question please press “*” followed by “1” on your touchtone telephone. If at anytime during the call you require assistance, press key “*” followed by “0” and 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 Mr. Jeff Wilhoit, Director of Investor Relations. Please proceed, sir. Thank you Nicca, and welcome to the Glamis Gold fourth-quarter and year-end conference call. Before we begin, I need to caution you that the following presentation contains statements that are forward-looking in nature which involve known and unknown risks, uncertainties, and other factors which may cause actual results and/or performance of the company to be materially different from predicted results. These factors are discussed in detail in the Company's annual information form. Before turning the call over to Kevin McArthur, I will add that we will be making detailed information about our resources available on our website as soon as possible following the conclusion of this call. I would now like to turn the presentation over to Kevin McArthur, President and CEO of Glamis Gold Ltd. Thanks Jeff, and welcome to all of you. As always, thank you for participating in our conference call and webcast presentation. Joining me today in the room in addition to Jeff are Chuck Jeannes, EVP Administration; Jim Voorhees, Chief Operating Officer; Cheryl Mayer, our Chief Financial Officer; Charlie Ronkos, Vice President Exploration; and Joe Danni, Vice President Corporate Relations. In the next minutes I would like to summarize our fourth-quarter and year-end financial and operating highlights and how that past performance positions us to continue to excel in 2006 and beyond. As usual, I would like to reserve most of our time to address your questions and discuss the issues you believe are important regarding Glamis and its activities. We had a very good year and an excellent fourth quarter. Of course, our gold price matters, that it also helps to deliver record quarterly and annual gold production into our favorable market. We produced over 430,000 ounces of gold in 2005, which is a record for this Company, as is the fourth quarter production of over 140,000 ounces at a total cash cost of $181 per ounce. Earnings were $0.12 for the quarter and $0.21 per share for the year and cash flow for 2005 amounted to $89 million. This was a banner year. Glamis was the top performing stock among precious metals mining companies on the New York Stock Exchange with our share price appreciating over 60%. Underpinning all of this was a rock solid first full year of gold production at El Sauzal in Mexico; a steady performance at Marigold in Nevada; and the commencement of commercial production at the Marlin Mine in Guatemala. And because we remain 100% unhedged, our shareholders enjoyed the maximum positive effect of this rise in gold market. Our 2005 gold production by quarter is a very revealing visual. We set our marks early in 2005 and then proceeded to hit them as the year progressed. We saw production building toward a very strong fourth quarter and as the chart most of you are looking at on the webcast depict, that is exactly what happened. I would like for you to keep in mind this chart for two reasons. One, you will see a somewhat similar pattern this year primarily because Marlin will continue to ramp up from 3000 tons per day to 5000 tons per day during the first six months of 2006. And two, it will remain our unrelenting focus to deliver on our promises. In 2005, we demonstrated a good track record of hitting our forecasts and I don't intend to deviate from that track record in 2006. On to the balance sheet. At the end of 2005 we had cash and equivalents of $32.1 million, working capital of 36.7 million and our debt was a very manageable $80 million. This is very strong, given that we had two brand-new mine startups and completion of the Marigold expansion within a very short twelve-month period. As you'll see in a moment, our very robust cash flow this year and in subsequent years will provide us a great deal of flexibility and by flexibility I mean we can vigorously address or even erase that debt, and continue to grow the company or both. The chart most of you are looking at now, this is perhaps my favorite. In my opinion there are three basic requirements necessary to grow our gold mining company and reward our shareholders. They are number one, increase reserves, number two, increase productions, and number three, decrease cash costs. There can be little doubt that we're nailing the last two. Given a $500 gold price, our result in cash flow is expected to approach $200 million in 2006 and surpass that mark in 2007. With that kind of momentum on the cash flow and production front, we can now redouble our attention to increasing reserves on the very prospective districts we now control. It's no secret. We have been very busy building mines and not just any mines but excellent performers in districts with significant reserves growth potential. Last year we grew the Company's total resources and you'll see the details of resource growth in this year's annual information form. It is now time to move our geologic potential along the curve into reserves and it is our goal to grow proven and probable reserves over the next three years to over 10 million ounces through discovery of new reserves, conversion of resources to reserves or through accretive acquisitions. On to production growth. I'm not aware of any other company that can point to such a dramatic growth profile with a corresponding plunge in cash costs. Last year we grew production 85% and we are projecting 670,000 gold ounces this year or another 50% growth. At the same time, we expect total cash costs to decrease significantly to between 160 and $170 per ounce of gold. Remember this is real growth from mines already constructed and underway and the potential upside like Cerro Blanco and other expansions are not included. Of course, grade matters. Certainly Marlin and El Sauzal bear witness to that. But great mines must be complemented by corporate culture to succeed. Strong management delivers by working through the many operational, political and other day-to-day challenges, and obviously we have such people on the ground. These are people who contribute greatly to the results you see so graphically depicted in front of you. I have already touched upon the projected quarter-over-quarter growth in 2006. As you can see, we expect a nice steady climb from the first quarter to the fourth quarter. This will be primarily due to the gradual increase of production at Marlin and seasonal production results at Marigold. As previously announced, we expect Marlin to produce around 254,000 ounces of gold in 2006, followed by El Sauzal at 217,000 ounces, Marigold at 118,000 ounces, which is our two-thirds share; and San Martin at 81,000 ounces of gold. Most of you are familiar with this next slide, which depicts our current operations and active exploration activities all located in the Americas. Very quickly let me give you a summary of both. Starting in Nevada and working south, Marigold enjoyed a good, steady year and forth quarter producing over 30,000 ounces of gold in the quarter and 137,000 ounces for the year. Cash costs for the quarter and year were $193 and $216 per ounce respectively. All mining is now taking place in the Millennium expansion area. We expect Marigold production to be lower in 2006 due to waste mining requirements and longer haul distances from Millennium. We will resume drilling at Marigold in the first quarter concentrating our efforts to the north in the pediment areas. Also in Nevada most of you know there are currently four drill rigs operating at the companies 40% owned Dee joint venture in order to further define the new Arturo discovery, and Barrick is currently responsible for that work. In Mexico, El Sauzal's first full year of production was nothing short of stellar. The mine produced over 61,000 ounces of gold in the fourth quarter at a total cash cost of $121 per ounce. El Sauzal was by far our top producing mine in 2005 and the top producing gold mine in all of Mexico, producing nearly 192,000 ounces of gold. We expect an even better year in 2006 with production coming in at a projected 217,000 ounces. We continue to explore at El Sauzal on a number of targets identified on our large concession area. The current focus is on drilling extensions to the Trini Zone and a 20-hole drill program at the Guayacan target which is now currently underway. As you know, at San Martin mine in Honduras we have transitioned to run of mine heap leaching even though production will continue to decline in the last couple of years of mine life, capital costs will be minimal and we expect strong cash flows. San Martin is expected to produce approximately 81,000 ounces of gold this year. At Marlin, we commenced commercial production last December, producing nearly 24,000 ounces of gold in the waning days of 2005. Production gradually increases throughout the year, working through typical startup and training procedures as we move from 3000 to 5000 tons per day by mid year. Marlin has a 10-year mine life of over 250,000 ounces of gold and 3.5 million silver ounces in each of those 10 years. As we stated in our press release, recent discoveries at Marlin strongly indicate the potential to add to the mine's expected life. We discovered two new mineralized veins during the year which don't yet appear in our resources and drilling on these Vero and Rosa veins is continuing. At Cerro Blanco, there is nothing new to add to what is already a very exciting story. As you know, the mineral resource now includes 1.27 million ounces of gold in the indicated category at an average rate of 15.7 grams of gold per ton. There is an additional inferred resource of 0.67 million ounces at an average grade of 15.3. Four drill rigs are active on the site to expand this open-ended resource, which includes a gold soil anomaly extending two kilometers to the north of the known deposit. Feasibility completion is still targeted for year-end and a positive feasibility study would allow us to move resources into the proven and probable category by year end. Finally I should add that we continue to actively consult and work toward building trust within local communities, government, business sector, and religious organizations. We delivered our first royalty check to the community of San Marcos next to Marlin two weeks ago and we fully intend to be a productive part of their community and surrounding communities for years to come. Let me briefly sum up. Last year was a very good year and looking forward we expect an additional 50% growth in our production to 670,000 ounces of gold in 2006. We expect total cash costs to decrease to between $160 and $170 per ounce. We expect to remain unhedged. We expect to move the Cerro Blanco project through feasibility. We expect organic growth on some very exciting mining districts, and we expect to continue to reward shareholders by conducting all aspects of our business profitably and responsibly. Yes, sir. Ladies and gentlemen if you wish to ask a question please key “*” followed by “1” on your touchtone telephone. If your question has been answered or you wish to withdraw your question please key “*” followed by “2”. Questions will be taken in the order received. Please key ‘*” “1” to begin. And your first question comes from the line of John Bridges of J.P. Morgan. Please proceed. I was wondering, if you could fill us in a little bit on how the feasibility for Cerro Blanco is working out? Well, early days, but it of course, looks very positive. The resource continues to grow. So, there is a little bit of a moving target. We have made a new discovery to the far north-end which in our opinion will increase the resource, but that’s going to take some time and there is a lot of drilling activity going on there with similar widths and grades. As far as technical, this year we plan to go underground. We have applied for permits for underground test work. We've got a decline planned. Boy, Jim, you got anything else to fill in on that? Yes. Of course we're doing all the other studies you expect, hydrological work and the like. We are working with contractors right now to start with our portal work and get that underground going. So that's moving along very well. Hopefully we will be under ground here around mid year. Okay. Kevin, I like your 10 million ounce reserve target. How much of that is likely to come from your properties and how much do you think would come, you know, M&A? Well, there's no answer to that. Of course, we are always working in many arenas. I think that in given time we have the potential for that to come from all of our properties that $10 million mark. I mean you look at Cerro Blanco which is growing at this time it's nearly a 2 million ounce total resource when you throw in inferred and growing. So, there is a pretty good start. We have got excellent potential for growth on the Vero and Rosa veins at Marlin, which looks very good. We are drifting towards other vein targets in the district. We have got lot of potential on the Marlin property, because there has never been historic mining there. So, there is plenty of work to do. Once again as I said in my early comments we are very focused on building a mine, and now the mine is up and running we've got some fine-tuning to do there. We are turning to a lot of exploration work. So, I think good potential there, at the El Sauzal property in Mexico of course, no new news yet there, we're just now drilling on the Guayacan target, we've got Trini. We are actively looking at a heap leach option for some of the lower grade materials that we're running into in the pit. So, you know, on property position, it is still early days. More material mine Marigold, for the first time this year we did not replace our reserves. We still have a lot more exploration activity to take place down in the pediment area to the north-end of the property. We have some early indications of some very interesting things there, high grade, sulfides, you know, it’s a matter of finding enough tonnage to make a difference, that is our goal right now. So, that, you know – that how do you know as much as I know about the north end of Marigold, but it is just going to take time to develop. Yeah, absolutely, I mean that’s -- there are two things there the grade and stripping ratio. Jim, do you have anything to add on that? We have done some testing up to $500 dollar gold price and we see up to a 30% reserve increase. Yeah, it is. Our reserves we have done at 400 but that plus $100 does improve Marigold. Okay. Can you give us couple of details on the joint venture at Dee? What percentage of the drillings and of the development costs if it is developed are paid by Barrick? What percentage by Glamis? What are the indicated resources thus far? Yeah. It’s early days on that, Elliott. We're expecting a resource update from Barrick sometime this quarter. We control 40% of the property. It is a participating interest. And so, Charlie, do you know what the exploration budget is at Dee this year? Okay. If gold tonnage is actually delivered in five years or so, what compensation would Glamis get? Would it 40% of the ore? Would it be a fixed amount of money? How would it work? A couple of quick questions for you, Kevin or one of your guys may give the answer. You give us a great graph showing the different year’s production profile, increasing cash flow, decreasing cash costs. Can you go through 2006 and just give us an idea of what you think cash costs would be at this point for the four primary mines for this year? Is it fair to say that the numbers we saw in the fourth quarter aren’t not too far off what we could see in 2006? Well, first of all, the big number there is Marlin, of course, had quite high costs in the fourth quarter, which we expect to improve pretty dramatically as we ramp up. Cheryl, do you have anything to comment on there? I think we are with decreasing production at Marigold going to see an increase in the cash cost at Marigold, that also, of course, leading you into what comes from the new deferred stripping rules that we'll be implementing. But, in San Martin the run of mines. So, yeah, that’s what we’re looking for those little slightly higher costs there, but El Sauzal and Marlin are very low. Okay, perfect. A couple more questions while I've got you. I just looking at El Sauzal DD&A in the fourth quarter went down quite a bit from other quarters. Is that a reasonable unit depreciation to use per ounce? In the fourth quarter? Yeah, I mean they should be tracking pretty closely and, you know, as far as our numbers for the next year goes, yes, it should be right in there. Okay, perfect. Another question on your balance sheet, you've got other assets, I'm curious what if you have indicated what those are? Yeah, we found -- when you look in the financial statements you will see that. The bulk of that is actually either receivables from the Marlin project. We put it in other assets rather than current assets because it’s going to come back to us over the next two years. So, we categorized it as longer-term rather than short-term. I think so, I mean we’re growing Company, so it is going to move up a small amount. Cheryl, do you have an answer? Yeah, it’s going to be up a couple of million dollars, but really pretty small amount compared to the growth we're experiencing. No, I mean, what we have now in terms of the 13 I would expect that to be around 13 to 15. I'm sorry, 2006. One last question actually probably requires a little bit more detail. For 2006, you give us a lump sum number for exploration and development. Can you just outline for starters, break out how much of that number is actually exploration? Total? Of the $25 million total we have about a little over $12 million that is development and the rest is exploration. Okay. So just now an accounting issue I guess from the remaining $13 million that goes to exploration, how much of that do you expect to expense and how much do you expect to capitalize roughly? Let me just back up what Charlie said. When he said $12 million is development, that is within the Cerro Blanco budget, but the total budget of Cerro Blanco is $15 million and 12 of that is -- call it development because it is permitting and feasibility and what have you. So all of the remainder is expensed exploration -- all of it is expensed. It's $24.9 million. Okay, so just to clarify, $24.9 million less what he outlined specifically was development, which is roughly $12 million, and the remainder of that is fully expensed exploration? You're going to see probably about the same rates. I mean we're about 27% effective now. We're paying cash taxes at a rate of 30% in Honduras. We are generating actually a lot of taxable income there. The rates between El Sauzal and Marlin of course we are not going to see much at Marlin yet. We're still in a loss period, but at El Sauzal, we are at the 28 to 30% range there. So what you see there is going to be pretty indicative going forward. Okay. Just seeing Marlin's contribution to the bottom line increasing dramatically over the year, would you suggest perhaps the tax rate might be lower than the current one of 27% for the year? No. You still have to provide for future income taxes on those profits for Marlin, okay? So even though it doesn't go into current, it still goes into future. No, we've got about 30% at San Martin. You are probably looking at about 25 or so at El Sauzal and then again the 27 to 30 at Marlin. That is how we are looking at it. We have some fine-tuning to do on all of those, because we are still pretty new in production at both El Sauzal and Marlin. Okay. Just a clarification on Hathem's last question. My understanding was you were going to expense all that $25 million in exploration development costs? Okay. As well looking at the production and cash cost chart going forward, I was just hoping you could give us some clarification on why in 2007 the costs are going to be going down? What is going to be the big driver there? Sure, it is relative production. 2007 we are seeing more -- of course more ounces helps that of course, but those ounces -- a lot of them are coming out of Sauzal going forward, plus we also see Marigold coming back up to a higher gold production level. So is really a volume impact more than anything else. It varies throughout the mines, specifically by mine, but we are usually in the range of $2 to $2.50 a gallon for diesel fuel prices….. I noticed the '08 number -- you're still looking at 700,000 ounces but if you look at the reserves at San Martin, it looks like you are going to be running out of ore there sometime at the end of '07. Does that reflect the potential for Cerro Blanco? Or do you just have San Martin still in there? That is just what you're seeing going forward there is San Martin just as it runs down and recovers ore or gold off the heaps. There is no Cerro Blanco in the numbers at all. Sure. We're going to be in the mid 70s, 70,000 ounce production level in 2007. Then in 2008 and 2009, we will probably be around the 30,000 ounce mark, 30 or 40,000 ounce mark. I may have missed this, but in the reserves that you have tabulated in the press release, what gold price and what silver price did you guys use? Sure, we didn't do any silver sensitivity, but on the gold side of it, if we are looking just at the surface mineable reserves with the $500 gold price, it's about a 20 or 21% increase overall in the Company. The underground reserves we really have not evaluated. It's not much of a change other than some minor cutoff rate changes. If you look at the Company as a whole, all reserves, the sensitivity is about 16%. Got it. Then I wanted to ask also on your exploration and development expenditures for '06, $25 million, can you apportion the $25 million out to project? Sure. We have combined 15 million at Cerro Blanco and then we have another $4 million for the rest of Guatemala. We have a couple million for Mexico and then for Nevada we have about $4 million. Good afternoon guys, excellent Q4. I wanted to also ask a question about Marlin. The implied silver grade you don't really state the grade for silver unless I missed it, but the grade of silver was would have been fairly low for Marlin through the mill. I know that you were struggling with some of the silver recovery issues. Could you elaborate on what you have under works to get the silver recoveries up? Unless they already have been? Sure, Steve. There's a lot of focus going on primarily on the gold side of course. The silver side of it is going to be a refinement in the whole Merrill-Crow circuit and also leach timing, actual retention timing through the leach tanks. So we are seeing that improve over time and I would suspect that we will get up to that 70, 80% silver recovery here by midyear. I thought it was 80. Steve, early on in the open pit, we have got pretty oxidy ore and saw rheology, the gooeyness if you call it that, of the ore is what effects the recovery rate on silver. And so we have oxide ore in the very top that depresses the silver recovery. We have got 72-hour retention time in the leach tanks. We have got startup issues. So the first little bit you're not going to see the best of silver recoveries, but we anticipate we're going to hit that 80 here pretty soon. Okay, and you don't have -- could you give us, Kevin, I guess the answer might be no, but do you have grade profile for this year for Marlin or do you stick to the ounces for now and look for more details later? I can give you just a generality. We are ore bound in the pit. It's hard to find waste. It's very good grade. Maybe Jim could just give a little more flavor to that, but we don't have any issues with grade there. We knew that in the very beginning, so our ramp up is quite conservative. Jim, stock pile grades or anything like that? Yes, just looking at -- so much of the information we have is on the gold side of it. I don't have a good number for silver this year. I guess either gold or silver, Jim. I guess I'm just trying to understand how is it quite sensitive for us to get this cash cost lower than 196? Obviously there could not have been a heck of a lot of silver credit given the ounces produced were only 156,000. I guess I am just a bit concerned about getting the silver production up and helping getting the cash costs down this year. Yes, Steve and the biggest factor there was a lack of a denominator. We had a lot of costs, but not a lot of production during startup. That will ramp up throughout the year. We're confident in hitting our numbers anyway. Silver certainly is an issue but not a long-term issue. You know you will see that drop during '06. Again the '05 numbers were actually predicated on calculations that we made back really in '04 on the reserves and production and everything and capital costs. So what is going to happen is that you'll see we have actual numbers now going into that and we are projecting that that DD&A should be lower in '06. Our people in Mexico tell me not this year. It is definitely going to flow into '07. So that is what we are looking at. It will be about 28% I believe the rate will be in Mexico at that time. That is the actual cash rate. I just had a question on South Arturo. I noticed you're going to be spending collectively $4 million on the project -- I presume on drilling in 2006. That is -- I guess it doesn't seem too high to me given your partner, third-quarter results really gave it a lot of high profile. My years in the business whenever a company is working on hot properties just at Cerro Blanco they spend a lot of money, a lot more than $4 million. Just wondering what kind of drill results you guys have gotten in the last while because I assume you have got lots of results and just your impressions on the project? Of course that's for Barrick to analyze and comment on. The drilling budget of course is results driven and should we be seeing very strong results, there's a good chance we would move that up. And we're just waiting for Barrick to come back to us and to publicly comment before we get too far out on a limb on Arturo. I guess if it's -- you just said it's results driven -- does that mean the results in the fourth quarter weren't that great or am I making a leap of faith here? The results were reported back last quarter by Barrick and we had a joint venture meeting, established a budget, and it just is what it is, Mike. We will wait for Barrick to comment. First I would like to say congratulations and thank you on a great quarter and a great year. I have three questions I'd like to ask about. Number one is Glamis' position in American capital gold? Number two is Glamis' position in Chesapeake gold? Number three, the status of the Imperial project in California? I'm going to turn that one over to Chuck, because those are all three of his areas. Chuck Jeannes, EVP Administration. Thanks. American gold capital, we have a remaining amount of escrow shares that are released every six months and we've got another release coming up here in a few weeks I believe to a total of about 2.1 or 2.2 million shares. With respect to Chesapeake, we own approximately 5% of the issued and outstanding shares there and I don't have the number at the tip of my fingers, but we had a warrant for 5% of the shares. We took that warrant down and have not sold the shares. Imperial project, as you probably know, we have filed a NAFTA claim and that is slowly working its way through the arbitration procedure. We just found out that the hearing has been scheduled for March of 2007 and in the meantime there's a lot of discovery and pretrial type motion practice going on. Kevin, I just wonder, with the resources coming out shortly, I just wondered if there was any sort of comment you would like to make on them rather than just ordering you up for some clarification, unless it is all footnoted. Yes, you'll see it in the AIF and it has grown. I will just say that. Not by a great amount but net of somewhere around 500,000 ounces of mining. That is a pretty good thing that the actual number has gone up. Other than that, I don't know -- I'm looking around the room to see if anybody has any comments. Do you have any specific questions about it, John? No, that's fine. I was just wondering if there's anything that might be contentious but it sounds as if you had Charlie in handcuffs most of the year while you were busy building the mines. Yes, just a reflection on our strategy. Once again as you pointed out we were building mines, and so while we had a lot of drilling programs going, we didn't need to focus on growing reserves; knew that we were depleting some reserves. We knew about midway through the year we would not be growing the reserves at Marigold for the first time since 1999. In the meantime we are growing from, say, 250,000 ounces per year to 700,000 ounces per year. There's certainly a great need to grow those reserves now for the future and we are on it. We have got a culture of getting things done, so we are quite satisfied we will be able to grow those reserves especially with Cerro Blanco feasibility moving forward. Kevin, just one follow-up on Marigold. Is there any way you can give us I guess guidance for production and costs '06, '07 and '08? We haven't disclosed individual mine production going forward. Our goal is to keep that mine running at the 200,000 ounce per year level; take 0.67 times that for us. Jim, maybe you just give a profile of the number of ounces? Actually we are on a growth profile going forward. We're going to see 10 to 20% increases in our production over the next couple of years. Does that help you out there? Yes. I mean it's the one that we don't have a good sense of comfort with. The numbers that you're looking at now are a good deal different than what I think you were originally looking at when you went ahead with the Millennium expansion. That's why I was just hoping you could provide us with a little more guidance in the ballpark. A little color on that. We made a discovery of a new ore zone where we intended to build a new leach pad, which created very long hulls for us due to permitting issues more than anything else. And in addition to that of course a fair amount of inflation that I guess if we had been smart we would have seen it coming a long ways but here we go. Oil price is increasing, so we've optimized the mine as much as we could. Our early goal was to get this mine up to 250,000 ounces per year. We just didn't get it there this year or next. As far as going forward, we are talking our portion of production of 118,000 ounces in 2006, 133 in 2007. It gets up to 146 in 2008 and unfortunately we used to say $150 cash cost, but that is not going to happen mainly because of the big inflation that we have seen not only in fuel prices, but also spare parts, chemicals, tires, you name it. So we are in that cash cost anywhere from 200 to 250 long-term for this mine. Okay. I appreciate that. Thank you very much for attending. We had a great end of the quarter. We're now working hard on the New Year and look forward to releasing results for the first quarter and speaking to you again in May. Thank you very much. Once again ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

EarningCall_233979

Good morning ladies and gentlemen. Welcome to the Cameco Corporation Third Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Alice Wong, Vice-President, Investor Relations and Corporate Communications. Please go ahead Ms. Wong. Thank you, operator, and good morning everyone. Welcome to Cameco’s third quarter conference call to discuss the financial results and thank you for joining us today. We are pleased to have four of Cameco’s senior executives with us. They are Jerry Grandey, President and Chief Executive Officer; Terry Rogers, Senior Vice-President and Chief Operatoring Officer, Kim Goheen, Senior Vice-President and CFO, George Assie, Senior Vice-President Marketing and Business Development. We’re very conscious of everyone’s time today and I just want to note that we’ll touch briefly on the highlights of the quarter and then get right to your questions. Today’s conference call is open to all members of the investment community and the media. During the question and answer period we’ll take questions from the investment community first followed by questions from the media. Please note that statements made during this conference call by the company regarding its objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of the applicable securities, laws and regulations. The company cautions that such statements involve risk and uncertainty and that actual results may differ from those expressed or implied. Important risk factors are outlined in the company’s annual information form dated March 15th, 2005. With that I’ll turn the call over to Jerry. Yesterday you would know that Cameco announced strong third quarter results. I mentioned in the news release, we’re certainly pleased with the higher earnings from Bruce Power, higher realized uranium prices, and we anticipate that both factors will be significant contributors to our bottom line in the years ahead. I’d like to spend a few moments talking about one of my favourite topics and that would be Cameco’s vision. If you’ve been on this call before, you would have heard many times that Cameco wants to be a dominant nuclear energy company producing uranium fuel and generating clean electricity. We continue to pursue that vision in all of our business units. Rather than run through the many initiatives that are underway at our various facilities, I thought I would review with you today the rationale for the decisions we have recently announced, and in doing so, explain some of the principals that guide our decisions as we move toward our vision. The most significant of these decisions was deciding or declining to participate in the four point two five billion dollar program to increase output and extend the lives of the four Bruce A reactors at the Bruce Power site in Ontario. Investing in nuclear generation certainly falls within our vision and if a different deal would have been available, I may have well have been talking about our new investment. However one of the principals that we follow carefully is that we will only pursue disciplined growth guided by our investment criteria. And after looking at all the risks and all of the rewards including the fixed price revenue stream that effectively would have capped earnings out of the investment, we made the decision to decline the only offer that was on the table. Simply put, it did not meet our investment requirements. The response to that decision from the investment community was overwhelmingly positive. In part I believe it’s because investors know that they can trust us to make disciplined decisions. We’ve don’t this in the past and we certainly plan to do so in the future. We also announced a plan to sell our interest in Energy Resources of Australia. As a leader in the uranium industry, Cameco strives to obtain interest in uranium operations where we can exercise some control and preferably a majority position. When the opportunity arose to redeploy a passive investment more strategically into other operations, we jumped at the opportunity. Finally, Cameco recently announced negotiations to acquire Zircatec, an Ontario based nuclear fuel fabricator. We have not finalized the agreement but we hope to make a decision within the next two months. The reasons for this initiative are clear, we want to grow in the nuclear energy business and fuel fabrication is the only step in the CANDU fuel cycle in which we don’t participate. If this deal closes, we will be part of the entire CANDU fuel cycle from exploration to electricity generation. Opportunities like Zircatec come quite infrequently in the nuclear business and one of our guiding principals is that we will be ready to move quickly when opportunities arise. While Zircatec would not be a large investment for Cameco, we are ready to capitalize on attractive opportunities large or small. We have the people in place and a conservative capital structure that provides the financial flexibility to make this possible. It will not be a surprise or it will not surprise you to hear me conclude by saying we are committed to our vision. And you know we are pursuing this vision with discipline and prudence, positioning ourselves to capitalize on the opportunities that meet our risk reward profile. I will now ask Kim to make a few remarks about our financial results. Kim. Thanks, Jerry, and good morning everyone. I plan to touch on the key results for the quarter, mention a few other important milestones we reached and conclude with a brief comment on the outlook for the rest of the year. Financial results for the quarter largely unfolded as we expected other than when it came to power prices in Ontario where prices were much stronger than we had hoped for. Overall, the results reflected a very good quarter; in fact, our earnings of forty-five cents per share was one of the best quarterly results during the past ten years. Another positive result was our year to date gross profit. All business segments have matched or are ahead of the gross profits generated during the first nine months of 2004. So we’re pleased with the results to this point in the year. Looking at important events in the quarter, we completed the successful debenture offering in September raising three hundred million dollars. Our timing was very opportune as rates were near the low point on the curve. The issue was very well received in the market and the funds were used primarily to repay commercial paper. And as Jerry has mentioned, we are in the process of divesting our six point seven percent interest in Energy Resources of Australia which we acquired as part of the acquisition of Uranerz in 1998. Those proceeds plus the cash from the Bruce A restructuring transaction will be used to increase corporate liquidity in addition to helping fund our near term cash requirement, notably our uranium mine construction projects and the purchase of Zircatec if that proceeds. I know many of you are interested in our approach for employing cash going forward. As we’ve mentioned before, we will focus on three key targets to create and preserve value for our shareholders. First, prudently and patiently growing Camecol into an integrated nuclear energy company; second, maintaining our world-class asset base; and third, distributing cash to shareholders through dividend and our share buybacks when we cannot effectively reinvest. Taking a look at the fourth at the fourth quarter, bottom line results are expected to be similar to Q3 with two significant and compensating shifts within those results. First is the revenue and earnings impact of the large volume of uranium and conversion deliveries scheduled in the fourth quarter and second, we expect our share of Bruce Power’s earnings to decline from the third quarter, even though the Ontario spot price has averaged about eighty dollars per megawatt hour during October. Another major shift in the fourth quarter is that as of November 1, we expect to start proportionately consolidating Bruce Power’s financial results. In the past, we have accounted for Bruce Power using the equity method. The move to this new method of accounting is driven by changes to how decisions will be made by the partners. All key decisions will now require the consent of Cameco, TransCanada and Borealis. As I had mentioned in a previous conference call, this is not that different from the past structure but there are a few added elements that are enough to require the accounting change. Looking ahead to 2006, we expect growing margins in our nuclear fuel businesses driven by a continuation of sound uranium and conversion fundamentals, plus the expiry of older contracts. And at this point, I think it’s worth stating once again and uranium demand is largely insulated from economic cycles. With that, I’ll turn things over to Terry. All right, thank you Kim and good morning to everybody. I’d like to add a bit of colour and context to the information about the operations that was presented in the quarterly news release. I’ll address uranium mining first, talk about development projects and follow it up by fuel services. Uranium mining in Saskatchewan is right on target for the year-end forecast. We will achieve our license limit of eighteen point seven million pounds at McArthur River and Key Lake Mill. We had hoped we’d be able to increase that production this year with our application to increase to twenty-two million pounds but approvals for the increase are still under review with the regulator. The federal regulator is considering the appropriate process to complete its review of potential impact associated with the proposed expansion. Once that process is identified, we will then be in a better position to estimate the time required for the regulator to reach a decision. The Rabbit Lake operation is slightly ahead of target for the year and we expect to achieve plan or slightly above by years end. Exploration in and around Rabbit Lake in the Eagle Point Mine continues to hold promise for us to be able to bridge the gap between the depletion of reserves at Eagle Point and the receipt of the uranium rich solution from the Cigar Lake project beginning in 2009. In the US, our ISL mine at Smith Ranch Highland Complex in Wyoming is falling a bit short of its annual target of one point five million pounds. We constructed new well fields as part of the expansion effort this year and while they came in on time, the flow rate and early head grades have been a bit disappointing. Remedial procedures are underway but we expect to fall short about, and end up with a total of about one point three million pounds from Smith Ranch this year. In Nebraska, Crow Butte Mine will produce as expected, probably exceeding a little bit, just over eight hundred thousand pounds. Onto the uranium mines in development, the Cigar Lake project scheduled to begin producing in 2007 is on track for an on time start although some construction efforts are slightly behind schedule for the moment. Shaft sinking is only slightly behind this schedule and will not be a hindrance to start up. Underground development work that has to proceed the infrastructure construction is the furthest behind schedule, but to mitigate that situation, critical path development is being done on a priority basis and we have divided the plan to continue develop mining while the underground construction is underway. We have been hampered somewhat by available skipping time for development, for taking the development waste to the surface. But we expect we can eliminate this shaft time competition that has been a bottleneck to date. As to the project costs, I’m sure everyone knows there’s a critical shortage of trades’ people due to the high level of activity in the industrial construction sector. We are impacted as are our contractors competing for trade persons against the oil spans and other mine development projects, not only in Canada but also in the western US and as a result, some contracted costs have risen substantially. That same competition for skilled workers is causing some concern at our US operations as well. Higher labour rates have resulted from increased activity in the coal oil and gas activity in the western US and also the cost of chemicals and petroleum related products like well casing and pipe have increased substantially. Consumable products, fuel, propane, cement and other things have experienced substantial price increases in the last year as has fabricated steel. And we use cement, a lot of cement in Saskatchewan not only for construction at Cigar Lake but we use huge amounts of it for backfilling raises and stokes at the other operating mines. In Saskatchewan we have an excellent supplier; however, the cost is increasing due to energy costs in their business. Of course all transportation dependent businesses are too, hurt by increasing fuel costs. So the bottom line of this dissertation is that the Cigar Lake project’s estimated costs have increased to about five hundred twenty million dollars on a hundred percent project basis, about fifteen percent higher than planned going in. The Inkai project in Kazakhstan is going very well. Approval of the final design and environmental impact statement was received in August. We have commenced foundation excavations and some early infrastructure works for the main processing plant. The expansion of the test plant in block two is also underway taking that plant’s capacity to seven hundred thousand pounds per year and we expect that Inkai will come on stream commercially in 2007 at nearly two million pounds, then ramp up to four million pounds in 2008 and ultimately to five point two million. The capital cost estimate of eighty-three million, eight for an allowance of the rising steel prices when that estimate was put together; so this has cushioned us against some of the recent price increases. At this time we are comfortable with the revised estimate but price inflation on all fronts is a concern that we keep our eye on. In the fuel services division we have mixed results from operations. First at the Blind River refinery with production capacity to build inventory and ultimately to produce an additional five thousand tons of UO3 for the Springfields plant, we are ahead of target for the year and will finish far in excess of the original plan at a good average cost. In the conversion business while the UO2 production for CANDU fuel was going well, the start up of the UF6 plant after the summer shutdown did not go particularly well. The main problems had to do with hot, humid weather throughout the summer and with inadequate flooring generation supports making of UF6. Restarting the plant was challenging with material flow and instrumentation issues and personnel heat stress concerns resulting in lower productivity. And once some of those issues were resolved, there were technical issues surrounding fluorine cell performance that limited fluorine generation capability. The causes are being investigated and being improved and fluorine generation capacity is slowly being restored to normal. We’re planning a shutdown earlier next year to avoid the summer heat problems. The shortfall expected this year compared to the original plan will be about nineteen hundred ton. And with that I’ll pass the discussion over to George. Thank you, Terry, and good morning everyone. As was expected, spot market activity in the third quarter slowed considerably from the previous two quarters amounting to about two and a half million pounds. This volume is reflective of both the traditionally slower market during the summer months and the limited quantities of uranium available for spot sale. However, given the large volumes in the first half of the year, spot market activity year to date totals about twenty-three million pounds which is higher than the annual total for any of the last five years. Discretionary purchases, those purchases that are not necessarily for specific near term needs continued at a higher rate than in 2004. This demand is largely due to utility inventory building and trader and investment groups taking positions to hold uranium. The majority of transactions in the third quarter were the result of informal requests from buyers. Sellers continued to increase their asking prices for each successive offer and some resorted to simply bidding the market price at the time of the spot delivery rather than fixing a price at the time of offer thereby retaining market upside. So in summary, despite the reduced level of activity in the spot market in the third quarter, the tightness in supply resulted in the spot price continuing it’s upward trend and the industry average price rose nine percent from twenty-nine dollars at the end of June thirty-one sixty-three at the end of the third quarter. At September 30 th of last year, that industry average spot price was twenty dollars, so year over year it’s increased almost sixty percent. Since the end of the third quarter, the spot price has increased further to thirty-three dollars and twenty-five cents. Looking to the fourth quarter, the level of spot demand is expected to increase from last quarter and will depend upon a number of factors including whether utilities pursue additional discretionary purchases to build inventory as a hedge against further price increases and future supply uncertainties, whether uranium producers continue to make some spot purchases as they did in the third quarter and whether investment funds continue to purchase additional quantities. Moving now to the long-term market, the average of the long-term price indicators ended the quarter at thirty-two fifty, up eight percent from the thirty dollars at the beginning of the quarter. The average long-term price has increased further to thirty-three seventy-five since the end of the third quarter. Term market in 2005 has been extremely active. We now expect long term contracting volume to be well above two hundred million pounds this year, significantly more than the ninety million pounds that was contracted in 2004. This high level of long term contracting also maintains upward pressure on the spot market price. In comparing volume contracted in today’s long term market with that of previous years, one must take into account that contracts have increased significantly in duration. In the past, term contracts were typically shorter in duration, more in the order of three to five years. Today’s market, they are much longer duration, more in the order of ten years or so as utilities look to cover at least some portion of their requirements for the longer term with reliable suppliers. Suppliers, including Cameco are willing to accommodate these buyers to the extent we can obtain market related prices with solid, floor price protection and market upside for alternatively attractive base prices which escalate over time. We expect the activity in the long-term market to continue at a strong pace in 2006. Turning now to the UF6 fixed conversion market, industry average spot prices for both North America and Europe ended the third quarter at eleven fifty a kilogram, down marginally from the end of the second quarter. The slight decrease in the spot market for conversion can be attributed to the form of uranium that buyers looked to purchase in the last quarter. There have been limited supplies of U3O8 available but small pockets of excess UF6 supplies. If a buyer desires to purchase uranium in the form of U3O8 and a seller only has UF6 available for sale, the seller may discount the conversion price in order to complete the sale in the form of UF6. Alternatively, a seller may be able to sell the U3O8 and conversion components separately, again, discounting the conversion to move it at the same time. This activity has been fairly limited and we do not expect it to be a significant factor going forward. In the long term market, the industry average prices increased over the quarter for both the North American and European markets to twelve dollars and thirteen dollars and thirteen cents respectively, increases of one and four percent from the end of the second quarter. In summary, the markets for both uranium and conversion services remain very strong and we see that continuing through the end of this year and well into 2006. So that concludes my remarks and I’ll pass things back to Jerry. Thank you. We will now take questions from the telephone lines. Please be advised that we will take questions from the investment community first followed by questions from the media. If you are from the investment community and you have a question, please press star one on your telephone keypad. If you are using a speakerphone, please lift the handset and then press star one. To cancel your question, please press the star two. Please press star one at this time if you have a question. There will be a brief pause while participants register for their questions. Thank you for your patience. Good morning. I guess the question is for George relating to your strategy in contracting now. You know, when you’re looking at contracts falling off and putting new contracts in place, what are you targeting in terms of, you know, base plus escalators versus market related contracts? Well, Lawrence, overall our targeted split between the two has not changed although, you know, we continually look at it. But it is still, today, generally sixty forty. So sixty percent market related at the time of delivery and the other fixed price. And George, I know this is a sensitive topic, could you give some indication of, you know, what type of terms you’re looking at? And when I say terms, you know, what type of floor prices you’re looking at and what type of ceiling prices you’re looking at? Well what we I think have indicated in the release that generally we referenced floor prices in the mid-twenties, so they’re all of that. And we look to avoid ceiling prices entirely. Thank you. George, another question on the floor prices. You say in the press release that the percentage of price insensitive contracts would not change significantly down to a twenty dollar US price range. For 2006 then, does that mean or can we infer that you believe your floor price on your realized price in 2006 will be around twenty bucks? It just means, Greg, that it’s not sensitive to changes. Remember, we have ceilings and floors in there so it just means the sensitivity doesn’t change. If you go back and look at previous releases you would know that the sensitivity kicks in at certain ceilings. Yeah, as an example, if you had a twenty-five dollar base price, you know, it’s not sensitive down at twenty. So any of the contracts with floors above that level wouldn’t be sensitive at twenty. Okay and for 2006, you had in 2003 and 2004 a number of contracts that ceilinged out at fourteen dollars or so. I would—I don’t have that information in front of me. I would guess that it would not be that significant at this point. Because you know, in 2006 we’re still working off contracts that were entered into, you know, some years ago, 2002 and 3. So I don’t think there would be an exceptionally large percentage of our contracts, market-related contracts that would have even twenty dollar floors in 2006. Again, I don’t have that—I don’t want to speculate or just guess at that price. I don’t have it in front of me Greg. Okay. Can I just ask one further question? At the end of the report you say you agree more or less with the World Nuclear Association’s supply and demand forecast but the only difference in their analysis versus yours is the consideration of prices required to bring on new capacity. What kind of prices do you think are required to bring on new capacity? Well that’s, you know, we really don’t speculate on that and it’s dependent on so many factors, including exchange rates and you know, you have to look at HEU too, new production from (inaudible), Olympic Dam, all the rest of it. So, you know, and Alice is here ready to kick me if I sort of suggest forecasting a price grade so I won’t. We haven’t—the cost base for the shares or the book value of the shares Terence is in our report so we really aren’t going to speculate as to what the proceeds will be. So, you know, that depends on how the marketing efforts go and so on, so I really can’t answer that question until the deal’s done. Yeah, so what we said in the press release is eighty-three million and we expect we’ll be right in that ballpark. Okay. And in view, I mean how would you judge that, um, it’s interesting they’ve opened the marketplace with another competing company in Kazakhstan with respect to the in situ leeching and they’ve got a, from what I’ve seen, quite a reasonable (inaudible) high new market cap. How would you rank your asset value in relation to that? Right. And there’s one public issue right now in Canada which has received quite an attention, and to me, if that’s the guidance, then your asset value in Kazakhstan should be quite extensive, and would you agree with that and use it as a yardstick as a matter of fact? No, I haven’t gone back and done that calculation but I would say that, you know, Inkai is, in our view, quite an attractive property. It was one of the properties that as we surveyed the universe of properties to invest in Kazakhstan, caught our eye. It was one that was undeveloped, which was one of our criteria, and so it’s very difficult for us to do complete comparison but we know that there’s extensive from the soviet era that we continue to confirm as we do our test mining and the work on the development of the new commercial mine. We believe the soviets did a very, very good job in delineating resources and as I have said historically, this is a property that’s got extensive resources even though we can’t show them today on our balance sheets as reserves. We carry about a hundred and fourteen million pounds as (inaudible), but that’s just right around our test mine and our commercial development. So we think Inkai is a very good property and we’ll be there for many, many years and beyond that, I can’t make any comparison with others. Jerry, the fact that the other ones also got some ISL, was it an opportunity for you that you declined or was it too much of open exposure in Kazakhstan that (inaudible) participate as well and be competing with you? We didn’t really have an opportunity in the recent past to pick it up, but as I said, Inkai is a very large property. I think it will keep us occupied for many years, not just in the areas that we’re presently developing but, you know, we are doing and will be doing in future years, additional drilling and test mining in other areas of that property. So I think Inkai is big enough to keep us occupied for a while. I agree, I agree. The, ah, just for us to gage though beyond five point two in the ramp-up process, what do you think in a global sense that potentially Inkai may be? Well there’s no reason why, in the next ten-year horizon you couldn’t double the production above five point two. But that’s market dependent, dependent upon getting permits and regulations, and remember, Terry, we have a forty percent owner or joint venture partner in Inkai and ultimately it’s going to have to be a mutual agreement on just where it goes. Okay. And just, last question on Inkai is that if the production gets ramped up, what does the cost scale look like in terms of the percentage degrees in the operating costs? Yeah, but I mean I’m not talking dollars per pound. I’m saying, from a base of hundred, (inaudible), starting to go (inaudible), how would you define the costs? Well you know, Terry, just because of the economies of scale, the unit cost does go down as production ramps up. If you take a look at where we are today in the test mine and you ultimately project that the commercial production, it’ll go down by probably half. Thank you very much. First I’d like to congratulate Jerry and your team for all the good work you're doing at creating shareholder value. My question is, assets under sixteen, you made positive comments about UEX, a junior installation company where you hold a significant stake. You talked about significant asset resolve at Shea Creek. Since then, more astonishing assets were announced at Shea Creek. So what can you tell us about your involvement with UEX and the Shea Creek prospect to become a major mining, um, in the Athabasca Basin? Bernard, we continue to hold, I think it’s around a twenty-two percent interest in UEX and on certain properties, our geologists provide consulting advice, not on Shea Creek because that’s run by their joint venture partner, AREVA or COGEMA/UEX, and that project is earning by spending money, a forty-nine percent interest. And you’re right; the results have been quite interesting, high grade results over some pretty good intersections and thicknesses. But like any of these exploration plays, particularly in the Athabasca Basin, given the depth and the geologic environment, there’s a lot more exploration drilling that needs to be done before anybody could conclude that it’s a discovery that’s got economic potential. It’s quite encouraging from an exploration perspective, but in the basin over the last thirty years there’s been lots of drill holes that have looked encouraging that haven’t panned out to be full discoveries. So we watch with great interest as they try to put lateral extent on this drilling that they’ve done and vertical extent on it. So encouraging, but a long way from an economic ore body. Thank you. Just a follow up question and unlike Terry, I’ll limit myself to one question. Other income, I guess this is a question for Kim, there’s a write down of portfolio investments around six point three million, just sort of what that is. Thank you. We had a few small investments and general hydrogen and such and another small one that, when we looked at them, they didn’t really pass the test as to keeping them on our books so it was time to take them off. Thanks good morning. A question on the Bruce Power as we look ahead in the fourth quarter. I know that the comments were made that it’s significantly lower earnings there but the spot price as you pointed out, still is holding up in the eighty dollar range and I was just wondering to what extent can you further detail that for us with respect to the impact of the new accounting, the fact that two of the A units that are operating are no longer on a go forward basis I think as of November 1 st. Just what’s going on in the market? I’m trying to get a sense of the ongoing earnings. There are several aspects to that. Certainly you identified that A3 and 4, we no longer have an interest in those units and that will have an impact but there’s also unit B5 that’s on a scheduled outage right now and will not be back I believe until early December. So that has a big impact on the quarter to quarter comparison. Yeah, the distinction between the two really is, we highlighted just so that people aren’t surprised when the revenue and expense lines change but the net earnings impact is no different whether it was proportionate accounting or equity accounting. Thank you. Once again if you are from the investment community and you have a question, please press star one at this time. Yeah, good morning. Within interest and other items you’ve got the foreign exchange loss and losses on derivatives; can I assume that all of those are non cash and that the derivatives are strictly your FX? Okay, and second question, on sort of SG&A and exploration, good operational results, but if you look back over the last couple of years, we’re getting some really substantial creep in SG&A. Can you give us some guidance going forward as to what those numbers should look like and what sort of expenditure rate we should be looking at on an annual basis? Well one of the items you have to pick up and be appreciative of is that in those SG&A items, we have a stock compensation charge and that is a very big impact. Through nine months of this year it’s eleven million dollars and certainly that’s, that’s one aspect of enjoying very high share prices as we are today. So I wouldn’t want that one overlooked. As to other activities, certainly what we’re, built into those G&A costs is a fair bit of business development expenditures and what we’re thinking of doing is pulling that one up to identify for people going forward. It does certainly look like there’s increases year over but we have the creation of Centerra. That is a separate G&A burden that was not there before. We have the stock compensation charges which are a significant item and then again we have the business development activities which have increased and are really buried in there, not identifiable at this point. Super. And last question if I may and this is for George and I apologize, it sounds like we’re beating a dead horse a little bit. But as we get out to ’07 and ’08 and we talk about price insensitive contracts, of those, for 2007 and 2008, the seventy-one and fifty-four percent, how many of those are completely spot insensitive, i.e., you know, you’ve always said that these market related contacts are price insensitive at the spot of thirty-three. What percentage of those have absolutely no relationship to the spot market? Well I’m thinking as we go forward because certainly one of the key challenges that we’re facing is trying to determine what sort of price realizations you deal in there. So if you’re writing long term contracts at this point which would make those completely price insensitive, then I think the market can look and say, the long term contract price is X now plus an escalator, use that as guidance. Would that be appropriate? Well I think the target so far, the target that we’ve had is still in that forty percent fix which would be escalated by inflation. So if you use that in your model, I think that’s probably a safe bet. You know, we are in, even on that side, trying to preserve some upside but that’s a function of how much the market has changed and remember, we’re just into the second year of this changed market. Jerry, on that question then, you know, preserving some upside is an interesting statement given the bullish comments that we continue to hear about the uranium market. You know, why is it not possible within the market to preserve all of the upside? You know, as a leading producer of an exceptionally scarce product, why do we continue to see caps in this market at all? I don’t think you’re seeing caps so much any longer on the market side of the portfolio. We are a pretty significant presence in the market and we think it’s important that we are on that responding to some of the desires for fixed prices as time goes on. But as you point out and we’re continually reviewing that, you know, where does that proper weight between predictability and total exposure to a very thin spot market make sense. We still point out that the spot market is not without risk given the fact that it’s only ten to fifteen percent of the total volume moving and you know, it’s basically our judgment as to where we ought to be in that balance given the risk reward profile and obviously trying to capture as much value as we can and protect it, now, not just three or four years but ten years and in duration in some of these contracts. You know, it’s not, we know that the market’s not unidirectional. It’s not going to go up forever. Understood certainly but I think the agreement from most perspectives is that we have a serious structural problem here and it would be very disappointing to get out four or five years and see contract prices again locked in at half of where the market is. Anyway, thank you very much. Future acquisitions of small exploration or juniors out there, there are a lot of exciting things happening with very, very small uranium exploration companies as far as stock price goes and I wanted to find out what Cameco’s vision is as far as acquisition, mergers and acquisitions in the uranium mining? If you look Robert, historically we’ve been active at acquiring uranium properties and companies engaged in uranium mining. We pointed to Uranerz back in 1998, Smith Ranch, a number of properties in Wyoming and Nebraska. So over the past decade, we’ve been quite active in doing that. We’re at a point, a point now where there’s just a limited number of opportunities because of the lack of exploration drilling that’s gone on for two decades. And the opportunities that we see out there right now are not all that interesting. We obviously continue to watch all the time. And as we talked about it with UEX earlier, those that we think are quite interesting, well we try to engage with. Over time, as you point out, there’s now a lot of junior exploration companies that have appeared in the last two years and they’re spending money. For the first time they can go out and raise capital and take the risk of exploration. We watch them all the time and we’ve got quite a number of experts on our geological staff that have been with us for many, many years and we’re augmenting that group. And so they watch world developments all the time and my guess is that as the juniors succeed in the future and have a discovery that might be interesting, maybe you’ll find Cameco becoming more active. But I’d say that’s several years down the road. We’ve got to get into this next exploration cycle enough that the monies that are being spent produce results. Okay, I know that there’s some recent exploration announcements coming out of Australia that are pretty exciting and a few companies come to mind, Laramide being one. You know, if the political environment changes there, Laramide could become a very exciting company to look at. What is Cameco’s thoughts on something like that? Well as I indicated, we continue to watch and we’re obviously quite aware of the political situation in Australia. We’ve got our own exploration efforts. I think we probably are the biggest explorer for uranium in Australia spending about six million dollars a year and have met here in August with the Australian government and testified before parliament. We continue to watch to see what’s going on and watch the political environment and when we think it’s opportune, then you’ll see Cameco, you know, looking for possible acquisitions. Yeah, good morning. I think you used to provide or just it’s my failing memory that sort of some guidance of how much poundage you actually had under contract and some sort of aspect of when it was rolling over? We had the pounds disclosed at the quarter end, or sorry, the fourth quarter or the year end for, we do that at a year end report, Ian. I believe that in the past we said we had in excess of a hundred million pounds under term contracts, that’s generally what was included. Thank you. We will now take questions from the media community. If you are from the media and you have a question, please press star one at this time. To cancel your question, please press star two. Thank you. Once again if you are from either communities and you have a question, please press star one. Thank you very much. Just a quick question for Terry Rogers, what are the challenges that you’re facing with the processing of the Cigar Lake ore when it comes to the mill head for the Rabbit Lake plant like in terms of diluting the high concentration ore to the mill head concentration requirements? Well Bernard, the ore from Cigar Lake actually goes to the mill at McLean Lake for leaching. The solution coming to Rabbit Lake is the leached product and we start from that aspect at that mill. So it’s no challenge as far as the concentrations at Rabbit Lake. Hi. As a former resident of Port Hope, I followed with interest the story of the slightly enriched uranium project (inaudible) and then the startling announcement (inaudible) with that initiative, and I really just had a question in my mind as to, you talk about the vision of the organization and that. What implication if any does that have for the vision of going forward of Cameco as a uranium (inaudible) and its vision as a company? Well what I just don’t really understand is like there was, it seemed to be a significant project, you made a determination that you could not provide, you required product and time, but what does that mean for the company going forward in terms of its vision, if anything? Not a thing, Tom. We are, as I indicated in my preamble, absolutely dedicated to the vision that we have of being in the nuclear energy business and being vertically integrated, expanding our uranium production. You’ve seen in the last year we’ve increased our inversion capability with the Springfields opportunity by almost half. And that meant almost doubling the amount of UO3 we produce at Blind River operation. So I wouldn’t look at the SEU decision in Port Hope as anything other than a recognition that, you know, given the process that we had to go through and the interest of the community, it was simply a recognition we could not deliver fuel, SEU fuel in time to meet Bruce’s needs and in the meantime, we found some attractive commercial opportunities that could meet the time schedule because they were already licensed and permitted in the US at attractive, economic terms. And in consultation with Bruce, we decided that was proper way to go and meet their needs. So I wouldn’t read anything into it. In fact we’re sitting here right in Port Hope right now having had, yeah, absolutely, having had just a wonderful evening last night with community leaders, the town council, Cobourg, a lot of business leaders and some people that were opposed to SEU. And so we’re with our board of directors here taking a tour of the facility and enjoying the community. I don’t know why you moved away. Why’d you move away? It’s a very nice place. All right, just one follow up then. To say then that there wasn’t a big market, that there was no sole market for this product, is that correct? Good morning. My question is kind of a follow up to the previous question about potential acquisitions. How would you characterize the relative attractiveness or unattractiveness of properties in the United States relative to other geographic areas? I guess if you take a look at our operations in Wyoming and Nebraska, using the in situ leach technology, these are low cost operations. And you know, as long as you can use that technology in the right environment, shallow enough and permeable, then ISL operations, even though their quite low grade can be competitive. When you look beyond that, well you’ve got a couple of categories; you’ve got those that perhaps are co-product with vanadium and as long as vanadium prices stay high, then uranium will be quite cheap. Now there’s a very limited number of those and unfortunately there’s only four uranium mills left standing out of the twenty-six that existed at one point in time. Other properties that you look at in the US that are not co-products were all built in a market environment where uranium prices were, you know, thirty to forty dollars a pound. So you know, you need to keep in mind what the cycle was like, what the prices was like when a lot of the, when the US was producing as it was back in the late seventies, forty-three million pounds a year. Today they produce about two and a half or three. Thank you. This concludes the questions from the telephone lines. I would now like to turn the meeting back over to Ms. Alice Wong for her closing remarks. Okay, well I’ll just interject and thank you all for joining us and Alice says the same thing by the way. We appreciate your interest in Cameco and have a good day.

EarningCall_233980

Welcome to the Dow Jones & Company fourth quarter fiscal year 2005 earnings conference call. Operator Instructions It is now my pleasure to introduce your host, Mr. Mark Donahue, Director of Investor Relations for Dow Jones & Company. Thank you, Mr. Donahue. You may begin. Thank you. Good morning. Welcome to our fourth quarter 2005 earnings conference call and webcast at www.dowjones.com. On this morning's call, Peter Kann, Dow Jones' Chairman, Chief Executive Officer, will touch very briefly on some highlights of the fourth quarter; Chris Vieth, our Chief Financial Officer, will take you through the financial results; and then Rich Zannino, our Chief Operating Officer, will elaborate with operating highlights and our forward outlook. Also on the call is Gordon Crowvitz, Senior Vice President of Dow Jones and President, Electronic Publishing. All will be available to take any questions you may have. For your benefit, a transcript of today's prepared marks will be on our website shortly after the conclusion of this call. Also, this teleconference call will be available by replay starting at 12 p.m. Eastern time today and ending at 11:59 p.m. on February 3rd. To access the audio replay, please call 877-660-6853 and enter our account number 286 and confirmation number 183899. Finally, should you have any questions after the call, please feel free to telephone Investor Relations at 609-520-5660. As we begin our call, I may remind you that we'll make certain forward-looking statements in an effort to assist you in understanding the Company and its results. Actual results may materially differ from those presented here. Additional information concerning risk factors that could cause such a difference can be found in the Company's documents filed with the Securities and Exchange Commission from time to time. Reconciliation of non-GAAP financial measures disclosed during this call are available in our earnings release, which is available on the Investor Relations page of our web site at www.dowjones.com. Thank you, Mark, and thank you all for joining us this morning. Very briefly, our fourth quarter earnings result, that is, before special items of $0.41 per diluted share, was down slightly from the $0.43 per diluted share earned in the year earlier fourth quarter. That said, we were pleased to see improvement during the quarter in "Wall Street Journal" ad linage, resulting in upward revision to our earlier guidance of low to mid $0.30 per share. At Print Publishing, we posted improved ad revenue at both domestic and international editions of the Journal, and that, of course, was driven by positive ad linage increases each month of the quarter. We continue to be pleased with the performance of our electronic publishing businesses in the quarter, with each posting revenue and profit gains. However, those positive results were not quite enough to offset higher newsprint marketing and other costs, in addition to planned spending relating to the launch of the Journal's new "Weekend Edition" and also Ottaway's internet initiative. Chris and Rich will review those results in some detail shortly. As we begin a new year at Dow Jones, my colleagues and I look back on 2005 as a year of bold initiatives, major strategic investments, and sound operational enhancements. Indeed, the year, I think, saw more positive change and more exciting innovation at this company than any that I can recall, from the acquisition of "MarketWatch" to the launch of "Weekend Edition;" from the repositioning of our international editions to the Ottaway internet initiative I mentioned before; from the announced redesign of the Journal to significantly accelerated print online integration, I believe we have set the stage for a future profitable growth. In closing, as previously announced, Rich Zannino is going to assume the CEO role and responsibilities next Wednesday. All units and functions of the Company are going to report to Rich. He will report to the Dow Jones Board of which I will remain Chairman until April 2007. I believe Rich has your full confidence and he certainly will have my full support and that of the Dow Jones team as he leads this company forward. I assume this is the last time I'll be participating in these calls. So I just want to close by thanking all of you for your thoughtful analysis and also, on occasion, your constructive criticism over these past 15 years that I have had the privilege of serving as CEO. And with that, I'm going to turn it over to Chris for a financial review. Thank you, Peter, and good morning, everyone. This morning I'll provide some additional background on our fourth quarter and full-year financial results which we reported earlier today. Building on Peter's comments, we closed the fourth quarter 2005 with some nice momentum in Journal advertising, which drove EPS above our original expectations to $0.41 per share, before special items, compared with $0.43 last year and $0.40 at first call. During the quarter we recorded special items netting to a gain of $0.08 per share as a special gain of $0.11 related to favorable resolution of federal tax matters as offset by a charge of $0.02 per share for restructuring at Factiva and $0.01 for accretion of discount on a contract guarantee obligation. For the year, total revenue increased 6% to $1.8 billion, and earnings per share before special items from $0.98, compared with $1.21 in 2004, as profit increases at electronic publishing were not enough to offset print advertising revenue declines and "Weekend Edition" spending at print publishing and investment spending at Ottaway. Turning to our operating results, total company revenue was up 10% in the quarter to $482 million, driven by the acquisition of "MarketWatch" and a 5% gain at print publishing along with continued strong organic growth at consumer electronic publishing and indexes, and solid gains at Newswires. Fourth quarter operating expenses increased about 14% to $433 million. "MarketWatch" expenses represented roughly 4% of the increase, and "Weekend Edition" accounted for about 5%, with 2% for increased newsprint and severance costs and all other expenses up about 3.5% to last year. We ended the quarter 2% above our 12% total expense growth guidance, roughly $7.5 million in the quarter. This was made up of $3 million for severance, with $2 million for print delivery and volume variable expenses, $1 million of increased circulation-marketing, and $1 million for higher incentive expenses. For the year, total expenses were up 9%, with about 5% related to spending for "MarketWatch," 3% for "Weekend Edition" and newsprint, leaving other expenses up less than 1% to last year as we continued to control costs across the portfolio, investing savings of print publishing into growth initiatives at our other two operating segments. Fourth quarter operating income declined $9 million to $50 million, and operating margin was 10.3% versus 13.4% last year. For the full year, operating margins were 7.5% versus 9.9% in 2004. For the quarter, excluding the $2.1 million restructuring at Factiva, pretax equity income was $9 million versus about $1 million last year, driven by the elimination of international television losses, as well as improvement at Factiva, STOXX, and "Smart Money", which more than offset reduced equity earnings resulting from the sale of SUSI. For the year, equity earnings increased nearly seven-fold to $16 million. Net interest expense increased $4 million in the fourth quarter and was up $15 million for the year on increased debt levels associated with borrowings to fund the "MarketWatch" acquisition and higher interest rates. For special items, our effective tax rate was 37.4% in the quarter and 38.4% for the year, versus last year's rate of 39.7, driven by the benefit of the deduction for domestic production under the American Job Creation Act plus elimination of FF SUSI, which was subject to a 65% effective tax rate. We're planning for a tax rate of 39% for 2006. Looking at some other key figures, our fourth quarter ending head count totalled about 7,500 and was flat with last year's fourth quarter, excluding employees associated with acquisitions. Total newsprint costs in the quarter were up roughly 22% with consumption of about 6%, and our average cost per ton up about 15%, with the increase in prices reflecting the $25 per-ton increase pushed through in the quarter, along with a catch-up on buying around of price increase in the fourth quarter of 2004. We finished the year with newsprint expenses up 10% on a 2% decline in consumption and a 12% increase in prices. For 2006, we're budgeting for a 12% increase in average prices. Capital expenditures total $27 million in the quarter, for a full year total of about $65 million versus $76 million last year. In 2006, we're planning capital spending at $100 million, with $33 million of the increase directed to configure our 19 presses to a 48-inch web width. In addition to some exciting content and format improvements, this project will launch in January 2007 and will generate P&L savings of more than $18 million per year. Appreciation and amortization totaled $28 million for the quarter and was up about $3 million for the year to $108 million, with higher expense from acquisitions at electronic publishing and initiatives at Ottaway offset by reduced depreciation on lowered capital spending at print publishing. In 2006, stock option expensing will cost us about $0.04 per share ,or about a penny a quarter. And lastly, our balance sheet and cash flow were strong, and we closed the quarter with a cash balance of $11 million and debt of $472 million, versus a debt level of $511 million at the end of last quarter. We began the year with $146 million of debt and incurred $439 million to fund the "MarketWatch" acquisition. During the year, we generated $58 million of excess cash flow after capital investments, dividends, and all other outflows, which we combine with $48 million of proceeds from asset dispositions and $7 million in cash to reduce our debt balance by about $113 million. Our absolute debt levels are still a bit higher than we would like, particularly given the currently depressed levels of print publishing advertising revenue, and as such we're planning to direct our excess cash flow in 2006 to further debt reduction. Thanks, Chris. Good morning, all, and thanks for joining us. We're pleased to see the beginnings of a payback on our efforts to overcome this difficult print advertising environment. We're tightly controlling costs, improving quality, successfully investing in bold new initiatives, and sharpening our execution to fuel our future growth. Early evidence of this payback is found in our fourth quarter results where total revenue increased just over 10%, driven by a 9% increase in advertising revenue. While total expenses excluding special items were up 14%, this was mainly due to investments in long-term growth initiatives, mainly "MarketWatch" and "Weekend Edition," and as Chris noted, comparable expenses were up only 3.5% in the fourth quarter. As a result, total operating income before special items declined 15%. Excluding "Weekend Edition"' dilution and the severance charge, the decline in operating income was only 4%. Adding in substantially improved equity earnings, we posted a 5% decline in EPS before special items in the fourth quarter. If we were to exclude $0.05 of dilution from "Weekend Edition," and $0.02 for the severance charge, EPS would have increased 12% in the quarter. In print publishing, total revenue in the fourth quarter was up 4.7% over 2004 on a 5.8% increase in ad revenue. Total expenses were up 15.4%. However, this increase was driven by "Weekend Edition" expenses, which comprised 8% of the increase; increased newsprint prices, which comprise 2%; and severance expenses which comprised 1%' with all of the costs at print publishing up a more modest 5% in the quarter, which was driven mainly by higher circulation, marketing, and promotional spending, which resulted in large part from the timing of spending this year compared to last. This all netted to operating income of $4 million in print publishing, down from $26 million around last year. Bridging this drop, about $7 million was from anticipated "Weekend Edition" losses; $6 million from timing of circulation of promotion marketing spending; $3 million from severance; $4 million from higher newsprint prices; with a balance due to remaining expense growth of 2%, exceeding flat revenue growth, excluding "Weekend Edition." During the quarter, we posted revenue growth at all editions of the Journal. We're off to a great start with "Weekend Edition," which is a success on every level, pleasing readers and advertisers and beating our bottom line expectations. We've conducted four nationwide reader surveys and reaction has been overwhelmingly positive. More than 90% of those who received "Weekend Edition" read it, and virtually all expect to continue to read future editions. They're spending an average of 51 minutes reading it, consistent with the 54-minute average weekday reading time. Nearly 60% of readers are sharing it with someone else at home, extending our readership and advertising reach. About 75% of readers agree that "Weekend Edition" helps them make more informed purchasing decisions and a majority are reading it before noon on Saturday, allowing our consumer advertisers to reach our affluent audience where they most want to reach them, at home on the weekend, and reach them before they make their weekend shopping decisions. It is no surprise then that advertisers are best attracted to "Weekend Edition" in increasing numbers. More than 360 advertisers supported "Weekend Edition" in 2005, with 55% of them new to the Journal. About 65% of the ad revenue in "Weekend Edition" are from consumer ads, and only about 35% of it is shifting from the weekday editions of the Journal Financially, for the full year 2005, "Weekend Edition" was dilutive to EPS by about $0.11 per share, better than our original expectations for dilution of $.15per share. Beyond "Weekend Edition," for the third consecutive quarter we increased circulation revenue at the Journal, and for the second consecutive quarter we increased advertising linage. In the fourth quarter, we posted an 8.1% gain in linage, with increases in each month capped by a 17% increase in December. Looking at the Journal's key advertising categories in the fourth quarter, all categories were up with the exception of finance financial, where linage was down 14.9% on declines in wholesale and retail advertising partially offset by an increase in tombstone advertising. At this time, it looks like the trend here will improve in the first quarter, with linage about flat and revenue up slightly in our financial category. Technology linage was up 3.2% in the fourth quarter as strong gains in office products and communications advertising were partially offset by declines in hardware and software ads. We're expecting tech linage in revenue to be up again in the first quarter. In the Journal's general advertising category, which includes both B2B and consumer advertising, linage was up 12.5% in the third quarter. We posted a 46% increase in general B2B advertising due to increased insurance, professional services, corporate, and media advertising. We expect general B2B advertising to be positive again in the first quarter 2006. The Journal's consumer ad linage was down 2% in the fourth quarter due to a decline in our auto category, partially offset by gains in travel and luxury goods advertising. We expect to post a gain in consumer advertising in the first quarter of 2006 as the auto category strengthens. In classified linage in the quarter, the Journal posted a 22% gain driven by continued strong increases in real estate. We've had a great run here, but expect to see these gains moderate to the low-single digit range in the first quarter as residential real estate advertising softens. While this will dampen our overall linage gains, the impact on revenue will be muted as our classified real estate ad prices are the lowest of any of our advertising categories. Color advertising pages were up 23% in the quarter, and color premium revenue increased 37%. However, the heavy mix of these lower-yielding classified ads resulted in the 2.5% decline in overall advertising yield at the Journal. As mentioned earlier, our focus in 2006 will be less on driving increases in yield, as we've done for the past two years, and more on driving increases in revenue. Price matters to our clients, and with our 80-plus percent profit margin on incremental ad revenue, we have many opportunities to profitably capture market share by focusing on relative price value with our clients. For the full year, Journal linage was down 7/10 of a percent; financial advertising linage was down 14.9%; tech was down 8.1%; and consumer was down 5.8%, while general B2B was up 13.2% and classified increased 12.4%. We saw an improving linage trend in each quarter of the year. While the first quarter was down 8% and the second quarter was down 6%, the third quarters was up 4% and the fourth quarter, again, was up 8%. We're successfully reinvigorating our Journal ad, sales, and marketing team and ramping up our corporate sales efforts. This has driven the improved trend and helped the Journal take meaningful market share in both B2B and B2C print ad categories in the fourth quarter and year. In 2006, we're continuing to strengthen our ad sales efforts with increased print online selling, news sales leadership, and a new, category-focused organization structure, including an even greater emphasis on consumer advertising, a new rate card that better rewards higher spending clients, and clearer recognition of relative price elasticity and our ensuing willingness to use relative-price value as a weapon to win incremental business from the biggest spending advertisers. Elsewhere in print publishing, at Barron's, total ad pages decreased 10% in the quarter while ad revenue declined 7%, mainly due to declines in automotive and financial advertising. Internationally, on October 17th, we launched new editions of the print Journal in Europe and Asia. These editions have been redesigned with tighter packages of global news of interest to global business readers and a more convenient, easier to read, compact format. In a bid to capture more readers and advertiser as users of both our online and print channels, we have also fused together our print and online efforts through greater content linkages and bundled subscription and ad sales offers. The repositionings should improve annual operating profits by about $17 million, mainly from reduced cost, but it is also driving increased revenue as evidenced by a 21% increase in advertising linage at these editions with ad revenue jumping by 29% in the quarter, driven by gains in general, technology, and classified advertising, modestly offset by a decline in financial advertising. We expect these gains to continue in 2006. Moving on to electronic publishing, we had a terrific fourth quarter. Total revenue increased 33% to $134 million; operating income climbed 86% to $29 million; and operating margins increased more than 600 basis points to 22%. These gains were driven by the very successful acquisition of "MarketWatch", strong organic revenue and profit growth at consumer electronic publishing and indexes, and solid gains at Dow Jones Newswires. At Newswires, revenue was up 6% to $68 million in the quarter on gains and international and domestic operations, as well as at our Dow Jones Financial Information Services unit. Our indexes ventures business again posted a solid revenue gain in the fourth quarter up 21% to $18 million, driven by continued strong growth in assets underlying many of our indexes. At Consumer Electronic Publishing, fourth quarter revenue increased 117% due to the acquisition of "MarketWatch," together with very strong organic revenue growth at the online Journal. Paid subscribers to Dwj.com at the end of the fourth quarter were a record 768,000, up 8% over the fourth quarter 2004. We're thrilled with our acquisition of "MarketWatch," and it is exceeding our expectations strategically and financially. We have recast CEP's 2004 revenues to include "MarketWatch's" 2004 publicly reported revenues. On this recast basis, CEP's online ad revenues for the fourth quarter were up 11%, and its total revenues increased 8%. For the full year, online ad revenues were up 16% and total revenues up 10%. These results reflect very strong online ad revenue gains at our legacy CEP business, and more modest revenue gains at "MarketWatch," which results have been dampened by integration issues including loss of key sales executives earlier in 2005, a new joint selling approach aimed at increasing "MarketWatch" ad yields, and consolidation among a number of online brokerage customers. These issues are mainly behind us, and we expect to post double-digit ad gains at both "MarketWatch" and legacy CEP in 2006. Bottom line, the combined CEP and "MarketWatch" has far exceeded our original profit expectations for the fourth quarter and full year 2005. Before moving off of CEP, we would like to note another online success story. We set up Barron's online as a separately paid site in January 2006. Previously,, it was accessible for free through a paid subscription to Wsj.com. In just two weeks since the separation, we've generated about 45,000 paying subscribers to Barron's online, the vast majority of whom paid an incremental $20 to add it to their Wsj.com subscription, proving once again that online users will pay for valuable content, giving us yet another online revenue stream and enabling us to further monetize our very valuable Barron's brand. At Ottaway, fourth quarter revenue was up slightly to $88 million, driven by a 1% increase in ad revenue. Linage was down 6% in the quarter as a 19% decline in auto classified could only be partially offset by a double-digit gain in real estate advertising. Operating expenses increased 4.3%, mainly due to 13% higher newsprint prices, higher employee and print delivery cost, and investments in our new Ottaway-wide internet initiative and content management system, which helped drive a 34% increase in Ottaway's internet ad revenues in the quarter. As a result, operating income declined 11% to $21 million, and margins declined 300 basis points to 23.6%. Ottaway's fourth quarter and full year performance reflect industry-wide difficulties, yet its operating margin remains among the highest in its peer group. Nonetheless, we're very committed to increasing Ottaway profits in 2006. Looking forward, as we start 2006, the global print ad environment remains uncertain. Advertisers continue to decide their spending close to actual publication dates, making predictions difficult as ever. Looking at the first quarter 2006, we're estimating that Journal advertising linage will increase in the mid-single digit percentage range with modest gains in tech and financial advertising. Together with the full quarter of "Weekend Edition," a 2.5% increase in average ad rates, continued strong growth at CEP and mid-single digit growth at Ottaway, this implies an upper-single digit percentage increase in total revenue in the first quarter 2006. Total operating expenses will be up about 9%; however, this includes 4% for planned additional expenses for "Weekend Edition", 1% for a full quarter of "MarketWatch", 1% for a 14% increase in newsprint prices and stock option expensing. This leaves remaining costs up only 3.5% in the first quarter of 2006 over the first quarter of 2005, rolling in $3 million more in equity income, increased interest cost due to 159 basis point increase in interest rates and a 39% tax rate, results in first quarter 2006 EPS before special items in the low teens, which is in line with consensus estimates and above last year's $0.11 per share. Before about $0.06 share per dilution and $0.01 from stock option expensing, EPS before special items would be around $0.20 per share versus last year's $0.11. For the full year, we'll continue to keep a tight lid on spending. While 2006 expenses are planned to increase about 6%, 2% of this comes from a full year of Weekend; 1% comes for the $9 million of launch costs associated with the reduction in web width at the U.S. print Journal; another 1% from a 12% increase in average newsprint prices; and stock option expensing. That stock option expensing, as Chris noted, will cost us about $0.04 per share for the year. This would leave comparable expenses for the full year of 2006 up only 3%. This 3% increase in comparable costs comes on top of 2005's 0.9% increase in comparable cost and 2004's 0.8% increase. We feel this proves our ability to hold on to the bulk of the hard won cost reductions achieved in 2001 through 2003. And looked at another way, it means we funded well in excess of the incremental annual expense of "Weekend Edition" and "MarketWatch" with cost reductions and cost control. In print publishing while we're not providing specific revenue guidance, we're optimistic that improvements already in place for 2006, including a full year of "Weekend Edition," continued growth in color advertising, and a resumption of consumer ad growth, together with the positive trends we saw coming out of 2005 and seen into early 2006, should drive an increase in print publishing revenue. We project total expenses in print publishing to be up mid-single digits in 2006 with about 80% of this increase coming from the full year cost of "Weekend Edition," 12% higher newsprint prices, and the launch costs associated with the reduction of web width, leaving an increase of less than 1% in print publishing cost for the full year 2006. We expect that "Weekend Edition" will be about $0.15 dilutive to EPS in 2006, which is slightly higher than the $0.11 dilution in 2005 and also slightly better than our original expectations. In electronic publishing, we expect revenue to increase by mid- to upper-single digits as double-digit growth at CEP will be moderated by a low-single digit increase at Newswires, driving margins up to the 23% range. Expenses in EP will be up about 6% in 2006, including a full-year of cost for "MarketWatch" and investment in profitable organic growth initiatives at both CEP and indexes. At Ottaway, we're projecting revenue to increase in the mid-single digit percentage range, with expenses up a bit more due to higher newsprint prices, higher pension expenses, and investments in new growth initiatives. As a result, we expect operating income to be up slightly, and operating margins to decline to just under 23%, though, again, remaining in the top tier of the community newspaper peer group. Below the operating line, we're projecting our equity investments to be about flat as the elimination of a full year's of losses at CNBC International is offset by a change in intercompany payments at Factiva that shifts income from Factiva to its parents, and lower profits at STOXX, which is coming off of a very, very strong 2005. Net interest expense should be about $19 million. Our effective tax rate will be about 39%, and diluted shares outstanding should average about 83.6 million. We're budgeting $100 million for capital expenditures, as Chris noted, which is up from 2005's $65 million to about $33 million for our web width reduction project, which is expected to save more than $18 million per year beginning in 2007 in operating cost. And finally, we project depreciation and amortization expense to be about $105 million, down a bit from 2005's $108 million. In closing, I would like to say how honored and excited I am being named the next CEO of Dow Jones. Over the next few months, I'll be working with our top team and the Board to strengthen our leadership and organization structure, enhance our strategies, improve our management processes and execution, and identify and execute an even bolder slate of strategic initiatives to accelerate our revenue and profit growth, all with the aim of creating the most value for our shareholders, customers, and employees. In the meantime, please be assured that we'll continue to uphold our core values, aggressively control everything we can, invest wisely, and successfully execute on the many bold and exciting initiatives already underway. And finally, on both a personal and professional level, I've been privileged to work with Peter Kann for the past five years. He has been a wonderful mentor, leader, and colleague, and I'm grateful he will continue as Chairman of Dow Jones. With that, we'll turn it back to Dan to open the phone lines for any questions. Hi. Good morning. Thank you. Peter and Rich, just to starts, congratulations and best of luck to both of you. Can you just talk about single copy sales for the Saturday Journal? How steady have they been since the launch, and how do they compare to the weekday edition? They've actually been quite steady since the launch, although, as one might expect, they're quite a bit lower than the weekday edition. A lot of copies, we have about 150,000 single copy sales Mondays through Friday, and we're running a bit under 100,000 for weekend. As you might imagine, many single copy sales are done Monday through Friday are bought by commuters on their way to work in the morning, and without that commuter traffic on Saturday, that basically explains the difference between Monday to Friday and Saturday. Ok, great. One other quick question. I think you kind of touched on this, but related to the Barron's product, I think you've also over the past few months increased the price of the online Journal. What kind of revenue impact are you assuming for '06? John, the most significant driver of circulation revenue increase next year will be based on the significant price increase, and as that gets rolled through all of next year, we expect to continue modest growth and circulation for the online Journal next year. I would note, by the way that the net increase of 56,000 subscribers to the online Journal in 2005 was the largest calendar year increase in online Journal circulation since 2001. So, we are budgeting modest circulation volume increases, but significant revenue increases based on the price increase. And of course, the Barron's online revenue stream really should be viewed as a new incremental revenue stream now that we've separated the two products and are charging for them separately. Thanks. To follow up on the domestic circulation revenue, you had fairly good numbers. Is that really all because of the weekend Journals or anything else going on that front, please? Steve, I think what we're seeing in the last couple of quarters is last year's price increase burning all the way through the file. And for the first time in some time, we've been net realizing the value of the price increase; i.e, we haven't been giving it away by having to discount new acquisition copies, so we're very encouraged by that. And clearly, "Weekend Edition" is helping, because as you all know, we did not raise subscription prices by adding the sixth day of Weekend, and readers are seeing a ton of value in it and have not had to pay for that value, so that's definitely helping our acquisition and renewal rates. Lastly, margin goals, you mentioned, I think, was 23%, Gordon, for electronic publishing. You had a much better increase this year. You went through quickly a couple of reasons. I guess I would have thought it might be a little bit higher than that. Maybe just go over some factors, maybe they're not getting it to jump up because there is a lot of leverage in electronic businesses that you have. I think these are very fast-growing businesses at 23% or even the current rate, we're way at the top of our peer group in terms of operating margin. A couple of things just to keep in mind during '06, we're continuing our Dow Jones Newswire solutions initiative, this is productizing of Dow Jones Newswires. We're very optimistic about the future of that project and our ability to add a lot of value by delivering our content and context. That's going to be a very strong driver, I'm sure, for Dow Jones Newswires going forward. So there are investments that we're making in those businesses to continue the top line growth, and I think 23% margin is pretty good in that industry given the mix of products that we have there. Thanks. Gordon, the 11% pro forma ad revenue growth you saw for the consumer electronic publishing in the fourth quarter, relative to what's happening in the internet ad market it actually seems kind of light. Can you talk about that? Yes. I think Rich touched on this a bit. We had extremely strong, very much in line, or even maybe a bit above what you're hearing from some of our peers at the legacy business, the online Journal business….. No. The big issue for looking at our all-in online advertising revenue really is one category, which is the broker site category, which is very important for "MarketWatch." It's historically been by far the leading category. As you probably know, over the last 18 months there has been a lot of consolidation among discount brokers, and when that happens, they usually cut spending. That category, we think, in terms of consolidation, is now stabilized. We're seeing a lot of strong need for the remaining players to brand the new entities that they've created. We see that in our bookings already in 2006. So we're very optimistic that we're going to have very strong double-digit growth across all of our properties, "MarketWatch," online Journal, the others, in 2006. Peter, I might, it's Rich, I might elaborate on Gordon's "no" to your question. It gets very, we've totally integrated the sales organizations at CEP so "MarketWatch," online Journal, Barron's online, and all of our verticals are being sold by one sales organization. So each rep reps all of those brands and sells them together. So for example, and we've been very successful in upselling "MarketWatch" clients to the online Journal, so to the extent we upsell a client from "MarketWatch" to the online Journal, who do you want to credit the revenue to? Do you want to credit it to "MarketWatch," who may have lost a bit in the upsell, or do you want to credit it to the online Journal? So we have issues like that, in terms of splitting out the revenue between "MarketWatch" and legacy CEP. We have similar issues on the cost side, where we've basically integrated from literally from top to bottom the cost structures, and at a certain point, the effort in keeping them separate is not worth it, because it is not how we're running the businesses. We're running the businesses on a combined basis, so we're looking at them on a combined basis. I just wanted to elaborate a little bit on why it is difficult for us to break those numbers out. We expect to be at least in line with what you're seeing from the third party analysts. In terms of growth, we are seeing strong demand for online advertising. Great. Last thing, Rich, the linage guidance for the first quarter of mid-single digit might imply a little bit of a deceleration from the fourth quarter. Is that meant to be the message, and is there anything specific that would drive that? I don't think that's meant to be the message. We're sitting here in the third week of January, and as we've discussed on previous January conference calls, first quarter is a difficult month, quarter to predict, because the business tends to build even later in the first quarter as ad buyers finalize budgets through the month of January and release money through the month of January. So based on our best visibility right now, that's our best estimate of what's happening in the first quarter. To build a bit faster, that we can certainly do better. We don't think it is going to build any slower than that. Just building off of Peter's question, I guess, looking at the comparison, by your own acknowledgement, it is one of the easier comparisons. And given some of the notable big branding campaigns that have started the year, whether it is AT&T or Intel, I guess I'm surprised, also, by that guidance. It seems fairly muted. And then I have a follow-up question. Well, how is January doing? Presumably, you face the same exact issue every year in terms of the buyers of advertising with their timing of their budgets and everything else, how does January look? Okay. And then I'm just wondering on a couple of items. There has obviously been a decline in Barron's linage, and I think you would have expected some of that with the "Weekend Edition." How is that tracking relative to your own expectation, and how is that tracking as you enter the year? And then on the community papers, given the linage decline in the revenue increase, is there a small acquisition or one that is worth mentioning that's in there that is bridging the gap between the decline in linage and the revenue gain? On Barron's, we've actually only lost one client at Barrons as a result of "Weekend Edition," and that was diminimus dollars. And so it is really not "Weekend Edition" which is adversely affecting Barron's. If you look at the "Wall Street Journal" advertising linage for the fourth quarter and the full year, it was down about 15%. And if you think about the composition of Barron's advertising, it is predominantly financial advertising. So it is just hitting Barron's harder because Barron's doesn't have the diversity of its ad base. It is working on it, but it doesn't have the diversity of its ad base to offset the 15% decline. You might recall Barron's, I think it was down 25% in the third quarter, so being down 10 in the fourth is a bit of an improvement in the trend. The team at Barron's's is optimistic that they will get back posting gains again in 2006 like they did in 2004. Based on what they're seeing in the financial pipeline and also based on going after some non-endemic categories like technology and auto, and also we started a couple of conferences in 2005. We'll probably do four in 2006. And that will also help advertising as we sell sponsorships to those conferences. At Ottaway, the difference, when you go from linage to, in reconciling from linage decline to advertising revenue increase, there are really two big items; one is ad rate increases which, Ottaway has put through and managed to get to stick, and the other is preprint revenues. As you know, there has been a trend towards people pulling back on display advertising and replacing it with inserts, and so Ottaway's seeing some nice gains there. So those are, and the other piece of it would be the internet, which was up, I think we said 34% in the quarter. So that would basically be the reconciliation. That's helpful. I guess, two other really quick ones, if I could. On the cost side, you seemed to be able to pull out some of the incremental costs that you incur related to "Weekend Edition" and "MarketWatch." I'm wondering if there is a way, and I think you have actually done this in the past, to give us a sense of what the organic revenue increase could have been absent "Weekend Edition" and "MarketWatch" ? And then, the equity line, while you gave very helpful guidance, I'm just wondering if you could give us any sort of quantification of the bigger pieces of what's in there at this point on an annualized basis, or any sense of what the seasonality might be through the year? I think on the equity question, we're basically saving $16 million or so by exiting CNBC International. We got half of that saved in '05, so we'll get the other half in '06. And offsetting some of that saved in '06 is a change we've made in some intercompany payments between Factiva and its parents, i.e., us and Reuters, where we're basically flowing more money back to the parents through our operating income, still well in line with market rates, so we're not doing anything that's beyond arm's length in market. But that basically, so it flows to us in operating income, mainly in the electronic publishing unit, and it reduces Factiva's earnings, which we see as a reduction in our equity income. The second item that adversely affects us is STOXX had a really, really strong year in 2005, and we're not going to anniversary that in 2006, or at least it is not in our budget to anniversary it in 2006. The third item would be we have a small, Russian joint venture that we own a third of, Vedemosti, and Vedemosti is going to make, it's actually going to put out a "Smart Money" magazine in Russian, in Russia. And so there's some start-up costs. Vedemosti is very, very profitable, very, very successful, so a natural extension is to do a business magazine, a consumer/personal finance magazine. And so they've done a license with "Smart Money," and there's some start-up costs with that. So based on all of that, I think we'll, we're projecting equity income to be flat for the year. We said it would be up $3 million, roughly, in the first quarter, so that would mean there could be some leakage in subsequent quarters, mainly in the back half the year, because that's when we got the CNBC International saves in 2005. So it would be up against those in the back half of the year. Right. Lauren, just reiterating what Rich said, in the first half and then down in the back half, cycle through CNBC, core revenue, excluding our estimation of "MarketWatch" revenue and "Weekend Edition" in the fourth quarter was up about 3%. And that's a rough number for the reasons that we mentioned in the answer to Peter's question, on splitting out "MarketWatch" and legacy CEP. Hi, it's Dave Lewis for Fred. Congratulations, Rich. Two quick questions, one is Ottaway. I know you guys have just reinvested a lot there, but with consolidation picking up in the industry, is that an asset that you guys would ever consider divesting? And two is the touch points. Can you just address the initiatives and opportunities with regards to media devices, bringing the content to other wireless devices? Thanks. We're not a seller of Ottaway. Ottaway throws off substantial cash flow and we enjoy that cash flow. It helps us reinvest in future growth initiatives. It helps us pay the dividend. And at this time, Ottaway is worth way more to us to keep it than it would be to sell it. We're optimistic about the initiatives Ottaway has in the pipeline for the future, in terms of its local media, franchise extensions; in terms of the internet and some other initiatives that are going on there. So we're a keeper of Ottaway. Dave, just on the electronic displays I think you were asking about, our strategy is to monetize our content wherever, however, whenever people want it. And we've been engaged in all forms of new media well beyond web publishing for years, starting with the e-books and that sort of thing. We're very active in office displays. We have a Blackberry edition of the online Journal that I encourage all of you to subscribe to if you haven't yet. And we're increasingly active on cell phones, especially through our "MarketWatch" brand. I cite, for example, the launch with Verizon Wireless; they launch "MarketWatch" on-demand short content programming for its VCAST multimedia service; that's a combination of audio and video. We're very optimistic about that. It is not a huge part of our business, but it is certainly a growing part. Hi, just two questions. First, I appreciate that it is hard to unscramble the egg at CEP, but if the egg is the information you provided us suggested that "MarketWatch" was flat to down on a year-over-year basis, and it sounds like there were some issues there, they have been resolved. I was just trying to understand if they have been completely resolved, and should we see some still muted revenue growth in the first part of the year? Maybe some acceleration toward the back end of the year in 2006? And then who are you most competing with when you go in for RPs for the online side? Is it Yahoo Finance? I mean, just give us a sense of your market share in the online space as well. And then the other question is just on the CapEx side, will you be done with the reductions in '06; i.e., '07 we should see back to normalized levels? Thanks. Sure, Christa. I think Rich gave the reasons for the somewhat slower out of the gate ad sales at "MarketWatch" during '05. Shortly after the acquisition, we did have a lot of turnover, especially on the West Coast for "MarketWatch," and that slowed down ad sales. We were not signalling numbers quite as you've described them; but they were not growing as quickly as we would have liked and hoped. I also touched on the broker website issue, which was significant in '05 for "MarketWatch". There are a lot of reasons we're optimistic about '06. We're fully staffed. As I mentioned earlier, we think the online broker market is going to be much more stable and healthy for us. I think I might, because you may also have questions about this, to give a little bit of context to our optimism about online growth opportunities in '06, if you look at our usage statistics and statistical information that we've disclosed, you'll see that we ended '05 at about the same number of page views, just under 300 million, as we began '04. And, likewise, the number of unique visitors was flat, about 3% less than the previous year, and let me explain why that was. The way we think about these metrics is really how we think about monetizing our page views, which, in the online world, of course, is how you generate revenues. So 300 million page views, we had a lot of inventory during 2005. We were very pleased that "MarketWatch" increased its page views per user, per month, by about 18%, and its pages viewed per visit by about 15%. So as we go into 2006, given the demand that we see for online advertising, we wanted to be sure that we had enough inventory and enough growth in unique visitors. So we've just earlier this year renewed an agreement with a very large aggregator, or portal, that had lapsed during 2005. This will result in a significant pickup in traffic. And I go through all of that to help you understand how we think about it, and how optimistic we are about online advertising, including and making sure that we have more page views and more traffic to sell against in '06. What we're seeing in January, it is only one month, but it is the right month in terms of being the star of the year, we are seeing "MarketWatch" online ad revenues pick way up, so even with the noise between "MarketWatch" and legacy CEP in there. So we're off to a solid start on the year, and as Gordon says, we're fully staffed. We've got some rebranding campaigns, rather than consolidations, coming up. I think to your competitive question, the online Journal and Dow Jones online network are really competing with all of the usual suspects, Yahoo Finance and CNN Money and MSN Money and so on for online ad dollars. And then Christa, on CapEx, we'll have all but $4 million of the web width CapEx spent in 2006, so we'll have $4 million more in 2007, and our CapEx will drop back to that $65- to $70 million range, which has been plenty over the last several years and will be over the future for us to invest and grow the business, as well as invest in maintenance capital. Good morning. This is Dave Clark for Paul. A couple questions, first on yield in U.S. publishing. Rich, you mentioned that that's no longer a point of emphasis as you pursue a relative pricing strategy, but then with the, you mentioned that real estate is going to slow, and perhaps classified will go down lower in the mix, which could improve yields. If you could net those out and tell us where yields will go, roughly, in this year or this quarter, that would be great. Then second, on the 2Q conference call, you mentioned that you had engaged strategy consultants, and I was wondering if you could tell us what you learned from that engagement? Thank you. Sure. On the yield question, I think we're looking at sort of a low-single digit increase in yields over the course of next year resulting from increased color growth, which, as most of you know, I think, runs at anywhere from 30% to 40% premium to black and white, depending on if it is a full page or a half page, as well as we put through a rate increase in 2006 that we think blends to about 2.5%. So we'd see those two things on the upside. Also on the upside would be the mix that you mentioned, as the mix of the lower yield in classified becomes less, that will help our overall rate. And offsetting those things may be some of the relative price value initiatives that we have. As far as your second question on the strategy consultant, I think the, I may have said this year or next year, when I meant something else, but we're in 2006 so I apologize. On the strategy consultants, they were spending quite a bit of time with the "Wall Street Journal," the U.S. "Wall Street Journal," and we learned a lot in those exercises. A lot of the price elasticity work that I reference in my comments and that you've heard us talk about out came out of that work; the web width reduction came out of that work; a redesign of the "Wall Street Journal," in conjunction with the web width reduction, to make it more of a newspaper for the digital age, is coming out of that work. Some interesting circulation, marketing, and print online integration issues, where we can do a better job of putting our efforts together on the circulation-marketing side for both print and online, as well as on the ad sales side for print and online, is coming out of that work. So we're going to get a huge payback on the work that they helped us do. Peter, congratulations on all of the new initiatives put into place, and, Rich, congratulations, and hopefully they'll all reap a lot of the momentum here. Just on the, Rich, on the printing costs, particularly at the Journal, this ramp up in circulation promotion that you just referenced, which was $6 million in the quarter, is that something that is going to be in place for most of '06? Because that seemed like quite a significant number. No. It will not be in place for most of '06. It was as much timing as anything else. We probably underspent that area earlier in the year, and we had to play catch-up at the end of the year on it to get to the circulation levels we want to be at going forward. Ok, so, I mean, because it seemed like with the ramp in ad linage in the fourth quarter, the margins, even with all of the other issues you're carrying in that division, should have been higher. So is it fair to say that the leverage you expect in '06 is going to be a lot better than what we've seen in the second half? Yes. I think that the answer is yes, although, when we look at our own internal plans and we look at the growth of print publishing year over year, if we strip out "Weekend Edition," the $9 million of launch cost for the web width reduction, we end up with flow-through on an incremental dollar revenue in that plan, in that budget, up near 100%. So we are getting the flow-through, the underlying core revenue. It's just we're spending some of it back on Weekend, and in the fourth quarter, we had a couple of those issues that we referenced, the severance charge and the higher circulation and promotional marketing expense. So we don't expect to anniversary those next year. I think our circulation expenses might be a little higher than average in the first quarter, but for the full year 2006 they're going to be in line with where they were in 2005. Due to time constraints, our next question will be the last one we will take this morning, which is coming from Craig Huber of Lehman Brothers. Please proceed with your question. Good morning. Thank you. Three of your last four months, clearly looking a lot better at the "Wall Street Journal," obviously helped by the Saturday edition. Is it fair to say you're feeling better about your business as you look out into 2006? I certainly note that your talk about comparable costs up 3% this new year after, I think you said 0.8, 0.9% in each of the prior two years, or am I looking into that too deeply? Thanks. Your budgeting for comparable costs up 3% in this new year. I think you said they were up 0.8 and 0.9% over each of the prior two years. Does that mean you're just feeling better about your top line going forward, or just the fact that you just can't keep running a business with comparable costs only up about 1%. And I have a couple of follow-ups. Thanks. I think in the terms of the first part of your question, we are optimistic that 2006 will be a better year on the top line at the Journal than 2005, both because of the trend of underlying business, as well as "Weekend Edition," as well as some other initiatives that we have that we talked about. In print publishing, we're holding comparable expenses to only up 1%, because even if we grow the way we want to grow in 2006, we're still, our margins are still far short of where we need them to be and want them to be in print publishing. That leaves the balance of the spending to get us to the 3% in the areas like electronic publishing, for example, and where we have many growth initiatives and we want to fuel those growth initiatives, so the comparable expense increase there is in the 6% range. And then we're spending a little bit more than the, we're spending in the mid-single digits in 2006 at Ottaway, which is a little higher than you might expect. But the print part of the community newspaper business is tough right now. Auto classified is down; real estate has been helping us, but none of us are very bullish on real estate for 2006, "none of us" meaning people here at Dow Jones or anywhere else that's in the community newspaper business. We're putting initiatives in place to help drive top line, and those are everything from the internet, that we've talked a lot about, to other community media franchise extensions like lifestyle magazines and retirement magazines, in local markets, things like Spanish language publications that we're testing in two or three of our markets. Also on the infrastructure side, we're looking for ways to leverage our infrastructure with contract delivery. "Cape Cod Times" is going to be delivering "The Boston Globe," for example. We're doing similar things up in New Hampshire. And so we're looking to leverage our infrastructure by driving revenue there, and all of those things will drive revenue, which is why we're predicting the mid-single digit revenue growth, but you also have to invest in them. The alternative is to hunker down and not do anything, and we don't feel that that's an appropriate long-term strategy for the community newspaper business. So, rolling all of that up, that explains why we're in that 3% comparable expense growth range. I think if we don't see the top line materializing, you would see us do what we've done in years past, which is try to hold the line on expenses and that 3% would come down. So that's a long-winded answer to your question, but it is both. We are optimistic that we can see the top line grow and we are fueling some of that growth, but if we don't see it we'll pull back like we've done in years past. Thanks for that. This is a totally separate question on circulation. You are charging, I think, $215 a year now for six days a week. Obviously, your number one competitor, The Times, is up at about $500 a year, including their latest 4% increase, I guess, in February. Obviously, that's a huge gap; they are seven days a week, you guys are six. I don't understand, I guess, why, given your even higher-end demographics, you guys don't think in the coming year you can raise that $215 up substantially? I think you mentioned earlier that you're not going to do it in 2006? Can we look forward to 2007, 2008, it going up quite a bit? Thanks. "The New York Times" has total circ of about 1.1 million, and we have total circ of a 1.7 million-ish, so that's part of the reason. We could raise prices that way if we were happy to have total circ of 1.1 million, but that's not where we want to head. It is a tough market right now for print circulation, and we think we're priced right relative to our circulation economics. We think that, net, if we put through a price increase in 2006 it might cost us more on the bottom line than it would gain us, so we're going to hold prices flat for 2006 and revisit it in 2007. I would add I don't think we view "The New York Times" as our primary competitor, which was the premise of your question. I mean, I think we compete with a whole lot of publications and other media that are primarily focused on business, and "The New York Times," is a fine general interest newspaper, but it is not, in that sense, our primary competitor. Okay. One last question on Factiva, intercompany charge, we're talking about the change there in terms of the intercompany accounting, are we talking just a couple million dollars that moves up to the electronic publishing line? That's it. Thank you. Thanks, everybody. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

EarningCall_233981

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. Presentation May 1, 0000 ET [Q]: Thanks for all the details there on the options, Paul. Given the high volume handset environment that seems to be out there for the last couple of quarters and the expectations that maybe that will that continue or that the 3G units, the high-end of that will grow dramatically next year, how do you think that's going to impact Linear's business, albeit it's not a huge percent of your revenue right now, but do you think you can commensurately participate there or what's the roadmap in terms of your cell phone business? [A]: Hi, Adam, this is Dave Bell. I will attempt to answer your question for you. I think in general, the 3G cell phones are going to create a growing opportunity for us. What you have seen during the last decade you went back to cell phones ten years ago they were largely made from commodity components, and as more and more performance, more and more features, battery life expectations and so forth grew in those phones, there were opportunities for more and more high performance products and part of our revenue growth was due to that. As there is more and more business in 3G and more of those phones to get designed, I think the same trend will continue and it will create even more opportunity for high performance products. [Q]: It's not really represented in your revenue this year. Should I think about cell phone being a bigger percentage of your overall mix at the end of next year than it is now? [A]: Part of the problem is categorization. As Paul mentioned earlier during his monologue we have some challenges on where to bucket some of these products. Is a cell phone with an MP3 player, should that be called a cell phone, should that be called an MP3 player? If you are looking at the total combination of our consumer products, as Paul mentioned when you look at cell phones, computer and high-end consumer, we actually grew 2 percentage points from last quarter. So you may see a little bit of fluctuation in the cell phone number itself but when you look at the whole consumer business it's actually growing. And I think there is some possibility of continued growing in the future. [Q]: All right. The other end market I wanted to ask about was just the whole telecom infrastructure and networking market, which I think you guys said bookings were up in absolute dollars. How is that spending cycle unfolding and how do you feel like that business is going to work out over the next couple of quarters or what to the extent you have visibility, how far off can you talk about that business and is it healthy and is it improving and do you see that picking up as well? [A]: This is Dave again. Yes, it's been with the last year or so our visibility isn't very great, but one of the things we are starting to see is some of the optical business starting to come back in as pretty much on its death bed during the last three, four years. We are starting to see some optical business returning. With the emergence of 3G that you were talking about earlier on the infrastructure side we think there is some growth opportunities for 3G base stations and some of our major customers there are already seeing some growth due to that. So I think overall the health of that overall communications and networking business is improving. And I think our chances for selling more and more products into that is growing as well. Historically it's been primarily a power management and partly signal conditioning business for us, but today as you know we've got growing family of high-frequency see products, high-speed A to D converter products and that creates even greater numbers of sockets that we can fill within that infrastructure equipment, too. [Q]: Just a couple of questions. I think, Paul, last quarter you talked about the bookings being strong in the month of July. Can you go into a little bit of how the bookings linearity was for the remainder of the quarter and what you've seen thus far in October? [A]: Yes. Actually the bookings increased in each of the months last quarter. So we had a strong start in July and that momentum also carried into August. Relative to October, the reason I was able to talk about July last quarter was our year end and we were, and we report one week later in our year end. So actually July was pretty well done. October for us we are in the middle of the month. That isn't done, but so far October is tracking along what we are expecting and doing well. [Q]: A little bit as far as the customer cautiousness that you talked about, can you give us a little bit of color on what you think is driving that? Is it, obviously there's worse in the macro economy so that's part of the question, but do they just feel they have shown enough lead time that they don't need to order anything? Do you think it's more a reflection on that side or the concern on the end demand in general, any kind of read through to that end demand that you can provide would be helpful? [A]: I think I will take a first crack at it and maybe Dave can supplement my comments. I think the customer believes he's in a pretty good position now. Lead times for most companies are low, they are always low for us. I don't think the customer is worried that demand is going to take a dramatic upturn. So the customer certainly pulls us up about our capacity capabilities, our abilities to meet orders. When the customer increases orders we can still do it within the four to six-week range. So I think the customer is a little comfortable now in having low lead times and not taking these chances. And then I also think, you know, they read the paper. They read about how, are hurricanes going to impact business, are they not. Certainly rising interest rates, one would be concerned they might impact business. But I don't think they’ve necessarily seen it yet but are just in a position that they can be cautious. The war keeps dragging on. I think most of the paper you ride the economic news is a bit mixed. The U.S. economy seems to be doing better, but the global macro economic news isn't so good. So I think the customer is just sort of cautious and events able to conduct his business accordingly. [Q]: One last more quantifiable question. On the share repurchase plan I noticed that the total amount spent dropped a little bit this quarter. Given the fact that your share price is at a relatively low level versus the last couple of years and the fact that the stock option expensing is going to actually increase the diluted share count is there any viability to the argument that you might want to actually buy back more shares to offset that dilution and just take advantage of a relatively low share price? [A]: Well, as I said in my introductory comments, the dilution due to FAS 123 R is a little bit fictitious. I mean a lot of the numbers around FAS 123 R are all estimates, as you know. You start off with an estimated expense that none of us think will be the real expense, and then just ripples through everything. So I thinking to go off buying shares based on a kind of mathematical rather than real increase in shares outstanding I don't know if we feel that we must do that or are driven to that. Relative to buying back shares our position of late has been to buy so many per quarter, usually it was 1.5 million, but we are not fixed to do that. The prior quarter we bought a little more. The average price of the stock during the quarter that we purchased stock at was close to 39. We are a little disappointed the stock is less than that now. But I think we look at each quarter in and of itself and don't have any set formula, Ross. [Q]: Last quick question. Capex, I missed that when you were going through the numbers and then I will go away. [Q]: Two questions. First we've seen a lot of talk at least out of some companies about the progress they are making in things like wide LED drivers, buck boost converters, you know power MOSFETs, some of the areas that in cellphones that at least in the past you've been competitors in. Have you seen the competitive environment in particular in wireless telephony change at all as a result of all this attention or does it just kind of feel like it always has? [A]: This is Dave, let me take a stab at that and Paul can add his personal view on things here. As long as there's change in the cell phone industry it is going to be good for Linear Technology, because we've shown year over year that we've been the first to identify new opportunities when they emerge. You talked about wide LED drivers. If you go back five, six years ago when those first opportunities emerged, Linear Technology was the first company out with wide LED drivers and we are on our fourth generation or so right now. If you look at battery chargers that can run off USB or wall adaptors, same sort of thing, we are always first to market to get those opportunities and that's where the highest profit potential is. But there's this constant evolution. You can say well, wide LEDs is a fairly mature area and there's a lot of competition in there and our sales in particular in wide LED drivers at least the single function parts has gone down because the other guys have caught up to a stagnant requirement there. But in wide LED drivers the need for multi-display wide LED drivers, ones that drive, say the main display, the sub display, the flash LED and so forth, I think we are in a leadership position there as well. So again there's this constant evolution that goes on. We think we are still at the leading edge with the new functions that are coming out and it's even more and more functionality goes into cell phones when you start seeing photo flash capability, searching video recording capability, television capability and so forth, I think you will finds that we are going to be right there at the front end there where the higher profit potential exists as well as and leaving the other guys kind of pick up the scraps with the more mature functions. [Q]: This is the up. You mentioned something that's of great interest to us. Are you beginning to see some design activity for the digital video broadcast in our handsets? Is that something that's beginning to materialize? [A - Dave Bell]: Yeah, we are seeing some activity there. I don't believe that we've really seen any sales of any substance for DMB applications yet but there's certainly some design activity that's going on and we have a number of our products going into such phones. [Q]: Okay and then for Paul, look, I agree with you in terms of the estimates piled on top of estimates for FAS 123. Is there a possibility maybe that it makes more sense to just move to straight stock compensation instead of the greater reliance on options? [A]: Well, first of all, Joe, the difference between pro forma results for us and GAAP results is not very dramatic. [A]: So that give so that I think should give you a clue that we have been pretty good historically at doing the very thing you are saying. What we have is within stock compensation, we have restricted stock and we also have stock options and stock options play a very critical role. Also though this company over the years has had very high cash compensation based on annual performance. So we have a very, very lucrative profit sharing program that everyone participates in. The last six months it was 46% here in the United States. And we also have a bonus program for senior people. So I think if you look at the way Linear has compensated people it would be something the investor would be appreciative of. We have goals that if we reach them there's good compensation on a cash basis and then we also have people participate in the long-term strength of the company. So I think. [Q]: I was in no way attempting to be critical. Just now that this is happening and now that you do have this kind of odd set of numbers flowing through the P&L I'm just wondering based on the comments you made about the plausibility of those numbers whether it makes sense to change behavior at all. [A]: Well, Joe, the critical thing for us is with our company has been successful enough that we can do what's right to get the most skilled people. And in some cases when you go with the implementation of stock option accounting for us when it changes from 42% return on sales to 39, that means I have a lot more capability of using stock if stock is needed to get the most talented people. So we are not embarking on a program to change that unless we don't need to do it to get talented people. But if we can use to it get more than our fair share of talented people we are going to do it. [Q]: Yeah, No problem Good morning, first of all. The question really was, talking about the supply chain in this kind of environment where your customers are a little cautious, it seems like everybody is depending on these lead times that are structurally shorter than your cycle times. What are the risks and rewards that you see from running a supply chain like this? [A]: For us it's always been a reward in that we historically, Michael, had four to six-week lead-times. So in strong aspects of the cycle, in weak aspects of the cycle. And we think that's given us a competitive advantage. The reason we drive to low lead times is it helps us run our factories more efficiently. We generally think the orders we get from our customers are close to the real end market demand. So I don't think we are one of those companies that in your question may be alludes to that we now have low lead times but when the cycle heats up we will have dramatically higher. I think we have been consistently low. We have run our business this way for a decade, so for us it's kind of business as usual. [Q]: I guess part of the question, are your customers, the OEMs, taking a risk in trying to run in this kind of environment? And to that end, is this possibly why we saw what looks to be a little bit of an early start to the seasonal build for a lot of the analog companies specifically? [A]: I think the customer relative to us feels comfortable. I mean revolve the shipment four to six weeks. The customer whenever he raises his bookings levels we can still meet that. So if you are saying if in general is the customer taking a little bit of a risk, maybe but I think the customer thinks that if he ratchets up his demands he will be able to get it fulfilled. If everybody did it at once and it was a huge step forwards there would be some problems, but I don't think that's what people are anticipating in the market now. [Q]: Great. And you talk about some new products, you recently talked about converter market, can you tie that in? Are these new designers you hired for any specific area and just remind us of all the area you would consider new product efforts over the last year that Linear is really going into? [A]: Okay As you know that's something that we have really made our first product introductions into about two years ago. And it's actually been a tremendously successful area. We have better performing products. They are smaller, lower power, better distortion and so forth, than the market leaders in that area. So, yes, that's one of the many areas that we are investing in. As Paul mentioned during the last quarter we had unusually good success in hiring design engineers. It hasn't been focused on any one particular area. And a lot of that has been at our satellite design centers around the U.S. So it's really been broad-based. High speed A to D converter is one area, but power management, signal conditioning, a variety of areas are seeing the benefit that increased engineering head count. [Q]: Hi, guys, thanks for taking the question. My question is really regarding looking forward and trying to get catalyst for growth. The new product that you introduced, the micro-module, can you touch on the size of market that that's going to be targeted after? And if there are other areas of growth that you think are going to be driving growth in '06 help us understand those a little better? [A]: Sure, Doug, this is Dave. If you look at the total power module business worldwide today and this includes the brick modules and so forth, it's in a range of $3 to 4 billion U.S. Now the portion of that that we are aiming at is maybe one tenth of that, a little bit hard to size it up exactly but probably in the somewhere in the 3 - $400 million range but also growing. So we think that is a substantial business opportunity for us, but one of the things that I think means that there might be a bigger opportunity for us is because there's really nothing like what we introduced on the market today. What we just introduced is a complete DC-to-DC converter module with almost all the external components integrated, which is unique in the industry today in the form factor of an IC. So it really I think addresses an emerging market need that really isn't fulfilled by products on the market today. So we are very encouraged by the response that we've seen so far. Under non-disclosure we have sampled this product to nearly 100 customers worldwide and frankly the kind of response that we have from those customers has been even better than we anticipated. So kind of my personal goal for this business is that we would exceed $100 million in annual sales in several years out. And depending on what we see in the coming year it could even be more than that. [Q]: Great. Thank you. Could you also focus a little, quick question for you on the burst mode licensing and have you licensed that technology to any other manufacturers? [A]: This is Lothar. We have not licensed that technology to any new ones, the only ones that we have are once that we talked about in the past with two quarters ago with Maxim. And also quite a way back with Texas Instruments. [Q]: All right. And then lastly, has the company taken any new approach to targeting large OEM customers where higher volume products are being manufactured? Is there any attempts to gain market share at some of the larger OEM accounts? [A]: Well, this is Dave again. We obviously have active programs that are aimed at building our relationships with major multinational corporations. So, yeah, I think that represents an opportunity. Many of the large companies that you and I could both name in the networking and infrastructure business and so forth we are gaining ground there and that's being done both at the management level as well as the engineering level. [Q]: Hi Good morning Guys A couple of questions, first, Paul, you mentioned that the dollar terms, cell phone bookings were roughly flat. Given the momentum we have seen in this segment, is this largely attributable to your reclassification or do we read into this that you are lagging in growth market? [A]: Well, I think Dave addressed that in response to an earlier question. What you have is within cell phone, you have different phases that the cell phone industry runs through and we typically sell really well products where there’s a new technological advance in cell phones. So you got situations coming up where you might be combining cell phones with audio entertainment, etc. So I think cell phones you need to look at that over a period broader than a few quarters. This past quarter as I said to you on a dollar basis our cell phone activity was flat. I don't know whether that means we sell backwards or not. I haven't seen all the industry numbers for the last quarter, but we are certainly not alarmed by what's going on in that area. [Q]: Okay The other question I had, gross margin, even after you exclude the impact of stock based compensation down a little bit, is this something we need to worry about or you think it's just a minor fluctuation around your normalized levels? [A]: I don't think you need to worry about it. I think it's minor fluctuations. I told you about half of it was stock option accounting. [Q]: Hi Guys, If you look back historically over the last five, six years down, it seems like the March quarter has typically been the strongest quarter of the year. Given your mix is moving more towards handsets and consumer related markets, does that profile change? Could you comment on that, please? [A]: You know, the more we are in consumer, I think that strengthens the December quarter maybe in the next few years, maybe a little bit. I don't know if it's going to have a particularly negative impact on the March quarter. A lot of the December quarter is generally not strong in industrial, generally not strong in U.S. distribution. You got that Europe has a stronger March quarter, Japan has a stronger March quarter. So I mean I think it's early to tell. You know as Dave said earlier a lot of customers are ordering pretty close in so it's several months out but we would certainly hope that the March quarter is a reasonable quarter for us. [Q]: Okay. And a follow up, since I commit a competitors are moving more to fab light model, in a ADI, Inner Cell to mention a couple, do you think that having a proprietary process is becoming in less of a differentiating factor or could you just comment on that as well? [A]: This is Lothar. There really are no plans for us to become fab light. We think that our proprietary processes is one of the things that allows us to make products that distinguish ourselves. And in the case where we do need to access some technologies that we don't have in house, we always have access to the foundries, but our foundry activity represents probably less than 5% of our wafer consumption. So we have no plans for a foundry light model. [A]: This is Dave Bell again, too. I think there are some real liabilities, too, with having an analog company that's entirely based on a foundry. The foundries primarily are built around a high volume digital process. So an analog guy who's dependent on a foundry, for one he's probably building products on processes that were designed for digital and may be modified slightly for analog, but as well, as you get into a boom cycle again the guys the foundries are going to take care of are probably not the small analog guys, they are going to take care of their big digital customers. So I think there are some real business concerns when you have an analog company’s that's based on foundries. [Q]: Thanks guys. Good morning our first on the consumer reclassification. Does that really reflect a change in the way you are looking at the high-end consumer opportunity or is that really just scrubbing the taxonomy? [A]: I think it's just scrubbing where the products lined up. As Dave said it's hard to be consistent where you put a product. For example, a good example he gave is a cell phone that has the capability of having audio entertainment. Before it had that it was a cell phone and communications for us. Now that it has that where do you put it, high-end consumer, or you leaded in communications or what do you do with it? That's why for the first time I went over the different in markets I cant summarized at the end by lumping a lot of consumer oriented products together that, being cell phone, computer and high-end consumer because I think products tend to migrate within those three categories. [Q]: Okay. Paul For a device like a next-generation gaming console like X-Box 360, does that fit in computers or is that high-end consumer? [Q]: Okay Switching gears a little bit then to inventory, there was a bit of an uptake in inventory related to the consumer business. As consumer grows is that something we should look at a structurally higher level of inventory or is that going to down tick when we get into the first half of next year? [A]: Let's make sure we note that. And you do have as September moves into, as you close September and move into October and early November you do have pretty heavy consumer shipments towards any product that's being sold in the holiday season. So I think there's a little bit of seasonality in that number. And but whether lit drop back down to what it was certainly stock option accounting is stay in the number even though that's kind of a bogus addition to the number, to be frank with you. But I don't think it's going to continue to grow relative to just consumer products. [A]: Yeah That's my guess, now, but again it's a pretty small number. We are talking 37 million on a balance sheet of 2.4 billion. [Q]: Okay and then lastly, we got a nice up tick in ASPs last quarter. This quarter we were up a penny. Is that an ongoing shift that you are seeing or are we at a level that will be pretty stable from here? [Q]: Hi, guys. Paul, question for you on the expense side. You said would it grow with rev, is there any granularity on R&D versus SG&A on a pro forma basis? I notice that it was down in the September quarter? [A]: 1.4 of it was expenses relative to hiring of new folks. We talked about that. We had a particularly productive quarter in hiring particularly circuit designers this past quarter. So my guess is you know R&D will, I don't know if we can have as equally a productive quarter next quarter, but certainly we have hired people in the October time frame. So I think R&D will go up, but it did go up last quarter. So I'm a little unsure of your question. [Q]: Okay. Yeah. I was looking on a pro forma versus what's reported on GAAP. Sorry for the confusion. Then Dave, over to you, on the new product front, you are seeing some MP3 players out there with video capability. Can you talk about any other applications out there that you guys are seeing some interesting design activity that based on new functionality really fits your high performance model? [A]: Well, it's really broad-based, Craig. There is so many hand-held consumer products when you look at GPS navigators and wireless communicators. You've got MP3 players, digital still cameras, on and on and on and combinations of them so it's very broad-based. So that whole category clearly is growing. One I should mention is satellite radios as well as. That market was virtually nonexistent not too many years ago and that's fairly sizable at this point as well. So that whole hand held consumer electronics business is growing. An equally important thing’s like battery life and size become more and more important as you put more of these features together and then drives the designers of these products, the high performance products that we sell. One other example that's not hand-held that's interest something flat panel TVs. If somebody told me five years ago that we will be selling our high performance analog ICs in the televisions I would have said they were nuts, but today that is a decent and growing market as they need to fit a lot of power electronics into a very small face in these flat panel plasma and LCD TVs. [Q]: On that note with the flat panels given that we are starting to see these some price declines for those products, are you starting to see those designs take off more or any color at this point? [A]: Well I know to taking off. To be honest with you I don't track the numbers really carefully in that particular category, but I know that we've seen decent growth there and we got major design wins in some of the industry leaders in that market. [Q]: Okay And then lastly on the power module front is there any particular application where you think you will have the most success write off the bat to lead off there? [A]: I think it's going to be really broad-based, Craig. I think the one area that we probably won't see a lot of sales are in consumer products, in the hand-held stuff that I was just talking about. But almost everything else is an opportunity for us. We are talking about industrial equipment. We are talking about networking and cellular infrastructure, medical equipment, perhaps even some automotive applications. And really one of the things that driving the need for this product is that there's this gap that's emerging in the industry. There's fewer and fewer people out there, talented analog engineers that are customers that are capable of designing these power circuits and at the same time the complexity and the performance requirements of these power systems keeps going up. So you've going to get this capability gap that's going out there in the marketplace so there's a real need it’s emerged for a product that's easy to use and minimizes the risk of new product development and that's precisely what will this module does. So as you mentioned a few minutes ago, we've actually been surprised at the reception we've had for just those reasons, that it's an easy way for customers to design high performance power systems without needing analog experts on staff. [Q]: Okay Good morning guys could you talk a little more about your expansion plans in the fab, is it largely on towards being applied towards capacity or is it for new capabilities? [A]: It's actually probably a combination of both. Most recently we've completed significant, I would call them infrastructure expansion projects. We completed the new test facility in Singapore and we've added clean room capability to both our wafer fabs here in the U.S. So that's I would say is more of a capacity related expansion and to support our future growth we continue to invest on capabilities both in our wafer fabs as well as into our assembly facilities as well. So it's a bit of a combination of the two. [Q]: Okay. And then on a slightly different topic, there's been some talk recently about Japan beginning to emerge out of its decade long recession. Are you seeing some science of strength yourself over there, obviously that that is potentially a large industrial market as well? What can you say about your business in that regard? [A]: Yes, I think we are seeing some strength in Japan. I think the Japanese market for us has had some shifts. The Japanese market if you go back a few years was particularly strong in computers and notebook computers and had some resident strength in cell phones. Some of that has migrated away from Japan to Korea or China, as you are well aware, so that impacted Japan. We are seeing strength, of late, a lot of strength coming from Japan in areas like automotive, industrial, infrastructure type equipment. So frankly for us Japan is becoming compared to what it was six or seven years ago a broader market, a market that has consumer products, also has industrial products, also has communication products so that particularly automotive products. So we do see Japan kind of coming out of what's been a malaise a bit and we think that will be a benefit to us. To take advantage of that we hired a few extra people there as well so I think that's going to be a good market for us. [Q]: Okay and then finally in the automotive arena, design cycles over there tends to be very slow, but you've been fairly progressive and introducing a lot of products, do you see greater strength coming out of automotive for you over the next few quarters? [A]: Yeah This is Dave. Absolutely. We are seeing greater strength in Japan. We are seeing growth in Europe as well in automotive. So as we said many times in the past automotive is a growing market for us. It's a market that meets our skills very well since it's becoming more and more performance intensive and always been very quality intensive. Absolutely we see good growth in the future for automotive in Japan. [Q]: Can you be more specific? I mean do you see that happening within the next year, within the next three quarters, two quarters? [A]: It's happening right now. As Paul was mentioning, we've been essentially flat in Japan for about the last year or so and that's why all this transition has been going on. While cell phones and notebook and computers have been moving out of Japan, we've seen rise in automotive business and industrial business and we are now starting to see some decent growth in Japan as that transition is complete and automotive growth is one of the key thing that's fueling our growth in Japan right now. [Q]: Yes good morning question for Paul, Paul I know you don't give out the bookings number but could you qualify whether it was up in the double digits or single digits. [A]: Paul We don't give the number so that's a way of kind of getting to it. We did tell you we had a positive book-to-bill ratio for the first time in several quarters. So we had a strong quarter but we don't quantify on the percentage growth. [Q]: I tried. Any way, if you look at the changes in the mix now, it looks like consumer is becoming a higher percentage of revenue. How is that really impacting your product life cycles and how you plan your business in general. [A]: Well, let me take a stab at that. It does have an impact on us. A lot of our business, in fact well over half our business today are still what we call annuity products, product that we may sell even for a decade or more and that provides a lot of stability. That clearly in the consumer business, the life cycles of those products are shorter but they are not as short as you might imagine. If you take the example of batter charger going to cell phones, one particular battery charger product might have a life cycle of about four years. And the reason for that is that the battery charger portion cell phone doesn't get redesigned with every model that that manufacturer makes. So Yes, they are shorter but like I say, it's not a six-month life cycle like it is with the models in the cell phones, it tends to be more like a four-year total life cycle in those type of products. [Q]: Right and finally if I remember correctly about 50 to 60% of your revenue comes from power management. How does that look when you, when we start talking about R&D? [Q]: 50% to 60% of your our revenue comes from power management, how much are you allocating to power management when you look at the R&D line? [A]: We haven't really disclosed that. But it's, it's pretty well balanced. We obviously have new product lines. You have to invest in R&D earlier so your investment in new product areas is disproportionate with the kind of sales in a more mature areas, you end up not needing to invest in much but it's not really disproportionate with the kind of sales we see. [Q]: Should I then expect maybe two, three years from now power management to still be more than 50% of your revenue? [A]: It's really hard to predict. I don't think we are going to see dramatic shifts in that in the coming years but I think we have some new product areas like our high-frequency and high-speed data converters that I think are going to grow much faster. There's some possibility that those growth rates in those areas would exceed power management and the percentage of power to come down. On the other hand in this new micro-module product that we just introduced is in the power management space so that could produce some additional growth in that area as well. Really hard to predict I guess is the bottom line. [A]: What's interesting, Tore, is you asked Dave that question. If you ask each of the people that run the different product groups here, each of them would say theirs is going to grow disproportionately in the next couple of years. I mean I think all of them are pretty optimistic that they have good business opportunities but my guess is like Dave, if you put the power module into power it probably won't be much of a dramatic change. [Q]: Thank you. I will keep it quick. Just one question. I would like to ask about the computing business. You know, the bookings there, I guess if you negate out the reclassification were down as a percent I think you said flat in dollars in a time when seasonality would tell you it's a lot stronger. So could you talk about the trends you are seeing in the computing business, kind of near term and longer term, how you view your participation in that market? Are there going to be new applications that will require much higher performance as you can continue to be there or gradually over time do you think it will be a less significant segment? Just talk about the near term competitive pricing and longer-term trust base? [A]: Sure, Bill, this is Dave. If you look at the components that we put into computing today it's such things as PDAs, notebook computers, servers, disk drives and so forth. If you actually go back in time we actually had desktop PCs were in that category as well but we sell virtually nothing into desktop PCs today. So what I think you are seeing is a little bit of a transition going on. You are seeing notebook computers declining a little bit, like we said in Japan, a lot of that stuff is moving off into China. So that's one of the reasons why I think we are seeing our computing number go down. On the other hand, it's being compensator to do some degree by growth in some server equipment and things like that. So I think it's becoming a little bit less in the notebook and desktop area and more in the server area, more infrastructure type equipment. Paul, do you have anything to add to that? [A]: No, we do continue to sell in the desktop area. But it would be more cutting edge new generation desktops that are, that might be more higher priced than -- we don't sell into the very inexpensive desktops but the more expensive once we actual dollar have pretty good positioning in. And Dave's comment on the notebook I think is accurate. Again, Bill, the most important thing I think in any of these areas is to see, are there any major evolutionary changes or revolutionary changes in the products themselves. When there's a big change in the fundamental product itself normally we do very well. When we are in a period where there’s a kind of subtle changes, cost reductions only being the feature people are selling, I would think you would expect to see us less in that environment. But then see us capitalizing in other areas. So Again, we are kind of more concerned about the what in the function, the what it is than the where it shows up. [Q]: Okay I think reading between the lines of what you are saying is there are not really those same trends for you in the computing market longer term. In the handset market you have a lot of questions and new applications, new functions capabilities required they are going to require your technologies. Maybe in what we traditionally think of computing that will be a little bit less over time and lit show newspaper other areas. [A]: Again, just to kind of underscore what Paul is saying. I think there are these natural evolutionary cycles. And we moved in and out of various markets and if a market stays very stagnant in its requirements then that tends to be an opportunity for competitors to catch up, but at the same time there are many other opportunities for to us continue growing. And such has been the case with Windows, desktop, PCs and to some degree with notebooks but there are many, many opportunities. I think the whole infrastructure business, the server business, the raid business and so forth is going to continue long-term to fuel continued growth in computers for us. [Q]: Good morning. Paul, on the SG&A line if you back out the options expense it looks like it went down about 10% on an absolute basis from Q4 to Q1. Is there anything other than legal expense that you mention there had that benefited you there? [A]: That benefited us in going backwards? Well, frankly if you back out the change, if you back out stock compensation it went down a little bit. The biggest area for us was legal that went down. We have certain costs around our annual report, the printing the annual report, the whole process of wrapping up the prior year end, you have more expenses isn't that area in Q4 than do you in Q1. And then there's just kind of a potpourri of some other little areas that caused it to go down a little bit. There were some headcount additions and some salary additions, but if you back out stock option accounting and back out legal it was probably flourish. [Q]: I was wondering whether or not there was any non-stock profit sharing type cash benefits that were flowing through '05 that with wouldn't expect to see in '06 unless things pick up to stronger numbers so when we model things going forwards there a lower percent of sales that you are tracking at right now on the SG&A line? [A]: No, I don't think so, I think the compensation, a lot of our compensation programs are based on the profitability of the company, not just the revenue increases of it. You shouldn't read into that that there’s been a lower profit sharing charge. [Q]: Okay and then the other question I wanted to ask you talked about getting comfortable with level of inventories out there with your customers, can you make it focus in on the high-end consumer and particularly given the strength in bookings there, your sources for comfort there that your customers are not building inventory? [A]: Well I mean, what we do is, the customers, some of these products you hear about very late and then they want a lot shipped right away because they announce them, they want to make a surprise in the marketplace. So there is an element of risk. There's an element of risk from the customers standpoint as to whether the product will sell as well as what he expects it to do. But I think in some cases we try to have some security on our side that we have more guarantee lead times, etc. If it's a very volatile area. But you're right, you are coming into the holiday season. People are making estimates as to what they will sell. The people we've been dealing with have generally been quite accurate if not needing more products in the past than they have initially ordered in the September time frame. So we are not worried about it but it certain is a potential in the business. [Q]: Hi Thank I just wonder, not to beat a dead horse, just to go through a housekeeping issue on the SG&A line excluding the stock compensation, the way that -- can you hear me okay? [A]: I can't now. If you repeat your question I know it's about SG&A but didn't hear the rest of it. [Q]: Okay Maybe this is better. Basically the way that we came to the SG&A number, we took the 31.2 million that you had reported and backed out 6.2 million in options expense, that comes to 25 million. Is that the right calculation because it sounded like some of your earlier comments differently? [A]: I'm not sure that's the right calculation because when you backed out the 6.2 what you didn't back out is that there was some similar charge in the prior year period which would have related to restricted stock. So if you go to the same footnote you got 6.2 from you saw the similar period a year ago was 1.3. [A]: Yes, so there's a number that you would take out of the previous quarter that would take the impacts on SG&A down to closer to a number of, closer to the 3 million plus range. [A]: And then you look and you see the increase quarter over quarter was 3.3, probably one item alone that would equal that or maybe exceed it a little bit would be stock based compensation. So therefore if you wanted to do an apples-to-apples comparison, it would be down a little bit as the previous caller referred to. That little bit I told you legal was down, cases were settled that were favorable to us so we settle them rather than pursue them further. So legal came down a little bit. Cost relative to the annual report came down a little bit. Labor went up and that we hired a few more people and then had you sundry other things in advertising, communications, that kind of offset one another. Is that helpful? [Q]: That clears it up for me. I appreciate it. If I can just follow up with regarding typical seasonality and you guys had sort of addressed this before but perhaps if you can clarify was guys consider to be typical seasonal so we have a baseline going forward, I was looking at the past 12 years, December quarter, typically up about 6%, the March quarter typically up between 8 or 9% is that still was guys consider to be typical seasonality or is some of the mix issues changed what we should be expecting from quarter to quarter there? [A]: Well, historically what we've done and said is that as we look out long-term at the business, historically the summer quarter has been flat to little growth. The December quarter has had low single-digit growth. And the March and June quarters have had mid to high single-digit or depending on the year. If you take those percentages and you compound them you get generally 20 to 25% growths per year. And if you look at the last 15 years, you back out the worse year, you back out the best year. We've grown 25% each year pretty much and you do the same for a 10-year period. So I think that's sort of historical. We've been saying to you folks over the last year and a half that as consumers become a bigger piece we would expect to shore up the December quarter a little bit and maybe come out of the March quarter a little bit. It hasn't happened to the extent we thought it would and I think some of that is consumer has been a little should stronger into the March quarter than historically. People sort of expected at the holiday season it would fall off a cliff. That hasn't happened much. So you're right, we still have to figure out the nuances between December and March but typically you would have more growth in December than September and more growth in March than December. Does that help? [Q]: Hi Good morning. Just some follow-ups on a few items. You mentioned, that it's been a while since bookings have been at this level, looks like it was a good bookings quarter. Can you give a sense from a backlog perspective when is the last time had you backlog at these levels? [A]: Oh, well, it's -- certainly we told you at the end of last year, that our backlog for the fiscal 2005 was down from what it was fiscal 2004. It was down considerably. So and you are probably aware of those numbers. I wouldn't classify we had a very good bookings quarter but it certainly doesn't rank up our backlog with some of the historical highs we've had in backlog. It's been a tighter market. I told you in my introductory comments that our turns business was towards the high-end of our turns business historically and that's directly a function of backlog. So certainly backlog is less than it has been historically, but it's still higher than it was at the end of June, for example, and certainly within a range we've clearly met our numbers in the past. [Q]: You usually give us a sense for the next quarter, the December quarter, what we could expect on bookings, what you think you would have a positive book-to-bill, at parity or below one, what's your thoughts on that? [Q]: Just on the module related questions, if you look at the module bill of material what percentage of that would be coming from Linear Tech? [A]: This is Dave. I am not going to quote what percentage is going to be from Linear Tech but what I will tell you is all the silicon within the module was designed and fabricated by Linear Technology. So it's built on a technology that we developed internally and we think that gives us a competitive edge. [Q]: I guess to get directly to what I was thinking about, how does this impact your margin profile? Are you thinking about this market from a gross profit per unit perspective or are you just keeping the traditional Linear module of high 70% gross margins here? [A]: I think this product is going to be a very good gross margin product. Certainly the ASPs are higher than most of our products so that's a good thing. But from a gross margin standpoint I don't think you can anticipate it will have a negative impact on the company's gross margin. [Q]: Okay. Sounds like some good business. And just on the led free issue, can you give us a sense what have percent of your products that you shipped in the September quarter, what percent of revenue maybe was lead free? [A]: Louis, one of the things that you're undoubtedly trying to get your arms around is how we are going to be affected by this transition of lead free, while we haven't talked about it much on this call or previous once, I think we are in great shape. I think we've got a good handle on the inventory at the factory here and a good handle on the inventory principally in Europe where it's impacted by this transition. So we've been for a long time planning our transition to lead free and I think the company has been executing that very well. So we don't have any worries about that coming up next year. [Q]: Good morning, gentlemen. Two quick ones. First one is in the computer side of the house when we look at both AMD and Intel moving to, I guess would you call it multi-cores, on both the client and the service side how does it really affect your power management business in the computer segment? And the second one I guess try to beat a dead horse again, Texas Instruments has been growing pretty fast the past couple of quarters and I was wondering whether you have actually seeing them more in the marketplace than before or is it just a function of them dipping more significantly during the downturn and sort of have the snap back effect going on right now? [A]: Well, David, this is Dave Bell again. As far as the dual core movement that's happening across the board, Intel and AMD, and so forth I think that's going to be a positive thing for us because it basically just means higher current supplies for these processors. So it's kind of in line with the overall move that's happening throughout the industry of having higher current, higher power, more complex power systems and the more complex those systems to get the better it is for Linear Technology. Although it doesn't really effect you're strategy directly, the simple fact that it increases power levels and complexity is good news to us. As far as answering the T.I. question, Paul. [A]: Hi, David, it's Paul. I think your second premise relative to the T. I. when we look at their sales growth in several quarters compared to ours, they dipped much lower than we did as a sequential and year over year basis in the downturn, and they've come up a little bit in the last two quarters. But I don't think we necessarily see more of them in the marketplace than we did a year ago. [Q]: You spoke about quarter to quarter going into the first half of '06, but based on historical patterns, but given the headwind out of rising interest rates and high oil price, how do you think this year's or next year's foot path March and June quarters are going to shape up? Is it going to follow the seasonal pattern that we have seen in 2005? [A]: Well, first of all, we wouldn't venture to be economists on that front. We know there’s been this headwind from rising interest rates that you've mentioned; I don't know that they've made a dramatic impact on the consumer yet. You also have rising oil prices. We don't know the answer to that, to be frank with you. We have four to six-week lead times. We feel that we've got a good grasp on giving you forecasts in the next quarter but going beyond that we don't give forecasts going beyond and don't feel comfortable doing it. [Q]: Okay. If you look at your business now, it's been a little bit high in consumer and if I two years from now what segment of the marketplace do you think would be driving your business then? [A]: The most important thing, I will answer and let Dave, what we do more than any other analog company is we focus on high-end analog functionality with commercial success. We don't try to guess where that's going to wind up and what particular end market. If you look at Linear over the last 20 years of the company, different end markets in each five-year segment and each three-year segment drove our growth. When people ask us what's going to be the driver three to five years from now, we know about functionality that we think will make a difference, functionality in portability, functionality in speed, functionality in module type stuff, but where it's going to wind up, if we tried to focus too much on that we think we would sub-optimize some of the opportunities we have rather than benefit them. Dave? [A]: The only thing I would add is we don't have any master five-year plan that we are heads down in executing. We are very opportunistic. We are always out in the field looking at where there are new opportunities for high performance analog, and there are changes that come along but because of the way that we approach our product strategy, I think we identify those opportunities before most of our competitors do, not all of our competitors. If you're looking back the last couple of years it's been automotive and high-end consumer that's grown quite a bit. If you go out two to three years it's hard to tell. I'm sure those areas will be strong as well as but even at categories like industrial, it's done very well, during the last year, a very diverse market. It's not any master five-year plan that we are executing. We are very opportunistic and identify new opportunities every month. [Q]: Okay. On the part of the ASP part of the commercial impact, the guidance that you had for the sequential quarter assumes an ASP in the rate of $1.54 to $1.55 because in the last quarter had you mentioned that this kind of ASP may be a two quarter or three quarter event and probably might be rating back to $1.40 range basically. What color can you give on that? [A]: Well, when we look at it that could happen. Now, our, when you go out a year the ASP could go up because of the module issue. But remember the most important thing to focus on, is what we focus on as the return less, than the ASP. So what you should not try to connect that if ASPs go down that means they are going down because we are selling the same functions for less money. If the ASP goes down we are selling different functions for the same percentage profitability. So if you go back three years our ASPs were $2. If you go back a year and a half our ASPs were down $1.40, high $1.30 range. The last two quarters they've been in the $1.50 range. If you go to the gross margin it's been the same or rising over the three-year period. So don't focus too much on the ASP if you think changes in it are going to be immediately visible in net margins. [Q]: Yes, I would like to nudge you what little bit further on Capex. You've had a pretty big year last year and this year looking forward to '07, '08, would you expect those levels to come down? Was this an unusual build as you still have equipment to buy to fill the clean rooms you have made or are making this year? [A]: Well, some of the addition this year is there are a few buildings that we rent that we potentially might buy. So some of our forecast of 80 this year would include some potential building purchases if that gets consummated. So that might be a third of that number or, roughly. So then if you look out the last two years we did roughly 60 million this year without that building we might do 60 million again. You know, I think going out we don't have an immediate plan for new fab in the immediate couple of years certainly going out a little further than that we will. So I think Capex will probably rough will be in this range maybe a little bit less, but Lothar, do you? [A]: Yeah, I think we've completed a lot of the larger infrastructure projects. Those are coming pretty much to conclusion, so from a brick and mortar standpoint those Capex projects are behind us. Going forward I think it will be more incremental capital associated with just growth of the company. So I think Paul's forecast of a number like 60 million is probably pretty accurate. [Q]: Good morning. Two questions. First, if I take your ASP this quarter versus your revenues it looks like unit shipments were down a little quarter-to-quarter. There was a lot of talk on the call last quarter about a big cell phone contract that had expired, caused a large increase in your ASP in the quarter. I would just like to clarify was there any of that cell phone business still being shipped in the June quarter so as I look at units, June quarter to September quarter, did that, if you will, I don't want to say inflate, but were there units shipped in the June quarter that then fell off and just weren't there on the September quarter? Was that contract ending in any way part of the reason that unit shipments to me appear to be down quarter to quarter? [A]: Well, first of all you're right, they were down but very, very modest amount in units. Again we focus not on the number of units, not on the ASP, but on the margin we generate from the products we sell. Relative to that cell phone contract, that Dave mentioned earlier that cell phones tends to be a longer life -- our products in the cell phones whereas the models might change, our product might change every four years. So we would have shipped less of that product this quarter but not shipped none of that product this past quarter. And any shift in those areas relative to the overall financial statements would have probably been very, very minor if not miniscule. [Q]: Okay. Second question. You talked a little bit about capital spending going up as you start to have to expand capacity to meet the growth of the Company. I was just wondering if you could help us understand at all when there is a, what year we should begin to think about where capital spending in fact jumps up to the kind of 250 million or $300 million level that I think you spent back in 2000 as you were building I think it was came us. When as, I guess the question is when as you look at a future plan today do you think you really have to tackle the next substantial condition to fab capacity. [A]: This is Lothar, the current wafer fabs that we have are still not fully utilized, meaning that the we've done some clean room additions, which is kind of the infrastructure, but in terms of the amount of output that they can accomplish there's a lot of sales growth that these factories can still support. And so there is nothing in our near term horizon that's forecast that we need to purchase or build a new wafer-fab and that the two existing ones we can support sales levels nearly double of what we are currently, so there's nothing in our plans current to the support that. But again if there's another dot-com boom or something like that that maybe takes place that will change, but right now in the current environment we have no plans for any wafer-fab. [A]: This is Paul, the numbers you gave for the cost of our past fabs, the costs really were roughly half of the numbers you gave. So we are an analog company, analog fabs typically don't come anywhere near the cost of a digital fab. I think when we built the came us fab and when we built the Hillview fab initially, the initial phases of both of those costs us about 125 million, in around there. [Q]: What was sticking in my mind and I hadn't gone back and looked it seemed to me there was a year right around the turn of the decade where capital spending for Linear had been over $200 million but I was doing that by memory. [Q]: I just pulled it up and the number you gave nailed it. It was 125 million in 2001. I just want to go to back to something Lothar just said. You can basically double the sales rate of the Company without any major increases in capital spending. I mean is it fair to just think in terms as we look out going forward that you really can keep capital spending no higher than the 80 million we are seeing right now until the company has doubled it's revenue rate. Is that the right way to think about thing? [A]: What I said was that you don't have any major construction projects that we would need to do to support our even a doubling of our sales because a lot of this infrastructure of buildings in completed, but I still have to reminds that you there are factory tools that go into those facilities that would have to support our growth. So, but, again, if you look at what we are saying is that I think the forecast of around $60 million a year of Capex really is a level that supports our normal steady state growth in sales and the infrastructure that we have in place right now from, particularly a wafer-fab which generally drives the largest spending when you build a new one, there is nothing in our horizon that says that right now we need to build a wafer-fab. So there is no, no large capital project like a wafer-fab certainly in the next several years. [Operator] There are no further questions in the queue, but I would like to take this opportunity to remind everyone that it is “*” “1” if you would like to ask a question. We will pause for just a moment. It appears we have no further questions. I will turn the call back over to you gentlemen for any closing remarks or comments. [A]: This is Paul. Thank you very much for your attention today. As we said, we finished a quarter in which we met our expectations. We expect to grow in the December quarter. And with that we wish you all a good day. Bye- bye.

EarningCall_233982

Here’s the entire text of the Q&A from Micron Technology’s (ticker: MU) 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, the floor is now open for questions. If you do have a question at this time, we ask that you press “*” then “1” on your touchtone telephone. Once again, to queue in for a question, it is “*” followed by the number “1” on your telephone keypad at this time. Our first question will be coming from Brandy Abrams with CSFB. Yes good afternoon guys. First, I have a couple of questions on the CapEx gains, could you talk about the 1.5 billion Micron spending and 500 million IM Flash in terms of capacity addition from 300 millimeter versus backend on shrinks? Well, there’s an initial clarification, as we had been guiding fiscal year 2006, at 1.5 billion and with the consolidation of IM flash, there’s approximately $500 million of joint venture spending which will be consolidated within the fiscal year 2006. The 1.5 billion reference for Micron is still representative of how are cash flow, as the additional spending at the venture is funded by the initial capital coming from Intel and Partners. Well, on almost vast majority on new fast finding the history of nanometer and then of course we don’t really breakout between, what goes to shrink versus this new capacity and this environment, because remember we, even at this point in time, we’ve been finishing out the RAM and MTP, a quarter of this and of course that will start increasing as we moved to the rest of this capacity for the year. So, I think it’s fair to say that the vast majority at some of the front end, and in our particular case, I don’t have the detail on breakout between new capacity and what is advancing the process because the joint venture obviously impacts that and I still have that detail, which definitely favors us. Okay, and maybe looking at the near-term just on the bit production growth, could you talk about where you’re targeting and maybe how that’s per se between DRAM and non-DRAM? We’re looking at mid to high-single digit production, bits growth and of course that’s the way it exclusive as the image sensor ramps. Okay and then you’re finished goods inventory looks like you came down in the quarter, I guess, and just still looking at your growth, do you expect an inventory build when you look at the next few months? If we were going to anticipate an inventory build, this is the core that we do it, because, the seasonality as well as the various holiday that we have with, of course our holidays here in the States while this New Year. In our internal rejections, we have a built in a slight inventory build, based on the shrinks of the market today, it’s plenty strong to be absorbing everything on pretty core producing. Thanks, I was wondering, if you could, guys could clarify what you have said with respect to seasonality and how it maybe different in terms of your expectations and I was also just wondering if you could clarify your comment with respect to R&D, I wish its been running at the, the 166 level. And it sounds like you are anticipating that would not move lower with the, with the collaboration with Intel. Thanks. I’ll speak on this. This is Mike. I will speak about the seasonality. First of all, in the quarter we just completed, from a demand standpoint, it really, it really played out just about we, like what we expected, all the end products were quite strong with respect to demand, we did however in commodity DRAM area, see pretty strong supply growth, which pull a lot of price pressure, on the commodity DRAM products they’re being used in both the notebook and desktop PC, but demand was the, was attracted by like we expected. Now typically in a calendar Q1 type of scenario which roughly corresponds with our fiscal Q2, we would expect DRAM demand from PCs to be all flat let’s say down 5% and on a recent pulling of our customers for this time period, for the coming quarter, if we add the remaining up is about flat, so flat quarter-over-quarter from the seasonality perspective into fiscal Q2 for us. On the other, does that address your question on seasonality fee? I think, we may move towards the second part of that, you’re about say seasonality and do you have a, image sensor business, but… Oh yeah, thanks for reminding me. We would have expect this, again, the primary driver for our image sensors today is mobile phone cameras and we would certainly have expected some, some seasonality there as well and actually we would not have been surprised had demand kind of, slacked out a little bit once we get, got past the Christmas selling season, but it is not the case at all. Our demand for our image sensors is absolutely growing into the current quarter, we’ve got customers coming in and you are just about everybody and pound us for more supply. So, where we would have expected a slight greeter from a seasonality standpoint on the image sensors side, I think they’re assuming from a demand standpoint really there appears to be no end in sight in the near to intermediate terms for growth there. And on the flash side, as well again this is a consumer item, the NAND Flash is a consumer item, we would have expected, there may even be some seasonal slowdown in NAND flash demand but my view of saying is that demand today is still greatly exceeds the industry’s capability to supply that even a seasonal flow around is not going to have a material impact on the current imbalance of supply and demand. On the, yeah, on the R&D front, with the question about what we expect to happen there, clearly we’re going to get some efficiencies from cost sharing but I also think that we need to separate in terms of short-term and long-term, in long-term we think the R&D will be much more efficient with us joining the, sharing the cost of that. But also keep in mind, that in the shorter-term, we have a much broader portfolio that we’re going to be pursuing and we’re going to have, some activities, trying to bring the innovation for both companies to the forefront. So when you think about, we got new fabs, and we got new product, an expanded product portfolio, now that we have the significant capacity that we will be taking advantage of, that, in net scenario, at least in the short-term, we really don’t expect this is going to go down. We’re going to get some benefits from the cost sharing but anyhow don’t add a comment. Yet, Steve’s comments lead us right to a range of about 150 million to 170 million we’re in the near quarter, we’re going to be towards the upper end of that range, in a couple of quarters out, we would expect to be towards the bottom of that range. That makes sense. Any color, just with respect to pricing in how that may play out in terms of gross margin outlook? You know, what’s going to happen in the prospect of pricing, if you paid attention to some of the, new designs on public, on stock market pricing in the DRAM area, just in the past week or so, it appears to stabilize, at a level of much lower than we would have hope for it but, appears to be stabilize our contract renegotiations, that occurred in mid month with our big OEMs resulted in flat pricing. So, it appears that we, we’re true to storm anyway on the price, the strong price reductions that we’ve seen in the DRAM area. And on the NAND flash area there is, there is really not much price pressure, all prices are relatively stable, and the CMOS image sensor area is where, kind of been on a full source situation, with virtually all of our customers so there is not a lot, commodity type price pressure there will be though. Yeah, Hi, what percent of your revenue within that 45% you reported. Can you break that down into CMOS manage specialty with DRAM portals? Well I can give you; we prefer to stand away from the revenue fees. But that again from a wafer allocation standpoint, we’re running right around 50% of our product and kind of the more PC-oriented DRAM capacity 30% and the specialty raised 25% to 30% in specialty and then that leaves you 15% to low 20% and every thing else, so as combination of flash and general and image sensors and others. Okay, so last quarter, I think you guys said that your NAND was kind of in that 6 to 8 range and maybe CMOS rounded up to 10, I mean, did the CMOS outgrow the NAND sequentially here in the, in the November quarter? Okay and then what percentage of your DRAM revenue came from tech during the quarter, or again, if you would not want to avoid revenue commentary? No I don’t see any change at all, until as Steve is mentioned in prior calls, tech begins to go through some type of a 300-millimeter transition, which we spoke to publicly be in towards the end of ’06, ’07. Right, last question is you know on the options accounting, it seems 2 things, one could you allocate to across RDS, it need calls for us, and also it seems like it came in a little bit below what you would previously expected can you explain that, modest reduction? Yeah that $3.8 million, probably half of that in the cost-of-good sold arena another 30% is in R&D and 20% in SG&A it’s the rough breakout for you. Having got into that analysis did not expect to. The amount, as you appreciate $3.8 million is just not significant to the overall results of operations. The estimate for the year is still running in the $25 million range and the fact the first quarter was somewhat lower, is just a timing of brands issue. Sure, we can do that for its, like prior quarters, image sensors continues to lead the parade, interestingly not the specialty DRAM and NAND was pretty closed in margins as particular quarter and then of course followed that by DRAM gross margin. Single digits okay, and then what should we look at, as far as the NAND RAM, with the little surprise it appears that NAND did not grow nearly as fast as, I was thinking it was going to and any sort of color you can offer on, sort of the aggressiveness that which we can expect NAND up a deserve ramping? We’ve had, as we’ve previously stated, it will be fairly flat in wafer allocation for NAND until we can start making some adjustments in Boise and we start to see an output from Virginia which is later this year. So, expect the NAND flash again ramp to be fairly flat for the next couple of quarters and then we start to see some ramp as we get into the later part of summer in the end of the year. Okay. And can you offer a bit shipment growth for the quarter because it appears as though you worked down quite a bit of inventory. Looking at my model; I’m coming up with the fact that you guys might have shift as much as 27% bit growth. Can you enlighten up this sort of whether you guys feel like you took them share going this period? Or is this really driven by the handset market consuming quite a bit more? Let me start with the first part of your question, and then I’ll pass it to Mike if he comment on some of the segments that, in terms of guidance for production bit growth would be mid to high single digit this quarter, and again that’s exclusive of image sensors and again that’s production and Mike would you like to make any commentary on different segment? Sure. Doug, I’m not, first of all, I’m not sure how you get your 27% calculation or whatever that was at the end with us, but we did last quarter, we increase bit shipments by 11% I think. And now, it was against production increase of 8%. So we get draw down inventory somewhat in the quarter, where we are seeing strength of work from an application standpoint, where, where we are seeing more dramatic growth of course in handsets. Both from a memory content just a shear demand growth standpoint as well as our market share growth and there so, handsets will probably be at the top of the chart with respect to growth, server is also a significant growth area for us and we have given up some share although I don’t think it’s significant but we’ve given up some share in the notebook and desktop space. Great, thank you. Looking towards the future memory architecture in the cell phones you have mentioned that you have four products that play into the cell phone area. Can you tell us what do you think the architecture is going to be, is the NAND still going to be separate, is it going to be integrated in the cell phone and say, how Micron will play in those different markets? Thank you. Yeah, sure both. Today our view is that NAND does not playing a significant role in cell phone architecture certainly from an embedded standpoint, it does from an external or card standpoint. Our plan is to put, spread on both size of that, John, 1) our first MCP product with the NAND flash device is going to be a 1 gig, 1.8 above NAND chip packaged with 512 megabit or 256 megabit low power DRAM product. That is probably going to be a market reality in the second half of 2006. So, that’s basic with the embedded play for us, and that’s going to grow of course 2 Gig NAND plus 1 Gig DRAM and so and so forth. And then the other side of that would be the embedded piece and that would be through a variety of different card form factors and we’ve got, we supply chips to car manufactures that get us in that way and, we are contemplating a rollout of, other means of entering that piece of market as well. But, surprised to say that the both the embedded and the internal features are significant interest for us. You mentioned, thanks Mike, you mentioned an interesting comment that the NAND flash in terms of your bit growth production is going to be kind of flattish for the next several quarters. I was wondering if you can elaborate on that and if you are going to be, participating or missing out in the market, as you would try to adjust to your capacity? Well we are, as we’ve mentioned before we’re ramping NAND but it predominant today in the Boise facility and keep in mind, in the Boise facility we’re also producing imagers which are in strong demand we are producing CellularRAM which is very strong demand and so in fact the really what I would think of it is, kind of the first custom design low powered DRAM device is running in Boise from the cellular market as well, as a extension of the CellularRAM business. So we have some challenges on balancing the capacity among some pretty strong products and as a result the Boise will continue to ramp on NAND but it’s not as aggressive as you might expect to be given the strength of the NAND market but that’s also because it’s against other products that are going quite well. And so it’s more of a calculated change in the balancing of the way for resources still some dramatic. That obviously will start to ship pretty heavily as Virginia comes online slowly, we are thinking in terms of Virginia, we will start to leading someway for it, on mid ’06 and in later ’06 for Lehi, so, that too will become all, but really the next couple of quarters as Kipp, on a relative basis, it’s still growing for us. But on a relative basis, compared to what will happen in the second half of ’06, it will appear to you to be somewhat flat. Hi, yeah I was wondering if you could provide a little bit color on your pricing in the DRAM segment, and I guess maybe in the Sensors as well on an average basis like what your DRAM pricing did quarter-over-quarter? And then I have a follow-up please. Sure, on the, if we look at the commodity piece of the market which again as Kipp mentioned is roughly half of our business. I think quarter-over-quarter prices were down round 15%, I think if I’m mistake that is slightly higher than that. If you look at our overall DRAM portfolio, our price per bit was down about 5%. So I think that speaks to, the strength of that portfolio, essentially there was heavy price pressure on a commodity area and pricing is going to flattish for all the other DRAM in the portfolio. On image sensors its really a function of what we are doing with a product line as opposed to what the external market pressures are but frankly speaking for us there aren’t a lot of external market pressures, we are, the big player in the market and, so in other words we did take average selling price is down quarter-over-quarter. Because we significantly grew our VGA sensor outputs in response to market demand. And of course VGA sensor sold in lower price than 1-Megapixel or 2-Megapixel CMOS Megapixel sensors. So essentially not a whole lot of price pressure there, just a function of what we are doing with the product portfolio. Okay, thanks. And I guess to you kind of two unrelated questions on the IM Flash joint venture is that signed or do you expect that to be signed in January? Good afternoon guys, thanks so much. Couple of quick question, first if just want to make sure particularly about modeling the profitability of the NAND business probably, the way for upward growth is going to be flattish for the next few quarters. And you are going to give up your are sharing half of the profitability with Intel so the NAND profits are going to go down for the next quarters until the Intel, tell me the incremental capacity comes online in which case you are obviously planning on growing at much faster than, what you are going to share with Intel. Am I taking about that wrong or have the right? Yeah I think in general that’s right. We, what we said was it’s for the next 2 quarters that the output with same relatively flat although it is still growing really it is the third important quarter of ’06. I think we’ll start to see something reflects in, in terms of change. And yes, we will be splitting the output and hence we will be not giving whatever margin is don’t that have to runs to our partner Intel. But of course the JV itself, the product to Intel will flow through Micron and then you got to remember that the R&D benefit that we are receiving we will be countering that. So when you net that out, I mean if you can help us from a modeling perspective for the next couple of quarters where, there is an incremental up tick you are sharing some of the profits. Can you obviously think about what kind of EPS impact that would be, or there something along those lines for modeling purposes. Okay. Next question you talk about the DRAM industry your commodity DRAM finding a supply and demand balance I think that was in the opening or is that will find a supply and demand balance service in the opening comment. But hasn’t the problem really been on the supply side from your competitors and not really on the demand side, I mean the demand for PC units has been great. It’s been the supply issue. What fixes it if the Taiwanese DRAM companies have been showing their willing to scale back on their supply. Yeah, in terms of, the in particularly the historical impact Jim clearly supply side economic has had greater impact than demand. Since the demand has been relatively good year after year, in terms of its bit consumption, ranging from 40% or all days of 75% to 80%. So your question about, what we will rationalize the DRAM supply going forward, we don’t necessarily have a good answer, because we don’t have visibility to what some of our competitors are doing specifically with respect DRAM into the PC space. But of course, if we have the absolute answer that I have we would have been diverse find the portfolio. Or maybe we would have been doing slightly different but, that’s the reason we are trying to be expose less to that product it goes right into the, the desktop space. And, I’ve heard both, sides of the fence of in terms of what the industry things are going to happen by supply. Clearly there is an allocation into NAND and in our case into NAND and Imaging. And what I think of especially DRAM because those markets are growing and others are trying to do, some others anyway to trying to do similar things. So, that’s we are chart for us to get a handle on it. How much migrate, how much current capacity migrate, how much the current capacity migrates out and then, the new capacity you guys can go and look at the models out there and that we are going to do with that despite, but…. How can sure about that on just for one second this would be my last one, if I think about ’05 we had great PC unit growth we had a lot of capacity allocated over from DRAM to NAND and Image sensors in your case. And the industry pricing was still a lot worse than expected I mean what kind of scenario do, you need to see where we get better than expected price. I’m not really sure Jim that we’ve seen that the, the results of a major effort of on the part those manufactures can, ship capacity towards NAND, we are not a lot that we can do with our capacity but we are doing what we can in order realize more NAND after sooner as suppose to later and in fact quite some DRAM, there are two either big players in the both DRAM and the NAND area they claim they have the capability to shift our capacity from the DRAM and NAND. And I think now it’s about the time when we sure really start to see the result of that effort were bear fruit. Because in NAND market is clearly under supplied right now, the DRAM market its clearly over supplied, so…. I mean those two guys would argue that they move whole fabs worth of capacity over in ’05 and they will do they will do that again in ’06 but no more. I mean do you think differently about that? I don’t know, no idea what there, what there mindset maybe just if I were in their shoes and I had the ability to be as flexible as they’ve indicated that they do I would certainly be moving much more capacity towards NAND and away from DRAM and this kind of environment if you look at the margin differential its staggering. Just a clarification on the R&D, all spending by the joint venture actually its, consolidates on your income statement, am I correct. So if your guidance, what you said a 170 million going down to 150 million. That’s what shows on your income statement line. Or it’s more than that because you were including statements by other third parties. You heard it correct and it’s the consolidation of IM Flash Technologies, we will include the R&D spending at the joint venture with our R&D spending and as a result of the sharing it will be in the 150 to 170 range even with the diversification and the additional product efforts that Steve outlined. Thanks, want to ask a little about price reduction, cost reduction that you are seeing now I assume you are staying under sort of typical plan. And looking at where spot prices today, actually my question is, is the difference between spot price in your cash corners and/or better or worse than it was at the beginning of the last quarter? We are not going to get into that kind of specifics. If you like to try the question in different manner we might be a little help. I don’t know if I can, because I guess whole no what the kind of reaction, I kind of guess it was, let’s maybe look somewhere else. You know, we were looking out at the image sensor market and we are seeing a lot of strength obviously from handsets in general. But, we are starting to hear more and more popular, image sensor demand coming out of China, in particular. They want to get attention from you what you see from that market and what you think that does or doesn’t give to a sustainability of image sensor to our strength? Actually we are not hearing much it all about Silicon coming out of china from for image sensors. There are two in one capacity, more capacity to do things on the backend if you will modules or see if there are something about nature and maybe one or two at the foundations right and trying to do something there, but we are not aware is there any silicon coming out of China right now. Oh, on the demand side actually, the camera phone market in China, the penetration rate is relatively low and the demand from the Chinese market, I’d characterize it, it has been significant today. So, that’s a, that’s a huge, huge potential growth area for us. What demand growth we’re seeing from China is strictly, today anyway is strictly from an assembly standpoint. So most of, actually if I am not mistaken virtually all of our, end-customers have either directly themselves or through subcontract arrangement of a module. Camera module assembly operation in China and that’s why we’re seeing demand coming out of China, its primarily just, just that’s where the assembling take place. Okay, just one another question, what you’re thinking about looking at the end of this fiscal year from now, how do you think we can expect to see the rates of, not the rates, but do how you, offer to give us a mix of your business, and I guess on our way for our date, which is, is a good way of thinking about this, for NAND, CMOS flash and special PC DRAM and commodities do you have. We expect the commodity PC DRAM that, to continue to trend down. We expect specialty DRAM to continue to moderate up and of course NAND flash will be beginning its pretty good ramp at that period of time. So, we will see some pretty significant increases as well and image sensors continue to look very strong. Can you quantify that, and in terms of where, what percentage they may, they might make up at the end of the year versus now? Its too far away, we are going to continue to be opportunistic and move wafers around where we see strategic benefits to do that, and anything more that a cycle time gives us a pretty good opportunity to move wafers. So, it’s a little hard for us to look out 6, 9 or 12 months and give you that ratio. Is there a range or a level at which you just can’t lower your DRAM, your commodity DRAM in market, because you’ve got certain responsibilities, to OEMs for example. Is there a level you have to just keep producing at? Well I think that the responsibilities to the OEMs in the PC market, it’s obviously a slightly different responsibility to the parts what we have sold so or so its not quite that issue, so long as, we are changing our capacity of RAM, as long as we get sufficient notice to the customer base, I don’t think it’s a bigger deal in the PC side. The challenge that, one of the challenge is that we have is, we’ve already made big moves in capacity allocations, obviously as Kipp mentioned, about half of it, we’re down from we used to be a 100% couple of years ago or few years ago, down to about half of it now going into the desktop space if you will, on the DRAM side. And, so we have capacity in place that’s geared towards doing certain things, we can migrate it overtime, but it’s, when you start talking about those kinds of changes and also a short period of time, we run into some limitations that exist at least for maybe 2 or 3 quarters, before we can substantially change that, and an example would be, we put in significant capacity in 12 inch, to run think of it is high volume DRAM products. And, if we are going to change that or to the greatest, we want to change that, it just takes us a little bit of time to do. And so, it doesn’t, we, you consider to be flexible capacity, you can change within a cycle of time as Kipp spoke about, and then there are some others that take 2 or 3 quarters to trying to change. We saw some flexible capacity lap, but we are going to run up against our ability to do something in more cycle of time being limited and we’ll have to make more wholesale changes on a facility basis. Yes of the 55% which is PC DRAM can you give us some estimate, there is, within that, the, is the Server workstation part of that, to the growing portion and can you talk about the profitability of that, these are the competing DRAM positive versus PC DRAM? I am not going to provide specifics on what portion of that would be the Server piece; but it’s less than half of that of PC DRAM piece with the Servers. And for us, the server space is more profitable than the Desktop and Notebooks base primarily because it is higher density required, high reliability devices and modules and so far, so it’s more profitable for us and it is a growing piece for us as well. Is there any consideration being given to just moving more PC DRAM, some of your older 8-inch PC DRAM side Server into the NAND flash joint venture because the revenue per wafer is higher there, so why not even lower the exposure to PC DRAM even more? Well actually we’ve been on that migration path, that’s what, we are experiencing today, we continue to move PC DRAM and the products. But, the other thing to make note of it, is we don’t have a lot of 8-inch capacities left running what you would think of is PC DRAM. We have a, what we call a legacy-driven portfolio, we’ve obviously got the man we spoke about, and we’ve got imaging in some of the cellular type stuff, which is consuming the vast majority of 8-inch. And the only exception to that, by the way would be our partner in Singapore Tech, and they are on a migration path to 12-inch, as Kipp mentioned they are going to start doing that, actually similar call is here in the next quarter to and then start in that progression of change. So, I mean what you have left after that is only Virginia running 12-inch. So, those this month, a lot of 8-inch running what you, what we are characterizing PC DRAM. I see and then turning to NAND flash, what steps are you taking to really sort of expedite the ramp in both in Virginia and Lehi. I’ve just given the tremendous profit potential there, how, how can we express the ramp of the NAND flash joint venture manufacturing? While we are aggressively as moving as we can, I mean it’s currently having child. There is a certain period of time, that you got to just stay and its going to take that long. So, to the extent that we accelerate it, we will, but as always somebody thinks you can do it, you got a full supply times, et cetera, et cetera. And can you talk about your product roadmap in NAND flash; I guess right now everything is on 8-inch 90-nanometer and can you talk about both the product roadmap in terms of density and line width in multilevel cell flash technology? Sure we’ve been producing and shipping obviously since Day 1, last December, so almost a year now, anniversary 2 Gig, we’ve been sampling now 2 Gig and 4 Gig, and that was, finally that was all in 90-nanometer, we are now sampling 2 Gig and 4 Gig at 72-nanometer as well. And of course we have a product roadmap beyond that, we are not sure probably yet. Okay. And how would you see pricing trends between the 2, 4 and 8-gigabit NAND flash out there, even though I realize you don’t participate in 8-gigabit, what do you see in terms of pricing? Yeah actually we do participate in 8-gigabit, by stacking 4 of our 2-gigabit chips and, from our market pricing standpoint, basically the markets have roughly parity on a perfect basis for either or 2, 4 and 8 gigabit solution. Good afternoon, what did wafer outs average for the quarter and could you give us estimate as to what they will average for the current quarter? Hi thanks a lot. I have a few questions, the first one is that, Bill, you indicated, the some, you give some color on how the accounting is going to work with the new venture with Intel, you’ve said that half of those will go to Intel, at a certain price and the other half we will be able to sell it on the market price. But the total cost-of-goods sold will go to the cost-of-goods sold. And the whole 100% cost-of-goods sold will go to your cost-of-goods sold. Now, can you add any more color on as to whether that Intel pricing is always going to be approximately below the market pricing at a certain discount, or if the market price goes down significantly, would you have some sort of upside on Intel pricing? Hey, Nimal, this is Steve. The basic way in the JV works is that we are buying; both of us are buying equally the products from the joint venture cost. So there is nothing going on at the JV level, besides that. And where we get consolidated we’ll just incorporate that council. Okay, I understand, I think, just my second question this has been asked by number of people, so please don’t, I just want to get some idea, when you exited calendar 2006, can you give us any idea on a basis, I think probably a bit basis would be the best way to look at it. At least, approximately, what percentage of you bit output would you like, or would like to be in NAND flash as opposed to everything else? Well you guys can first of all forget the bit piece in CMOS Imaging, it’s not even relevant, it’s got nothing to do with any of it. So, if we look at the allocation when we make the imaging, you got to tell me to a full of that, it’s not even a relevant image with respect to NAND versus DRAM, hey look you guys can do the math. Okay, Virginia is capable, we’ve already said it’s capable of about 7K per week, and we guys are capable of 11k per week, and then we’ve got the Boise RAM from, as Kipp already mentioned, we do about 5k now and it will take that about to probably 10k, 11k, 12k per week on 8-inch. It really all has to do with timing, we’ve already said that we want to start ramping Virginia in sometime in mid ’06 and we have the middle of ’06. So, take your historical perspective on how that’s ramp, plug that in and you don’t have a pretty good number. So did that concern you about all the numbers together about 22k, in addition to US, you are probably running someway out of the 22_ of by end of next year. So 70k, out of the 70k say about to 16, though so would be, is that the right calculation, am I in the… You can’t ask me a comment on the math doing in your hand, I am going to have ask to pass. Hi, thank you, could you talk a little bit about the drivers, CMOS Image structures in the coming quarters, if market penetrations, market share gains or just really strong cell phone demand? All the above for us to really, I did mention in an near term to date and in the near future, primary driver gains in the camera-enabled cell phones and my perspective is that, we are the beneficiaries, certainly of the growing penetration rates, in terms of cameras, cameras being the numerator and total cell phones being the denominator. We also are, have put ourselves in a position where we are the supplier choice just based on the imaging quality that we are able to deliver with our sensors. So, we are benefiting from market growth, we are benefiting from market growth, we are benefiting from market share growth, and if I look at, say a couple of quarters to, to say 4 to 5 to 6 quarters down the road. We will start to see some significant growth as well from automotive applications as well as some further penetration in these digital still cameras and in PC camera area. In the quarter we just completed it was a little less than 50-50, DDR being less than, DDR being greater than 50, DDR being less than 50% of the commodity pie. In the current quarter it’s probably going to be about split 50-50. Okay, and then final question, in the strange world of commodity memory, given you are allocating capacity to IMSC, in the future if there was a shortage of DRAM could you revert that capacity, with DRAM or is that just a ridicules thought? We cannot, we well, put it this way, its not that it couldn’t happen, it’s that, we have a partner manufacturing name and the name actually manufacture with the partner. So that extent that we are going to do something with that capacity, in an increase or decrease if we have to have discussion with the partner. Okay, like just so in the sense it limits your flexibility from reallocating capacity going forward, from DRAM to NAND and back and forth. When you say limit, owing to the extent that our partner believes that we should do something different with it. But in other words, just a similar of a self breaking mechanism. If the, again not to believe in this but, if the margin on NAND is much better than the margin on DRAM, of course we would want to allocate it in the direction of NAND, and if that were to be the case, the probability is our partner will be fine with that. If the margin on NAND is worse than the margin on DRAM, it depends on how worse it is, before our partners want to reallocate it, but thoroughly if they wasn’t doing very well now because the market was over supplied. They’re unlikely to have too bigger problem with the reallocation. Thank you, we had a, group of question. First of all, Mike you had referenced camera phones with 2 cameras. Would you please walk us through the applications where having 2 cameras on the same phone, it advantages and then relative to the JV, the IM plus JV. What percentage of the production needs to be dedicated to Apple versus the availability that you have to address the large opportunity that you are anticipating developing here in later this year in the cell phone market? Okay then on the first one, the dual camera phones, their primary application would be video conferencing. So there is, we have, we would call an in camera which is typically a low resolution, a VGA camera, which should be on the inside of the phone, basically looking at, you were taking the picture of the user for video conferencing purposes and you have out camera which would be for taking photograph by the end user. The penetration rate of dual camera phones today is not that great, but again as infrastructure improvements are made to enable more seamless video conferencing we expect to see that increase. But that is one of the big drivers of those extended life of VGA cameras is the dual camera phones. And we before we shift to the next question, you’d referenced the infrastructure out there, with the current technology as they were the services providers, is this something that is can be fluid or there are upgrades to the existing infrastructure, that really needs to be made. It depends where, I think probably the most, where geographically, probably most infrastructure today from Mobile communications will be in Japan and video conferencing over the mobile networks bares the reality today. In Europe, I believe it is as well, in US again this is a, beyond my area of expertise, but its probably quite someway off into this future. Yeah, Bill its Steve. On the question regarding, I think it was specifically with respect to with some slighter Apple, we saw us we had a long-term agreement with them on that. Obviously I am not going to disclose a lot specifically because agreements both with our customers and with our partners. But I think it’s suffice to say that the percentage of exposure that we has in that agreement is really controllable by us, in other words I mean the partnership because its quantity-defined. So, if we want to produce more products, then the percentage goes down and if we produce less products then the percentage goes up. It’s completely within our control, as to how we want to, how much of our outlook that we wanted to be exposed to that. So I think that’s the best way to think about it. That is helpful thank you and then, one additional question, and I think this was somewhat addressed earlier. But I would like to try again to see if I can get a little more clarification please. Relative to the inventory decline given that the pricing in commodity DRAM was down, often times that, you don’t see inventory declining when pricing is also declining. Would you walk us through again where with in what products you actually saw the decline in inventory please? I think pretty much, while we entered the quarter with firstly no inventory on in my senses that you could probably imagine based on the way we stop speaking about it. So there was not much of a change there. I think that if I remember back across probably with the case on especially DRAM as well, so the inventory we carried with primarily in the PC DRAM area and demand was strong enough to absorb it, albeit, there was a tremendous amount of price pressure, had we projected that pricing was going to be increasing in the current period, it probably why it chose into whole small inventory. But we weren’t projecting that, still not really projecting that. So, as the market had strength enough to absorb it, we just hold at the market prices and ended up near draw down on inventory as suppose to your building or keeping it flat. But if we did hear your earlier comments in the call, there it certainly appears to be the possibility that some of the manufacturers are shifting from DRAM to NAND. But that makes started taking queries and actually impacting the market here, favorably in this seasonally slow period? Bill thank you very much, I think we have time for one more question and then we will wrap it up. Yeah I will try to, this on the NAND side, this agreement that u have with Apple, I know the way Apple operate, it take too much about, could you just help us think a little bit is this a sort of a, a cost plus thing or how do you supplying to them or driven by market ASPs and they still to, need to be cost competitive to their current suppliers to make comparable margins or not, and I do have a follow up please. Okay well as you suspect to them I can call it pricing to, think your customers as, that wouldn’t be probably exceptional for them more, having said that on the cost, our, our expectation is to, is to be equal or better than anybody else in the cost side, its got nothing to do with an Apple agreement and, I think the way to phrase it is, we’re planning on making money on the product we sell to Apple, we trying to making money on the product we sell to other customers, so, we expect to be as competitive as anyone in terms of cost. Okay account for you had, I know you don’t want to give specific some gross margins of product area. Could you may be give us, a rough estimate on the spread and gross margin between all those 4 major areas the highest and the lowest. Now, we wont give you specifics on the spread although Kipp indicated that the CMOS image sensors and specialty DRAM and the NAND were well and pretty close together this last quarter had a very attractive rate and there, there is a significant spread between that and the commodity DRAM. Thank you Ben. Now, with that we would like to thank everyone for participating on the call today, if you will please bear with me, I’ll need to repeat the Safe Harbor protection language. During the course of this call, we may have made forward-looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that may have been made, on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially, for information on the important factors that may cause actual results to differ materially, please refer to our filing with the SEC including the company’s most recent 10-Q and 10-K. Thank you for joining us. 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_233983

Thank you very much. A couple of questions. First, I think if the trend holds seasonally in the December quarter, international will be profitable for the first time I think ever for CNET. I just wanted to see if you would comment on that. Secondly, on the publishing side of the business, I know you're not giving, you've given some guidance for 2006. What is your confidence level that publishing can actually not decline year-over year or can actually be, what is your confidence that it can grow again at some point? That's it. Thanks, Mark. Let me, on the first question, that is right. We will see international profitable in the fourth quarter. I think I'm correct in saying it was slightly or just marginally profitable by a little bit in the fourth quarter of last year, so this would be the second time. But I think it really speaks to the leverage that we're beginning to see in that business and going into 2006. On the publishing side, it's kind of good news/bad news. I think the good news is we've done an incredible job over time of shifting dollars from off-line to online. I think what you see in our own results in the publishing area is consistent with what you're seeing throughout the market. And I think as we've said before, we are an interactive content company. We're focused on building out interactive content, and as long as we believe that the publishing assets can be strategic to us, we will keep them and use them, and when we think that is no longer the case, we won't. This is Lloyd in for Gordon. I was just wondering if you could comment a little bit you mentioned that you were unifying some of the game and entertainment properties to make a unified marketing platform. I was wondering if you all were considering integrating Webshots into a similar platform. And as a sort of a follow-up to that, if you could perhaps give us some color as to how you all were able to attract New Line/Warner and AOL to the Webshots properties, whether they came from other CNET properties or whether they were new to Webshots and CNET altogether, and how they sort of look at Webshots versus other CNET properties? On the unification side, one of the really interesting opportunities we've seen as you look at our games and entertainment properties is you have so many overlaps. When we launched MP3.com, one of the things we did well was beginning to take, for instance, soundtracks from games and tying them in and being able to do a lot of smart cross-promotion between the game site and the music site. And we're finding a lot of similar things with respect to the TV site. And so we've seen a real ability to take all of the different entertainment properties and literally have users stand at the center and be able to navigate and trade information between all the different properties. Now I think you should, you'll continue to see us add more and build out around that general theme within that group. At the same time, we think of Webshots really kind of in a different light. And I think it's a form of entertainment, but is really more focused kind of overall with respect to community and what we can build out there. And I think as you've seen in the last six to nine months, you're seen a lot more interest on behalf of marketers in that area. We're putting more focus behind it and our plans will be to be more aggressive in that area. I think we've demonstrated an ability to take Webshots, take what was already a valuable asset and I think make it more valuable, and that's been both through product enhancement and through platform enhancement. So I think we're feeling really good about that area. As I've mentioned, we've beefed up the dedicated sales effort behind Webshots, and I think, again, we're still early, but I think we're seeing some good traction there. I think the two advertisers that you pointed out are examples of what we're seeing with respect to traction of kind of bringing in new people into that opportunity. No, these were new advertisers. And I think it's back to that theme, one of the things I said earlier is the more things we continue to do to broaden the opportunity, the more people we make aware of who we are and what we have, and so part of our focus on continuing to expand and add more categories really is the notion that it makes the whole thing more valuable, every new thing that we add. Shelby, I was wondering if you could comment on whether or not there will be an increased focus or is there an increased opportunity to really leverage user-generated content and really the high-margin profitability of that type of content, as opposed to content that you're creating per se, and obviously user-generated content can actually be exclusive to you depending on how you deploy it. And then secondly, if I look at your trend in RPMs, it really, and using just the marketing services revenue as opposed to interactive revenue, it really looks like sort of bottomed out here. Do you think we've hit an inflection point where RPM could actually increase in 2006, given that the trend looks like it's bottomed out sequentially June to September? Thanks. Great. We have been very focused over the last really two years on user-generated content. I think you see it if you look at all of our different properties, whether it's users contributing FAQs within our games environments or writing user opinions or helps and how-tos or other things. Same thing on CNET.com, when you look at kind of a show me yours, where users are going in and showing their own systems and how they set them up and what they bought and what has worked and what has not worked. What is unique about how we focus on user-generated content is we focus on really delivering high-quality user-generated content. So one of the things, for instance, you've seen on sites like TV.com is even things like a minimum number of words you have to do to fill out a review of a show. And so kind of consistent with this notion of the passionate third, we very much are positioning user-generated content as something that we think is critical to everything we do, but we're very much focused on kind of the best users and the highest-quality content that can be provided. With respect to RPM, I think as we have said consistently over the last couple of quarters, we're really focused on two things. One is we're focused on growing users and usage faster, as fast as we can, to kind of build inventory in anticipation of the opportunity we see, and second, growing revenue. So at different times I think you're going to continue to see RPMs bounce around. We really aren't building or designing the business against that particular stat. That's more kind of a function of both users and usage and revenue rather than something we're kind of driving to independently. I was wondering if we could revisit the first topic on user-generated content. Do you think you could take it to the next level, I'm not suggesting that it's the right thing to do, but Yahoo! started to experiment with some things sort of below the radar screen, like the Yammys when they've had users send in various types of entertainment content. Is there an opportunity to take a whole new dimension on user-generated content for CNET? Yes. We think of user-generated content as a very important kind of piece of the puzzle. But we believe it needs to be much more kind of the notion of structured participation. So how do you create forums where it can be done in a way that people can, you can kind of optimize to getting the highest-quality information, it's easy to find and it's functional, things like that. So it's clearly a very important theme. We think it's a important complement to what we do. Even when you look at, for instance, the redesign of News.com, you see that we're beginning to really focus on how do we leverage more content from our user base, even within a news environment? So it's something that we recognize and believe in as kind of a critical component and we continue to look for more ways to do it, but it's not something that's really new and it's something since way back when, launch of CNET.com in 1995, the whole notion of user participation has been important. I just think as the medium is getting richer, broadband is, you're seeing broader penetration, there's a lot more ability to get participation, especially among sites like our games and entertainment group, where you're dealing against a younger demo. So it's an area that I think is an important area. We think we have a unique ability because we can really anchor it against high-quality content, so we give people a reason to be there and a reason to kind of participate with our brands. And we also do it in a way that we make it attractive to marketers. And so marketers want it to be an environment that's credible that they understand that is well organized, and I think that mix of how do we take good journalistic content and marry it with really good user content I think is something we can do uniquely and is a real opportunity. It's Akil for Paul. Just one quick housekeeping question. What was search as a percentage of revenue? Then also, the sequential growth in uniques was down for the first time since 2Q '04. Was that just from redesigns or was there something else behind that? And then finally as it relates to Computer Shopper, the publishing trialing that Google is doing with the magazine ad initiative. That's something that they mentioned some of the Computer Shopper's competitors have embraced. Can you give us any color there? Is this something that you're looking into or already trialing? Thank you. The search as a percentage of revenue we don't break out. Over time, what we've said about kind of our Google relationship, which makes up most of our searches, has been, at different times been at 10% or close to a 10% revenue stream for us. On the uniques being down, we did do a lot of redesigns this quarter, and I think it's something, we went in with expectations of we want to get our services kind of buttoned up into great position as we go into fourth quarter. And as I mentioned in my comments, you always get dislocation when you make redesigns. This is just kind of part of it. But it is really critical if you're going to do this well, you need to keep kind of raising the bar and challenging sites and building better and better services. And I think we're very pleased with where we are overall with respect to product. And now on the third question, it is not something that we're participating in now or really planning on participating in. I got the majority of my questions answered. One I had was you mentioned advertisers in video advertising right now is at about 1% of revenues, but interest is high. Do you care to comment on how high that could, what percentage that could get to in, say, '06 or '07, ballpark range? We did not break out a percentage, but we did say that it's a small number. You know, it's hard to know right now because the market is changing a lot faster than I think any of us could have imagined. I think, as I mentioned, I think that the iTunes announcements with Disney is an important one and really could mean kind of a further acceleration of what we see with respect to video. But as I think I said on the quarterly call 90 days ago, part of what's been the most helpful about video is it's really forced advertisers to take a hard look at the medium, and I think for many, they've said this is a direct marketing medium. And as they see the really interesting things and the way you can deliver kind of very meaningful emotive stories within video delivery, I think it's really changing people's perceptions. So I don't know that we have a forecast for what it looks like 2006 and 2007, but what we do see is it's having a very meaningful impact on kind of overall perceptions of broader marketers. And I think that is very important for what you see kind of in the broader advertising opportunity. Good afternoon Shelby. A couple of questions, first, could you give us some measure, if necessary, qualitatively at least, on the revenue breakdown between the traditional, kind of your classic CNET-branded properties and tech advertisers, those might be two different ways of looking at it. And your new properties and the new type of advertisers and I have a follow-up. We haven't broken those numbers out. I think what we have said kind of publicly is that the CNET brand of properties from a size-wise have been our largest as compared to our other properties. But we don't break them out specifically. What I can say overall is when you look at kind of overall growth in our business in the second quarter or third quarter, most of it has come from kind of that definition of in category contextual advertisers. And so whether it's within the Red Bull environment, people that are advertising in an overall personal technology environment, or the games and entertainment group, where you're going to see game companies and TV companies and music companies and others, or in the B-to-B properties, where you see people that are marketing into the enterprise space. So we're still overall looking at kind of revenue growth. It's still really coming out of what we kind of commonly refer to as endemics. So I think the whole notion of what we see out of kind of broader-based consumer advertising is still something that we see being more of a 2006 and 2007 story. Okay thanks. And second, as I'm sure you have noticed, there have been many reports in the media about potential takeover or merger between CNET and others. And it's been reported that this has been an ongoing kind of discussion between the management and many potential acquirers. And I obviously don't expect you to comment on it directly, but my question is with these stories continuing, how much of the management time is devoted to these issues and to what degree kind of it distracts you from focusing on a longer-term strategy? I would say we're very focused on operating our business. As we have all kind of looked at each other, if you think about what it was like to put your trousers on and go to work in 2001 and 2002, it's a very different market today. And we're seeing a lot of opportunity. We're really excited. We have a lot of confidence in our ability not only to deliver on the categories we're in, but to be able to add new categories. It's nice for the first time in a while to have a little bit of wind at your back, and we're just seeing a lot of opportunity. And so I think it's a time that we're very encouraged about what we're seeing in our business. Clearly, there's been a lot of broader interest in the content space, and I think when you live in an attractive neighborhood, other people are going to want to live there. And so we do see a lot of that interest as a real validation on the things we're doing. But you know, management team is very focused on delivering for the fourth quarter and delivering going into 2006 and 2007, and it's a time where I think we're very excited about what we're seeing overall. I was wondering if you could clarify the comment about the incremental margins. I just wanted to make sure I got it right. And what I heard was that you said the 50% incremental margin target is still unchanged, although it may bounce around from quarter to quarter. I just wanted to make sure that you weren't trying to say the 50, you made maybe below 50% next year, if you could just comment on that. And then secondly, you mentioned both in your verbal comments, Shelby, and in the release a bunch about the podcast products you added in the quarter. I was wondering if you could comment about how your you're monetizing those products and services, or if you're just using it to drive traffic to the site or if you might, if you're going to be putting ads in front of them or inside the podcast to monetize those products? Thanks. I'll take the first question, which was about our expectation for incremental margin. And that's just to say that we expect that our future performance will generate incremental margin on EBITDA of 50%. But if in a particular period we see attractive investment opportunities to expand existing brands or to launch new brands that we would expect that that 50% incremental margin rate may be below that level. And I just, I might add to that that overall, our number one focus is how do we build the most shareholder value. And I think the degree to which, we don't, as we go over time, we want to make sure that we're being prudent in terms of our own ability to reinvest against our business. And so it's just I think we want to be in a neutral position relative to what we see, and our expectation is it would all be done kind of against the guise of how do we ultimately build the most shareholder value and deliver the best returns for our shareholders? With respect to the podcast side, we've seen some good sponsorship opportunities around podcast. I think it's still early, I would say it's unclear to me whether video is not going to kind of jump over podcast. So it's unclear to me how significant and important podcasts are going to be. It clearly gets more interesting when you get Wi-Fi-enabled automobiles and people can in theory listen to podcasts interactively on their way to work and other things. But I think we're putting a lot more shoulder and see a lot more opportunity specifically on the video side. Yet you did see us make a series of announcements. And we think you've got to do everything; you've got to try everything. And our number one objective is to just deliver better, more engaging, more authentic experiences for our users. It's actually Bill Drewry here. A couple of questions, Shelby. On the 16 million of international revenue, how much of that came from China? We do not break the percentage out of China. What we have said is that China and the UK are our two largest markets and our two most attractive markets within our international properties. Okay. And given that you guys continue to make acquisitions here, I mean, you are not seeing any issues with the authorities there in terms of, you know, they've obviously had some high-profile crackdowns on the traditional media companies in terms of incremental investment and they're taking some steps to ensure that control of content is still within their realm. Do you see any of that in the space that you're trafficking in? No. Clearly, we've been with our China properties, been very focused on kind of product-focused coverage as opposed to kind of general news-focused coverage. And so we've had a team kind of that's been in place since 1996, I think, we've been very happy with both what our team has been able to deliver in terms of kind of existing businesses and their ability to find new business under attractive terms. And so I think we've been very pleased with what we've seen. You always kind of want to knock wood a little bit, but it's been very attractive. And I think importantly, we're seeing strong growth out of our online properties within China, and I think that was one of the more encouraging things we've really seen over the last three months to six months, is we made some key acquisitions with both ZOL and PCHome, and I think those are paying off and we're very encouraged with what we're seeing. And just two other follow-ups. You cited traditional media companies moving into the online realm pretty aggressively here, and I'm just wondering as these deals get done, News Corp.'s probably a good example here recently, are you seeing either competition for properties that you might be interested, or are you seeing, and/or are you seeing potential prices go up against what you might otherwise you want to pay for something? Bill, it's Neil. We have, obviously, we've seen more people at every potential acquisition than we did six to 12 months ago. We've had the most success in our acquisition strategy around smaller properties, where we haven't run into these folks as much. As they've entered the market, they have been focused on the larger opportunities. So as we participate in those ongoing forward, we probably will see them there, but we continue to have an attractive backlog of interesting smaller to medium-sized opportunities that we're focused on. And just one last question, if I could, for you, Shelby. You were talking about pre-2000 trends and also what you thought the sustainable growth rate for you guys is going forward. And I was just wondering against that, there is a school of thought with portfolio managers that going forward, we could see some consumer-led economic weakness. And I think investors are worried on the traditional media companies that an advertising slowdown could be a reality going forward, not saying it's going to happen, but that's just one school of thought. And so under that kind of scenario where we potentially have an advertising recession again, '06-'07, what this time around do you think your growth rate would be against that? Would you go down with the market, or do you think you can grow through it this time? Well, I think the more interesting thing going on right now kind of with respect to that question is you look at an announcement like the Ford announcement, which is to take 15% of their budget, which would be about $150 million, and move it to the interactive space. And that is not a single announcement you've seen. You've seen that among a lot of different players, which is clearly you are seeing very dramatic shifts or intended shifts in dollars. And the truth is there isn't that much really good premium inventory right now on the web. I mean, there's in general there's a lot of inventory, but there's not a lot of great inventory. There are not a lot of great CNETs out there. And so I think one of the questions you have to ask is I think to its advantage, you're seeing very good research supporting it. This is a medium that's getting more and more measurable as compared to a lot of other mediums. So, when you, if you think kind of a downtime, can, how is that money going to get put to work, and if you can measure it and how does that compare? Third, you're going to have more and more dollars that are in the process of transferring, and if anything, there might not be in theory enough great inventory to put it to. And so I think you've got, unlike what you saw really in the 2001 and 2002 period, where you went into what was I think an advertising slowdown, but we very much had a headwind, my belief is that you would see somewhat of a tailwind going into it. And it's not to say you wouldn't be impacted, which I think you would be. But I think the degree to which you did have a tailwind I think it would somewhat mitigate the overall risks. Thank you. There's been a lot of discussion about I guess very strong demand, primarily in advertising, for the December quarter. So I'm wondering if you could put it in perspective relative to the first nine months of the year. How much visibility do you have to your targets for the December quarter, or how much is already sold versus what you still need to do? And I guess in connection with that, the difference between the high end and the low end of your expectations for December, how much of that is driven by real sales execution versus your ability to drive traffic and users and create inventory? I would say from a visibility standpoint, it's, the business has gotten to a place where I think we have much more visibility than we would have in a comparable time two or three years ago. So if you look at how we've guided throughout the year, I think guidance has remained relatively consistent throughout the year. I think it's also consistent with what we saw kind of pattern-wise from last year. If you look at the first half of this year in places where we had numbers relative to what other people were doing in the space, we over performed the industry both in the first quarter and the second quarter. So I think overall, we've got a pretty good view of it. I think that there are a number of different factors. In the big scheme of things, I think it's relatively tight guidance ranges, but I think we're basing it on really kind of how we're seeing our business develop and kind of where we are overall, which I think is pretty good. We're very pleased with kind of how the year is progressing, where we've gotten in terms of our ability to penetrate accounts, our ability to grow revenues and our ability to continue to improve our product and increase user engagement. So I think overall, we're feeling pretty comfortable with where things are at. Shelby, a couple of questions. Actually, I totally agree with you that there's not a lot of great inventory on the websites. So in terms of as these traditional companies start spending more money online, how capable are you to create more inventory? And if you're not able to create inventory, if the CPM prices goes up further, what does that mean for ROI and what does that mean for future on that advertisement? And second question is in terms of if you look for Q4, which verticals are doing well, if you can give us some color about which part of those we should look for? With respect to the first question, which is kind of traditional, kind of where do the dollars go? Part is that I think in many ways the easiest thing is to be, you kind of look from an overall industry perspective, then front-door takeovers and guess what, you can only sell a certain day once. And so a lot of it you've gone kind of low-hanging fruit, and you see in terms of how people are doing a smarter job of packaging, how you get smarter about taking inventory, whether it's using behavioral targeting or other types of targeting. I think there is an ability to be more thoughtful and strategic about how overall you package inventory. But I think, too, the overall question is why kind of going back two years ago, we said, look, in some respects, RPMs be damned, we're going to grow users and usage as quickly as we can because you can see dollars coming. The question is how are they going to get put to work? And so our thought for the last two or three years really has been that we believe it's going to be a lot cheaper to build inventory now and to build traffic and user experiences now than it will be going forward. And so it's something we've been very focused on, and I think it's something that's really over time going to pay a real premium for us. And I'm sorry, I didn't catch your second question. Second question is that looking forward in Q4, as you look at your inventory sold out, like you said, that you feel much comfortable about Q4. Can you give us some color which verticals you're seeing the strength coming from? It seems pretty consistent across the board. I think in a good way, we've gotten businesses in a place where I think each have really found their sea legs, and we're kind of very comfortable with what we're seeing among all of our different categories. Clearly, as we've said, we're much more dependent on kind of the, what we refer to as endemics or the in category advertisers who are buying contacts. And so those are clearly going to be your most, the really good contextual placeholders are going to be your most valuable. But I'd say we're seeing it across the board and I think are very encouraged kind of with what we're seeing this year as it kind of unfolds as we go and begins to look through the budgeting cycle in 2006. And so I think we're in a pretty good position. With that, I think that was our last question. I want to thank everyone for joining us this quarter. We look forward to talking to you next quarter.

EarningCall_233984

Here’s the entire text of the Q&A from Amgen’s (ticker: AMGN) 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. [Q - Greg Parker]: Hi George, could you provide a few more details on the use of Aranesp in dialysis, specifically the proportion of dialysis patients who are currently treated in the hospital and what you think that Aranesp penetration is at that segment right now? [A - George Morrow]: Well Greg, I do not have the exact figures. It is much less than 20%, probably close to the 10% or may be we can get a more specific figure, and I would say we are well over two-thirds of the way there. [A - George Morrow]: Yeah, I do not know if we are fully penetrated, but you know I think by the middle of next year, anybody who is going to convert will convert. [Q - Chris Raymond]: Hi, thanks. A question for George. You know, I noticed quality care demonstration project is still sort of up in the air, but you may be handicap for us may be how likely it is that it will be in pretty much the same format or you thinking that there will be at least some change, and how important is that to you that it at least looks, you know, 90% similar to the way that the program looks now? [A - George Morrow]: It is really difficult to handicap because we are not preview to any of the discussions ongoing between patient groups, oncology societies, and the CMS, but we are encouraged by things that _____ has said and things we are hearing, so I think there is a real commitment toward Mc Laughlin’s very quality care oriented and I think to the extent that the new demo project if there is one as a quality component, then I think it is going to be beneficial for the patients, for the physicians and for us. [Q - Chris Raymond]: Given that they have sort of you have blown threw much of that budget likely if not by now certainly before the end of the year, do you think there will be any sensitivity to that? [A - George Morrow]: There may be, but I think the first commitment is to making sure that cancer patients are being taken care of, I think that was the motivation to do it last year and I think that that motivation still exists today. [Q - Jennifer Childs]: Thanks for taking the question. Another one for you George. Epo and Aranesp do appear light in the quarter despite the share in penetration gains. Is there a trend towards greater discounting and where do you characterize inventory vis-a-vis the second quarter? [A - George Morrow]: Okay, with regard to inventory, everything is in the normal range, but the normal range that we have is usually you know 4 days 5 days and you know so a product can go up and down and actually could substantially impact the growth rate, for example in our average billing days about 60 million in sales, you take just one day 60 million out of one quarter into the next is $120 million change, which is a 4% change in the growth rate, so that is why as we said on previous calls, we really do not pay a lot of attention to quarter-on-quarter. If we see a trend break, we will certainly call it out for you. [Q - Jennifer Childs]: Okay, that is best helpful and in just in terms of growth in both renal and onc market, what are you forecasting in terms of year-over-year growth for the US and Europe in each of those market? [A - George Morrow]: We don’t share forecasting in different settings, but I can tell you that in the US oncology market, we saw about 14% growth in demands in the third quarter and in nephrology we saw about 16% demand in the quarter in the US and a little bit lower in Europe as I mentioned on the call. [Roger Perlmutter]: Jennifer, you mentioned you had thought Aranesp was a bit light. We do not see it that way. We see Aranesp as very very strong, and even in the Epogen, area we see situations where there isn’t this hospital dynamic that the growth is in line and has been for sometime with patient growth rate, so we are delighted with the performance of Aranesp both in terms of the market growth that George talked about a 14% and our continuing share gains. In fact, we feel very good about it. [Q- Eric Smith]: Good afternoon. I was wondering if Roger might be able to clarify whether for anatumomab this ongoing study 408, whether the trial which is yet to get final data from is required for the BLA under your SPA agreement with the agency. [A - Roger Perlmutter]: Eric, the original agreement in SPA was for the studies that I mentioned, 250 and 167 studies with 408 support. When enrollment was slow on the 250 and 167 studies, we did go last year to the SPA and asked about the 408 study, which is a course of randomized study versus best supportive care and they agreed to that study, so in principle, we could go either direction. I have to say, you know, if you have a response rate without any change in progression-free survival, you would have to ask some questions about what you really wanted to say about the data. I think at that point it becomes important to look at what happens when you use the drug at an earlier time point and in first cycle while the chance to see that from the phase data, so you know there is a lot of data here, a lot of experience that shows that anatumomab is active in patients with colorectal cancer. It is really a question how you position it. [Q- Eric Smith]: And it was my understanding that the phase trial was not registrationally directed, but you turned that also possibly supported, is that right? [A - Roger Perlmutter]: No, the phase study is not, I would not view that as a study to support registration, although the data will be filed of course with the agency because of the experience. [Q - Matthew Geller]: Thank you very much. I would like to ask Roger. Can you talk a little bit about whether you see the possibility at this point of any accelerated pathways for getting Kepivance approved, in particular, do you see as the pathway for metastatic bone disease and also do you see 2-year data as the possibility with the FDA? [A - Roger Perlmutter]: Mat, the question of 2-year data comes up of course all the time in the postmenopausal osteoporosis setting. It has been the subjects of a lot of extra reviews, both in the US and also in the EU. We are still working with draft guidance that is a decade old from the FDA in this setting, and it is not exactly clear when that is going to be resolved. I think our sense is that more progress has been made in terms of CHMP and EMA than the SPA, so we do not know, but there is experience of course with more rapid registration based on overwhelming efficacy. So a lot depends on what happens in our interim analysis in 2007 and the question of what the effect is of Kepivance on fracture in that setting. Clearly in the oncology setting, the question really relates to sort of the overwhelming weight of the data again, particularly with respect to skeletal-related events, and I cannot really speculate because we haven’t even initiated the trials yet, do not know what the enrolments are going to look like and whether or not we could use that as a more rapid registration path. [Q - _____ Hope]: My question is for Richard. Now that you have Neupogen/Neulasta bulk manufacturing in Puerto Rico, what is the impacts for 2006 tax rate? [A- Richard Nanula]: [____] we are going to talk a little bit about ’06 in January, so rather than predict the tax rate today, I would rather wait until then. I think we have said that the tax rate for this year, especially in the second quarter had some one time risk that will make this year lower than it ordinarily would have been, which we called out last quarter, so Neupogen/Neulasta will begin to have a positive effect on our tax rate in 2006. They will probably do not much more than offset the one time risk that was this year, so 2006 tax rate should be pretty similar to ’05, and we will update later when we get together in January. [Q - Geoffrey Porges]: Thanks for taking the question. Question regarding Epogen again. Your down 82 million I think year-over-year versus the same period last year. I am wondering if you could give us a sense of how much of that difference is attributable to cannibalization by Aranesp, but how much is attributable to the channel using up some inventory that goes up in Q2? [A - Richard Nanula]: Hi, this is Richard. I think you should think about two-thirds in the difference is what George talked about a couple of days of inventory making a little swing and about one-third is the cannibalization from Aranesp. [Q - Joe]: Thanks a lot, on Neulasta. I understand your cautions on sequential sales analysis, but it looks since the launch, sales have never decreased from the second quarter to the third quarter, and even the label expansion in third quarter is well. I am wondering if there is some other factor that caused the sequential down trend. Thanks. [A - Richard Nanula]: I do not think there is anything that is causing us any pause in our confidence level in Neupogen/Neulasta. As George said, all you have to do is take a couple of days within the normal inventory range and a couple percent negative on a sequential basis becomes a couple of percent positive, and frankly I think when you look across all of our products, I think you can say that. Sequential sales were of really less than 1% for the whole company. If you were to put two more shipping days in quarter 2 than we had in quarter 3, you put a couple of more shipping days back in the company on a sequential basis as the couple of point ahead, so it is really year-over-year trends we think are important. [Roger Perlmutter]: Let me give you some color on the overall sequential question. I think Richard and George have analytically nailed it in the couple of days’ difference. We would also point to historically this happens to the company. I went back and looked a few years. If you kind of go to the next altitude if you are well and you ask yourself are there anything in the market on the competitive environment, reimbursement environment, customer environment, we feel strong strong momentum in the business right now, whether it is market growth or market share gains compared as to last year when there was a couple of significant questions related to Medicare reimbursement, etc. It looks thus right now that we are operating at a really high levels of effectiveness and we are optimistic about the future. I understand the question that the important thing to get to handle around, but as you pass the answers, the third quarter performance in our judgment was very strong. [Richard Nanula]: And let me get that one thing.. that pricing has stabilized in the US oncology market, so that ought to let us enjoy all the volume demand growth that is existing in those markets as well. [Q - Steve Hall]: Sorry. Richard a just question on the tax rate again assuming you guys will repatriate dollars before the end of the year that you talked before about 800 million to a billion dollars being eligible in the first half and are you still planning to do that in the second half? If so, is that included in guidance of 310 and 320? [A - Richard Nanula]: Steve, let us see. I think we stated 500 million not 800 to a billion. So, 500 million likely in the fourth quarter, I believe, we will end up treating the tax associated with that $500 million which I think is going to be 30 to 40 million outside of adjusted earnings inside a gap and so no it is not included in our 310 and 320. [Q - Mark Augustine]: Thanks I was just hoping to get an enrollment update in the TREAT CKD study and then any updates on the Aranesp safety studies in combination of chemotherapy and radiotherapy. Thanks. [A - Roger Perlmutter]: Mark, enrollment in TREAT is kind of steady at this point. We are behind where we would like to be in TREAT, but we have introduced a couple of protocol amendments and brought on some new sites and that seems to be having an effect, so we are still anticipating that we are going to go through and complete TREAT enrollment next year, again treat some 4000 patients starting 2000 patients per arm, and then with respect to the safety studies on Aranesp in cancer patients, we continue to conduct these studies quite a number of them. We have a data safety and monitoring report that reviews this, every 6 months they review it and so far the studies continue.

EarningCall_233985

Good morning. Thank you for joining us for a review of Questar’s results for the third quarter and first nine months of 2005. I’m Steve Parks, senior vice president and chief financial officer. We had a pretty good quarter – net income was up 78% compared to a year ago. The increase was driven by higher production and realized prices for natural gas, oil and natural gas liquids, and increased volumes and margins in gas gathering and processing. Our earnings release – issued yesterday – provides a more-detailed review of our results and is available on our Web site at www.questar.com. Following my remarks, Keith Rattie, our chairman and CEO will provide an update on operations and comment on our outlook for the rest of 2005 and our initial earnings and production guidance for 2006. After Keith’s comments we’ll take your questions. We have with us today other members of Questar’s senior management, including Chuck Stanley, president and CEO of Questar Market Resources; Allan Bradley, president and COO of Questar Pipeline, and Alan Allred, president and CEO of Questar Gas. Our remarks this morning will contain forward-looking statements about the future operations and expectations of Questar Corporation. These statements are made in good faith, and we believe they are reasonable representations of the company’s expected performance at this time. Actual results may vary from our stated expectations and projections due to a variety of factors that are described in our Form 10-K and 10-Q filings with the Securities and Exchange Commission. Questar’s net income was $65.8 million, or $.75 per diluted share, compared to $36.9 million, or $.43 per share, in the 2004 period. There were 87.4 million diluted common shares outstanding in the current-year quarter compared to 85.9 million a year ago. Once again, our Market Resources subsidiary led the way for earnings growth – up 75% from a year ago. You’ll recall that Market Resources engages in gas and oil exploration, development and production, gas gathering and processing, wholesale gas and oil marketing and gas storage. Market Resources net income was $65.3 million in third- quarter 2005 compared with $37.2 million in third-quarter 2004. Key drivers for Market Resources were higher production and realized prices for natural gas, oil and natural gas liquids, and increased investment in Wexpro. Also, gas-gathering and processing margins were higher, and NGL volumes rose significantly. Market Resources subsidiary Questar E&P grew production 16% to 29.2 bcfe (billion cubic feet equivalent) compared to 25.3 bcfe for the 2004 period. Our Pinedale play in western Wyoming accounted for most of our growth. Pinedale production grew 72% to 8.7 bcfe compared to 5.1 bcfe a year ago. At the end of third-quarter 2005, Market Resources operated 127 producing wells at Pinedale – 39 more than a year ago. Market Resources realized a $.6 million after-tax gain in third-quarter 2005 from the sale of assets. Uinta Basin production – located in central Utah – grew 4% in the third quarter over a year ago. Rockies Legacy production – which excludes Pinedale and Uinta Basin – was flat with the prior year. Midcontinent production grew 1%. Questar E&P’s average realized natural gas price increased 26% in third-quarter 2005 to $5.12 per Mcf (thousand cubic feet). The company hedged or pre-sold about 81% of gas production in the period at an average price of $4.89 per Mcf, net to the well. On an energy-equivalent basis, natural gas comprised about 88% of Questar E&P production in the third quarter of 2005. Questar E&P’s pre-income-tax cost per unit of production rose 11% to $2.82 per Mcfe in third-quarter 2005 compared to a year ago. Higher production taxes accounted for 59% of the year-to-year increase, as a result of higher commodity prices. Depreciation, depletion and amortization expense rose 12% in the third quarter to $1.19 per Mcfe. The company’s drilling and completion costs were higher because of rising day rates for rigs and other services and steel prices. Wexpro’s net income for the third quarter 2005 was $11.3 million, compared with $8.7 million for the year-earlier period. Wexpro’s investment base increased to $198 million, up $32.6 million over year ago. Wexpro also benefited from higher oil and NGL prices in 2005. Market Resources’ Gas Management subsidiary increased net income 53% to $7.3 million in third-quarter 2005 compared to a year ago. Gas Management’s NGL volumes grew 62% over the year-earlier quarter due to the first-quarter acquisition of a gas- processing facility. Gathering volumes increased 17% to 63.8 million MMBtu (million Btu) for the current quarter compared to 2004 due to growing equity and third-party Pinedale production and new gathering and processing projects in the Uinta Basin. Questar Pipeline, our interstate pipeline and storage business, earned $9.2 million in third-quarter 2005, up 15% over 2004. The FERC (Federal Energy Regulatory Commission) approved a settlement in July that resolved a dispute over revenues from NGL (natural gas liquid) sales. The settlement required a refund of one half of a previously accrued $5.4 million liability. The other half of the accrual was reversed, adding $1.7 million after tax to earnings. Excluding the settlement, Questar Pipeline’s third-quarter earnings were $0.5 million lower than the 2004 period due to lower NGL sales revenues. Questar Gas, our retail gas-distribution utility, reported a higher seasonal loss of $9.9 million in the third quarter of 2005 compared to a $9.8 million loss a year ago. Higher bad-debt expense and labor costs and a 4% decrease in usage per customer during the current-year quarter offset increased revenues from a 3.1% year-over-year increase in customers. Now, I would like to give you a brief update on our capital-investment plans. Our board of directors recently approved an increase in our capital-investment program for 2005 to $690 million, up from $587 million, primarily for drilling and related gathering at Pinedale, with $525 million allocated to Market Resources and $83 million each to Questar Pipeline and Questar Gas. The board also approved our 2006 capital program of $712 million. This total breaks down with $490 million to Market Resources, $122 million to Questar Pipeline, $99 million to Questar Gas, and $1 million for Corporate and other operations. Steve has covered third-quarter and year-to-date results. I’m going to cover our outlook for the remainder of the year, provide an update on key operating activities, and comment on our initial earnings and production guidance for 2006. Note that we now expect 2005 earnings to range from $3.50 to $3.60 per share. That’s up from our earlier guidance of $3.25 to $3.35 per share, primarily due to higher natural gas and oil prices, and better-than-forecast results from Wexpro and our gathering and processing business. Please note that our 2005 guidance now includes the two-cent-per-share contribution from the resolution of Questar Pipeline’s gas-liquids dispute with shippers. We’re also assuming a three-cent-per-share contribution from the pending resolution of Questar Gas’s nearly seven-year-old gas-processing dispute with Utah state agencies. As always, when we give guidance we exclude one-time items and assume realized prices for unhedged production consistent with the current forward curve. Note that with hedging we’ve essentially taken commodity-price risk out of the equation for the rest of 2005. We’ve now hedged about 80% of our forecast production in the fourth quarter. Also note from the attachment to our release that we’ve hedged additional gas and oil volumes for 2006, 2007 and 2008. We continue to hedge in a process analogous to dollar- cost averaging, when the market gives us an opportunity to lock in returns and protect our cash flow and earnings from a significant decline in commodity prices. Turning to operations, Questar E&P grew production 16% in the third quarter to 29.2 bcfe compared to 25.3 bcfe in the year-ago quarter. We now expect that Questar E&P’s 2005 production will be in the middle of our 112 to 114 bcfe range. In the third quarter we got a boost in production when we completed and started production on the eight wells we drilled from our winter pad. We still expect to complete 35 wells at Pinedale this year despite challenges with rig and crew availability. We’ve hit our goals with our summer drilling program. We’ve averaged about 47 days from spud to TD at Pinedale this summer, compared to about 65 days per well a year ago. In fact, we’ve recently drilled several directional wells in less than 40 days – so we think we still have room for improvement. We’re not aware of any other Operator at Pinedale that’s getting these results. Our Pinedale team has changed our basic well design. We’re drilling smaller wellbores that generally drill faster with smaller and less expensive bits, plus smaller-diameter and therefore lower-cost casing. We’ve also cut costs by drilling all pad wells to intermediate-casing point before switching to oil-based drilling fluids. Oil-based drilling fluids, combined with improved PDC drill bits, have also helped us cut drilling time significantly. What’s more, with limited winter access we can now control more rigs year-round between Questar E&P and Wexpro, so we’re hanging onto better rigs and more stable crews. One of our third-quarter highlights was the August 9 Wyoming Oil and Gas Commission approval of 10-acre-density drilling for Lance Pool wells on about 12,700 acres of our Pinedale leasehold. With 10-acre density we now believe we’ll need to drill up to 932 wells to fully develop the Lance Pool on our core leasehold. We get a lot of questions about our deep well at Pinedale, so in the spirit of being fully responsive to investors who want it, let me give you a fairly detailed update. Recall that in mid-August we TD’d the deep well in the Hilliard Shale at a depth of 19,520 feet. We logged the well and identified multiple zones of interest in both the Rock Springs Formation and the Hilliard Shale over a 3,500-foot interval from about 16,000 to 19,500 feet. Based on the logs and the gas shows we saw during drilling, we opted to run casing to total depth. In mid-September we pumped three frac stages to test the Hilliard Shale over a 900-foot interval from about 18,500 feet to about 19,400 feet. Initially, the well came on fairly strong, at extrapolated flow rates as high as 10.7 million cubic feet per day of dry, sweet gas, and 2,400 barrels per day of frac water – and with up to 12,000 pounds flowing casing pressure through an 18/64 inch choke. We produced gas to sales for about 32 hours. Rates and pressures declined steadily but remained significant. During this flowback period, the production rate and flowing pressures fluctuated more than you would expect, for reasons we now think might be related to the inflow of formation material – shale and proppant – through the perforations and into the wellbore. In fact, the well choke plugged several times during flowback, forcing us to shut in to clean it out. Then, after about 32 hours the well plugged off completely, with pieces of formation rock smaller than a pencil eraser mixed with proppant and chunks of the flow-through frac plugs we used to isolate each frac stage. We re-entered the wellbore with coiled tubing and tagged up on what appears to be the top of the obstruction at about 6,800 feet below the surface. We have no way of knowing how big the obstruction is – could be a few feet, or the entire wellbore could be filled with debris all the way to bottom. We’re seeing some communication with the open perforations because the well has built up pressure at the surface to over 13,500 psig since we shut it in. So where do we go from here? Given these very high pressures, we’ll need a high-pressure snubbing unit and a very experienced crew to try to circulate out the rubble inside the wellbore and either re-establish production from the initial test interval or isolate it with a plug so we can move uphole to test additional zones. We looked but couldn’t secure the right snubbing unit and crew for this operation before cold winter weather makes this operation risky. Safety comes first, so unfortunately, we’ve had to shut down for the winter. We’ll resume testing next spring. So what do these early results mean? Frankly, we don’t know. We expected to test gas in the Hilliard, but the test was too short and the flow too unstable to draw any conclusions about long-term production rates or reserves. And since we know we have at least some shale in the wellbore, we’re concerned that at these depths and pressures the formation might turn to rubble at the differential pressures required to flow gas at economic rates. We’re in uncharted territory – to our knowledge, nobody’s ever tried to frac and produce from shale at these depths and pressures. On the positive side, we now know that the Hilliard will flow gas at these depths. The Hilliard, by the way, is the stratigraphic equivalent of the Baxter Formation that we’re producing in the Vermillion Basin. I also remind you that the Hilliard wasn’t our primary target in this Pinedale deep test. Our primary target is the Rock Springs, above the Hilliard Shale, which we have yet to test, and unfortunately now won’t be able to test until next year. That’s probably more detail than some of you wanted, but if not, please tag Chuck Stanley when we get to Q&A. Let me turn to other activities at Pinedale. Questar Gas Management, our gas-gathering and processing-services business, is now in the process of starting up the $35 million condensate and produced-water gathering pipelines and related facilities, and will have them in service in time to satisfy the BLM conditions for expanded access this winter. With these facilities, we eliminate over 25,500 truckloads of produced liquids per year at peak production from just Questar’s operated acreage. We also eliminate the related air emissions, dust, noise, visual and traffic impacts. Let me turn to the Vermillion Basin, our emerging new unconventional gas play in southwestern Wyoming and northwestern Colorado, and give you a drilling update. We now have extended production tests from two new wells, Alkali Gulch #1 and Canyon Creek #41. The Alkali Gulch well IP’d last spring at over 4 MMcfd and is currently making about 1.5 MMcfd. We estimate ultimate recovery could be 4 to 5 bcfe from this well. Canyon Creek #41 has been on production since September 21 and so far, based on initial production performance, looks a little better than Alkali Gulch – but it’s still too soon to tell. After a little over a month on production, C.C. #41 is making about 2 MMcfd. In July we reached total depth at about 14,000 feet on a third new well, the Hiawatha Deep #5. You’ll recall that we reported last quarter that we dropped a string of coiled tubing in the wellbore. It took us several months to fish it out. We’ll frac this well shortly and it should be online by mid November. We’re now drilling our fourth new well in the Vermillion Basin, the Canyon Creek #47 well, and with luck we should reach TD by the end of the year. We also continue to get good production from two partially recompleted older wells, Canyon Creek #34 and Hiawatha Deep #2. Recall that these old wells were drilled for other horizons, and the general well design was far from optimal to test the targeted Dakota, Frontier, and Baxter zones. Please note: in 2006 we now plan to drill at least a dozen wells in the Vermillion Basin to further define the aerial extent of this play. Recall that Questar is by far the largest leaseholder and Operator in the Vermillion Basin with over 140,000 net acres, all of which are operated with an average working interest of over 90%. Most of our acreage is on BLM- managed public lands, subject to an existing Environmental Assessment. If the play continues to develop the way we hope it will, we’ll need a new Environmental Impact Statement and, in fact, we’ve already begun work on it. In the interest of time, I’ll defer discussion of our Uinta Basin and Midcontinent activities to Q&A. But I would note the outstanding job our seasoned teams of asset managers have done replacing decline and growing production modestly from these mature areas. When we get to Q&A, you should ask Chuck for an update on our new Flat Rock and Wolf Flats wells in the Southern Uinta Basin, and for an update on the Midcontinent. Questar Pipeline has commissioned part of the $55 million southern system expansion project. This project will add over 100 Mdth (thousand decatherms) per day capacity from the Uinta and Piceance basins to the Kern River Pipeline at Goshen, Utah. Our investment is underwritten by 10 and 20-year contracts with power-plant owners and producers. We estimate that it will add 3-4 cents per share to Questar earnings in 2006. Turning briefly to our utility, in the third quarter Questar Gas reached a settlement with the Committee of Consumer Services and the Division of Public Utilities, both Utah state agencies, hopefully ending the seven-year-old gas-processing dispute. For the first time since the dispute began, the parties now agree with the conclusion that Questar Gas reached back in 1997 – that the safety issue is real, and that gas processing is the most cost-effective way to protect customers from the risks related to changing heat content in the gas flowing into the Questar Gas distribution system. The proposed settlement requires Public Service Commission of Utah approval. If the PSCU approves the stipulation, Questar Gas will recover $3.6 million of costs previously expensed for the period from February 1, 2005, through September 30, 2005. Questar Gas would also be allowed to recover go-forward costs through January 2008. These costs have averaged about $5.7 million per year. The actual go- forward costs will vary because cost recovery includes plant fuel costs. Let me shift now to our outlook for 2006 and beyond. Earlier this week the Questar Corporation board of directors reviewed and endorsed our five-year business plan. The lower end of the estimate is based on an assumed average NYMEX price of $9 per Mcf for currently unhedged 2006 natural gas production, with Rockies basis ranging from about $1.30 to $1.60 per MMBtu. We assume an average prompt-month NYMEX oil price of $60 per barrel on unhedged oil volumes. The upper end of the range is based on an average NYMEX gas price of $11.50 per Mcf and an average prompt-month NYMEX oil price of $63.00 per barrel for unhedged volumes. Note that with hedging we’ve taken significant commodity-price exposure out of the equation for 2006. With about 65% of our forecast 2006 production hedged, we estimate that a $1 change in the average NYMEX price of natural gas will result in an $18 million change in net income, or about 20 cents per share. Similarly, a $1 change in the average prompt-month NYMEX price of oil will result in a $0.4 million change in net income, or about one-half cent per share. We estimate that Questar E&P 2006 gas and oil-equivalent production could range from 120 bcfe to 122 bcfe, unchanged from the guidance we gave earlier this year, as rig and crew availability continue to be issues. This estimate is based on 42 wells at Pinedale next year. We expect continued upward pressure on our cost structure, which we’ll continue to work hard to offset with productivity gains. We expect 5 to 10% earnings growth from Wexpro. Coming off of a year with record-high gas-processing margins, Gas Management earnings could be flat to down slightly versus 2005 depending on frac spreads, which are currently underwater for 2006. We expect Questar Pipeline earnings to grow by 2 to 4%. We expect the utility to earn at or near its 11.2% allowed return on equity in 2006, but there’s downside for our utility. Because about 70% of Questar Gas’s revenues are based on volumes, Questar Gas earnings are sensitive to customer usage. We estimate that a one-decatherm change in average annual temperature-adjusted usage per customer – that’s less than 1% of a typical customer’s annual consumption - will result in about a $1 million change in Questar Gas earnings. In summary, Questar is on track for a strong finish to 2005, with a lot of momentum heading into 2006. Looking out beyond next year, our five-year plan shows that Pinedale will continue to drive Market Resources production and earnings growth. The key issue is: How many wells can we drill each year? We still have about 800 wells left to drill on 10-acre density at Pinedale. We may have a significant new play in the Vermillion Basin kicking in later this decade – we plan to drill at least 12 wells there next year to further evaluate play potential, so we’ll be in much better position a year from now to quantify the potential impact on Questar E&P reserves, production and earnings. Wexpro has identified over $600 million of new investment, so Wexpro may continue near double-digit growth the rest of this decade. We also expect Gas Management to grow at double-digit rates over the rest of the decade as Pinedale volumes grow and as we expand our Green River and Uinta Basin gathering and processing hubs. If the Vermillion Basin develops the way we hope it will, it will create opportunities for our gathering and processing business. Finally, we’re counting on Questar Pipeline to remove pipeline bottlenecks in our core basins and help make major new export pipelines happen. With that, we’ll now take your questions. 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 will pause for just a moment to compile the Q&A roster. Good morning, Keith and Chuck, and very good results. I wanted to ask you a few questions specifically related to E&P. And the first one is – you know, Ultra Petroleum had commented on their conference call that they see 10% greater gas in place at Pinedale. Does that match up with anything you’ve been looking at? Could you maybe comment briefly on that? Scott, go back to last quarter when we talked about our initial impressions or actually during the quarter when we talked about our impressions and testimony that we put forth before the Wyoming Oil and Gas Conservation Commission in conjunction with our request for 10-acre density on acreage. We actually talked about an evolution in our view of gas in place in the Lance pool. We now believe that the estimated gas in place is double basically over what we originally suspected when we were drilling on 40 acres. And even with the 10- acre-density drilling, we’re recovering with average wells out there less than half of the gas in place that we calculated. What’s the big change? The big change is a lot of work that’s been done on the rock properties, including water saturations and effective porosity and permeability, which means that a lot more of this section is actually productive than we originally suspected from our initial work. Okay. I don’t know how much you can comment on this, it’s a little bit of a sensitive topic. But regarding the Natural Gas Week note on mule deer that came out a few days ago, it seems like you guys have been proactive in terms of building the pipeline system underneath and doing the single-pad drilling, that you’re doing everything possible you can to be sensitive to migrations of mule deer and other animals in the area. Could you talk a little bit about whether that article might be a little bit backward-looking? Or, what’s going on with you working with the various commissions and environmental groups? Sure. First of all I think that the actual study has been widely misquoted and the data contained in it has been selectively used by folks with different agendas to further their arguments. Basic conclusions from the study are not surprising. Number one, deer don’t stand on active drilling pads or on active producing pads. They avoid areas where there’s been disturbance. That’s a big surprise, I’m sure, to everyone listening. Deer do avoid the areas of human activity. But, interestingly, once the activity ceases, the study has shown that the deer do come back closer to the facilities than a lot of people thought they would. The key points from the study: First of all, it’s a multiyear study. We funded it because we want to see how our mitigation measures that we’re still putting in place are working – for example, building this liquids line and gathering system that will go into service this winter and totally eliminate 25,500 truck visits a year to producing wells at peak production. That’s going to make a significant difference in the amount of human activity and, we think, long term will be very beneficial for the wildlife. In addition, with pad drilling, we’re concentrating our activities in the southern end of our acreage and, therefore, the entire northern 90% of our leasehold is basically undisturbed through the winter. Again, this is a laboratory, a large laboratory and a study in progress, and a lot of people are front-running the conclusions after one year. The other thing that I’ll quickly mention is that there’s a lot of discussion about mortality rates. Southwestern Wyoming – in fact most of the Intermountain West – has been in the midst of a five-year- plus drought cycle and, as a result, forage and overall habitat quality are affected and deer-mortality rates are up. So, to make conclusions about directly linking oil and gas activity to deer mortality is a bit of a stretch. Yeah. No doubt. Just two other quick questions: one is, inflation and the industry. EnCana and a few other companies have gotten a lot of people alarmed, I guess, about their cost structure because the oil- service companies, and particularly services like fracing gels, different sands, rigs – there’s a call on everything because of the fact that we’re going through such a big cycle right now for natural gas. Could you talk a little bit about where the pinch points are and also, because of year-round drilling, is that a bit offset with Questar? Or could you maybe help color in that for the next few years and provide your outlook? Well, obviously, Questar, like every other Operator, is feeling the pinch, as you described it, from increased costs. We’ve seen 70%, 80%, 90% increases since the beginning of 2004 on key services and supplies. Rig day rates are up 70% plus, steel costs are up 80%, fuel has more than doubled, cement, pumping services, everything is generally up. On the drilling side, it’s a good story. As Keith mentioned in his commentary, we’ve been able to successfully reduce the number of average days required to drill a well at Pinedale from 65 last year down to 47 this year. In no small part, that’s a result of a lot of hard work by the folks that are running our drilling program. It’s also our ability to find and retain through this year-round drilling activity the very best rigs and very best crews. We still have a significant learning curve to go up and more improvement to make on getting more wells drilled. The result’s been that we’ve been able to offset most of the inflation that I just mentioned to you. Our wells are still costing within a couple hundred thousand dollars of what they cost a year and a half or two years ago. The pumping services and frac stimulation have also experienced an increase. We’ve been able to reduce cycle time by going to 24-hour fracing. We’re hauling materials in bulk, we’re putting frac crews on pads and completing multiple wells continuously, without stopping. And we’ve also recently started using what’s called “slick water” fracing, which substantially reduces the chemical costs and the amount of sand that we pump per stage. As a result, we think we’ve been able to offset substantially all of the inflationary pressure we see there. How long can we continue to do it? It depends on how much more innovative our folks have been. They continue to surprise me, but obviously there is a limit to what we can wring out in the way of efficiencies to offset cost creep. Scott, the other point that I’d mentioned is, as you know, we focus on returns, and you used to hear us talk about drilling at the margin requiring a 15% risked return at a $3.50 to $4.00 NYMEX price. At the margin, we’re drilling wells that require a significantly higher price than that. So it comes down to a question of how hard do you want to drive growth? Because driving growth drives cost structure, particularly in the Midcontinent. We think our team down there could grow production at a faster rate than they have if we relaxed our criteria and let them, for example, drill wells that have a 15% rate of return on the forward curve. But we don’t run our business that way. We still believe in cycles, and we’re running the business to ensure acceptable returns, cash flow and earnings in a lower commodity-price environment. Okay. I have a last quick question. Regarding the Vermillion Basin and the test wells – those are very good initial results on what sounds like stabilized initial production on some of those wells, and it’s a large chunk of acreage that you have. I think it’s 143,000 acres. Is it much, much too early to assess how much of that acreage could ultimately be productive? It’s a little early. We think that the reservoirs that we’re targeting are widespread. In fact, we’ve got enough subsurface control to know that they’re present over the whole area. The key is whether or not structuring or folding of the rock is critical to the rates that we’re observing in these first wells. This year the Canyon Creek #47 well’s the first off-structure well. In 2006 we’ll drill some significant offset wells to spatially sample the area and get a feel for the aerial extent. We’ll have some slides with us, when we’re back in New York in early November, that we can talk from and show where the structures are and aren’t in play. But at least 35% or 40% of the acreage is covered by large structures, very large anticlines. So, that should give you a bit of a hint. With regards to the deep test, obviously it’s very early, but would you say the issues that have come up in the completion process that you described are something that you know you could improve on if you were to drill more wells over time? Or do you believe that what you’ve experienced is just a normal risk that you’ll have to account for with drilling at these depths? Brian, I wish I knew the answer. As Keith mentioned, we’re not aware that anybody’s ever attempted to frac and produce shale at 19,000 feet at the kinds of pressures that we’re dealing with. We’re doing some rock-property studies and, frankly, the early results from those rock- property studies would indicate that the behavior of this formation, the inflow into the wellbore, wouldn’t be predicted. In other words, we would think the rock would have enough mechanical competence to stand up to flowing at the kinds of differential pressures that we’ve put it under during the initial test. There’s a number of things that could be causing this. We don’t know how much rock volume we actually have in the wellbores. Keith mentioned it may be tens of feet of rocks sitting on top of one of the frac plugs that are moved up the hole, or the wellbore might be completely full. We just don’t know until we get in and clean the wellbore out. Just the mechanical act of fracing a rock at this depth will rubblize it some, so it could very well be that the debris that we have in the wellbore is just some near wellbore rubble that’s created by pumping fluid into the well at high pressures. We need more data, frankly. And we’ve got data on the Baxter which is the Hilliard equivalent down in the Vermillion Basin. It doesn’t behave anything like this. We’ve never seen it rubblize and produce into the wellbore, so this is uncharted territory that we’re in. Until we get more data, we just can’t speculate as to what we will or won’t be able to do with the Hilliard shale. And Brian, all those comments from Chuck relate to the Hilliard shale and, as I stressed, Hilliard wasn’t our primary target. The primary target’s the Rock Springs. The reservoir quality appears on the logs to be generally poorer than the reservoir quality that we see in the Lance pool, but we don’t know what that means and won’t until we can get some tests on it. And now, unfortunately, that won’t be until next year. That’s helpful. On a separate note, you talked about the impact of a potential decrease in gas consumption at Questar Gas. What are you seeing in terms of a response to higher prices in the cities? Brian, this is Alan Allred. We’re not seeing a lot yet. The third quarter, as we said, was down slightly, about 4%, but I stress if you look at the numbers, that’s half a decatherm in the quarter. The third quarter is a low-gas-usage period. But just from past experience, with the kind of increases we’re seeing, we are anticipating a demand response from our customers and lower usage next year, especially as customers see these higher bills in the winter. How much we won’t know until we go through the winter. I can tell you we have seen past periods where usage per customer fell over a three-to-six-month period by anywhere from three to five decatherms. Great. Thanks. Lastly, you mentioned the capital spending this year and next year. Do you have numbers for Questar E&P, specifically in 2005 versus 2006? We’re not getting it right away. I’ll let Steve come back on that point in a little bit, Brian, and we’ll take the next question. We’ll get the numbers for you later in the call. Hi. It’s actually Devin Geoghegan. Thanks for the time, guys. Congratulations on the good quarter again. I just had a couple of questions – one, in your ’06 guidance, how much exploration and abandonment expense did you guys assume? We’re anticipating shooting a considerable amount of additional seismic data, and we’ve got some substantial budget in there for leasehold, which under successful efforts, as you know, is expensed. Right. I think for ’05 you guys were focusing about $30 million for exploration and abandonment, about $17 million for exploration and $13 million for abandonment? Yeah, the exploration expense year to date has been about $9.4 million, about $2.6 million for the quarter. I don’t have the abandonment expense right off the tip of my fingers here, Devin, but we can get you that number. Okay. I’ll follow up off line. I’ll tie in the questions. One of the things that’s confusing me is you’ve raised the CAPEX budget for E&P, excluding Wexpro, but your production guidance didn’t rise. And I was wondering if that’s because the cost of every well is just increasing so dramatically or if you’re just being conservative given the issues with rigs? It’s generally driven by our view of being pretty conservative in October of 2005 and forecasting production volumes in 2006. Our capital budget is increasing, largely because last year, when we set our capital budget and it was approved by the board, we didn’t know if we were going to have winter drilling. And so we’re going to have six rigs working through the winter and, as a result, we’ll have a number of wells in progress. In fact, we’ll have a lot of wells drilled to intermediate casing point by year-end. And that’s the 2005 capital that we hadn’t anticipated. In addition, we’ve got about a $15 million forecast increase in capital budget for Wexpro that will, in part, be this year and, in part, carry over into next year just due to additional wells that we’re drilling at Pinedale. Let me answer Brian’s previous question. The question was: What’s Questar E&P’s capital budget? What’s our forecast for ’05, and what’s our budget for ’06? The forecast for Questar E&P for ’05 is about $395 million. The forecast for next year is $372 million. Of course, that can change throughout the year as we identify other opportunities. We’ve seen a bump up in the amount of capital we’re re-employing in our business this year because of the incremental drilling at Pinedale. If I could ask one final question? Just in terms of the information that you guys disclosed, would it be possible to get a break-up for the E&P business so that we could get a better handle on how much is fee? I can tell you that about a quarter of our business is not fee related. In other words, it’s frac-spread exposure, commodity-price exposed, Devin. And underlying that quarter of the business are some contracts that we’ve structured so that if the frac spread goes upside down, the processing reverts to a fee-based processing arrangement. We cover off a lot of the downside commodity risk in the processing business and still are able to capture the upside. Getting back to the deep test on the Rock Springs – I mean, I guess the issue here is obviously permeability, or that was the risk going into the well. Have you learned anything from this test that you care to share with us? Well, David, the first stages that we pumped are in shale. And shale really doesn’t have much permeability. In fact they’re nanodarcie-type rocks as far as permeability is concerned. So… We haven’t tested the Rock Springs, so we don’t have any way to do any real permeability calculations other than some very crude estimates from petrophysical analysis. But, I don’t put much trust in those based on our experience in other places around the Rockies. It’s really a question of flow rates and sustainability of flow rates that give you a good feel for relative permeability. That’s where we are right now. Okay, and that’s where I was going, to see if you learned anything. Can you lay out exactly what you’re going to do come next spring when you come back to the well? We’ll rig up what’s called a “snubbing unit,” which is basically a work-over rig with a series of rams, basically like a blowout preventer that we can strip tubing into the well at high pressure and still control the well. We’ll load the hole basically with fluid and circulate out the obstruction. We’ll have a bit on the end of the tubing so if there’re any hard obstructions in the well, we can drill them out – i.e., one of the frac plugs – and we’ll just keep working our way down the wellbore circulating out the fluid and rock material until we get back to total depth. At that point we’ll have to make a decision on whether or not to continue to test the bottom zone or whether to put a bridge plug over it and come up the holes of the primary objective. And, in part, that decision’s going to be driven by how much fill we find in the hole. As I noted earlier, the shut-in pressures build up to about 13,500 pounds at the surface right now. Normally, pressure’s a good thing, but obviously that’s a lot of pressure to deal with. The safety issues are very significant with this activity. Okay. Let me jump basins. You guys kind of skipped over Uinta due to time, you said. Can you just talk briefly about what you’re doing out there and your activity levels, etc.? Okay. We’ve got a multi-rig development program ongoing in our conventional Wasatch formation, Upper Mesa Verde development play. As we noted in the comments in the call, we have been able to slightly grow production year over year in the third quarter. The objective is to keep the base business out there flat. It’s a large number of producing wells and, of course, they’re all in decline. So, just replacing decline and growing production modestly is the goal for that group. Outside of the conventional Wasatch, we also have the Green River oil play. We drilled some additional horizontal oil wells during the quarter. The results are mixed as we’ve seen in the past – decent results on one of them and not so good on the other. We continue to go around the fields or spatially sampling the reservoirs in the Green River to see how successful a redevelopment program might be in the Green River oil sands. We’ve also got plans to move a rig into the Uinta Basin to drill a 16,000-foot Mancos test. And the Mancos is the age equivalent of the Baxter Formation in the Vermillion Basin and the Hilliard shale in the Pinedale Deep well. And based on what we’ve observed most recently at Pinedale Deep, along with our ongoing observations in the Vermillion Basin, we’ve become intrigued with the Mancos Formation, which is a multiple-thousand- foot-thick shale sequence over-pressured in the Uinta Basin. And we want to go take a look at that and try fracing it, using the techniques that we’ve developed in the Vermillion Basin and the same techniques, by the way, that we applied at Pinedale Deep. So, that will be an event for next year, and I can’t tell you when that rig will start, probably sometime late in the first quarter. It’s coming off of another well for another Operator. The other play that’s going on that Keith mentioned briefly is down in the southern end of the Uinta Basin – our Flat Rock and Wolf Flats area. We’ve recently reached total depth on our second well in that area, the Wolf Flat well which was the first well under our joint development program with the Ute Tribe. The well logged pay in multiple zones. We ran pipe to TD and will be initiating completion on that well here in the next few weeks. We have a 50% working interest with the tribe. We’ve also completed a seismic survey in the area and, as a result, we’ve exercised our option and picked up about 12,500 net acres in the joint-development area and will be commencing evaluation of where to drill our first well. We’ve got a couple of locations picked, and we’ll high-grade that and start that process here in the next quarter. Hi, guys. Following up, are you comfortable with the level of exposure you now have to the frac spread, or might you look to maybe try to reduce that going forward? Patrick, Chuck Stanley again. If we execute, if Perry Richards and the Questar Gas Management team execute their plan over the next five years that we reviewed with our board last week, we will reduce our processing margin exposure from 25% processing to less than 10% over the next five years. Most of the new business we’re doing is fee- based business. As I mentioned, we’ve got bottom-side protection in the form of fee-based reversions in these contracts as frac spread goes upside down and stays upside down. And we still maintain the upside to NGL prices in the event of positive frac spread. Okay. And another one for you, Chuck – back to the issue of slick- water frac. I think when I spoke to you at the Pinedale field trip, you talked about trying to frac a few more wells at that time with slick water. What kind of success have you had there, and do you envision you will be able to apply this to more wells going forward? Patrick, in fact, the well that we visited while we were on the field trip was the first slick-water frac that we attempted from bottom to top in all the zones at Pinedale. That well’s been on now for a little over a month and the performance that we’re seeing is identical to, if not slightly better than, the offset wells. Now, there’s some natural statistical variation between wells, so it’s hard to say whether the slick water is actually giving us better results, but it’s certainly not markedly poorer. As a result of that performance, we’ve pumped three or four additional slick-water jobs on wells that we’re completing right now as we come up toward the end of the season. We’ll watch them over the winter. We’ll be building up an inventory of wells to complete next spring, assuming that performance is similar to the first well we did, and right now I don’t have any reason to believe it won’t be. We’re likely to shift to slick-water completions on all of our wells going forward. And, as we pointed out on our field trip, the potential savings over conventional gel-type fluids and higher concentrations of proppant are anywhere from $200,000 to $500,000 a well. Great. My last question, if I may, is just more of a housekeeping issue. But it looks like you guys had about a $2 million increase quarter over quarter in interest and other income. What was the driver behind that? Questar E&P sold some assets in Arkansas in the Arkoma Basin for about $2 million, a little over $2 million pretax. And, then there were some increases in interest income as well. But the largest share of it was the sale of some assets in the quarter. Good morning. In the Vermillion Basin, can you just remind us where you stand on the existing EIS? How many locations are left, and will you be able to use the EA process before the next EIS is completed or far along? What’s the status there? Joe, Chuck again – it’s in flux. And we’ve got some remaining locations under the current EA. The reality is, over a large part of the area where we’re drilling right now, Canyon Creek Dome and Hiawatha, there are a number of old wells that we operate or that Wexpro operates that produce from shallower horizons. And we believe that we can go back on those locations, expand them slightly, put a rig on them, and basically twin all those wells with deep wells without a lot of incremental surface disturbance. So our regulatory affairs team, along with our technical team, is in discussions with the BLM on next steps. Frankly, we’d like to drill some more wells and do some more technical scoping to understand the aerial extent of this play, the correct spacing and all the questions that we really need to address before we go into the full-blown EIS. And that doesn’t mean we won’t start the process. In fact, it’s already started. But we need to make sure we’re talking about the right number of wells, the proper spacing so that we only have to do this once. In the meantime, historically, we’ve been able to work with the BLM in a memorandum of understanding-type mode to continue development while we work through the EIS process. And I think the rate-limiting step here will likely be our desire to limit exposure until we fully understand the nature of the play rather than the regulatory process. But we’re working it in simultaneously. Okay, great. With Ultra and Shell now talking about their desire to sort of process and handle liquids on the Pinedale, is that a move that you guys think you can benefit from? Is there any capacity in the system that you designed up there that would allow incremental volumes from other Operators? We deliberately oversized the pipe. It’s in the ground, it’s filled with liquids now, and it has excess capacity. We’re not sure we want to be in the field-level liquids-gathering business for third parties. We’re comfortable doing it for ourselves but it’s very labor intensive. It requires a lot of operational focus, and we think the field-level gathering should be run as part of the production operation. We’re in discussions with the other producers about collecting their liquids on our liquids-transmission line of central delivery points for redelivery into the Rocky Mountain Pipeline. Okay. And then Ultra also indicated on their call the other day that they plan to drill another deep well. Do you have an interest in this well? Where is this well in relation to your existing location? And what are your thoughts along those lines prior to the resumption of completion operations on the Stewart Point well? You’ll have to ask Ultra. I don’t know where their well is. We don’t have an interest in it. It’s south of our acreage, I presume. And you’ll have to ask them for their take on why they’re drilling it right now. Okay. And then the Rockies Express line has been proposed. What are your thoughts on the likelihood of that line being filled, and does Questar have any plans to take any capacity to assure transportation out of the Pinedale area? Let me just comment briefly, and then I’ll let Allan Bradley add anything he wants to add. The bottom line – and I think this is reflected in the basis assumptions that we gave you for next year – is that the market is signaling that we need more pipe out of the Rockies. The export pipes this summer ran pretty close to full, and if you extrapolate where volumes are likely to go in major producing areas, you see the potential for a basis problem here as early as next summer. We think the industry needs to work together to get at least one of these major new projects built. And in fact, we’ve given Allan Bradley and his team a mandate to try to work with the sponsors of those projects because we think we have a role to play. And I’ll let Allan add to that. Well, specifically, you probably saw our open season for capacity on Overthrust out of Opal. That was directly geared to both the Rockies Express and El Paso, and perhaps Northern Border. We’re in discussions with each of these long-haul pipelines to capitalize on Overthrust’s existing capacity and unique corridor. We feel that’s the most efficient way to move gas from Opal to either Kanda or Wamsutter depending upon where these long-haul pipelines want to start. So, yes, as Keith said, we’re actively in discussions with long-haul project proponents. Clearly, Rockies Express seems to have an edge with an anchor shipper now. I read their press release with some interest. It looks like EnCana will, indeed, be sort of contributing, the Entrega pipelines into that project. So, it seems to be moving forward with a significant pace, and we want to make sure that we facilitate that anywhere we can on the Questar Pipeline system as an upstream transporter. These pipelines have to get to Opal to access gas there, and we think the route to Opal is through our 88-mile, 36-inch Overthrust pipeline. Okay. Thank you. And back to the Flat Rock area, real quickly. The first well, how is that performing? And what are the issues on takeaway out of that area at this point? Chuck Stanley: The first well – I haven’t looked at it in a few weeks – it’s making about 2.5 million, 2.4 million a day, which is about where we have it projected from our reserve model. Currently, there’s not a capacity issue. Part of the issue this summer with takeaway capacity had to do with construction activities on our interstate pipeline and maintenance activities on some other interstate pipes that backed gas up into the Uinta Basin. In addition to our joint-development project with the Ute Tribe, we also are working on a joint project to develop a gathering system in the Flat Rock area and to the north that would alleviate any midstream constraints basically from the wellhead to the main line. It’s part of our Uinta Basin midstream hub strategy to move gas from various producing areas to central points for processing and blending and redelivery to Questar Pipeline and other interstate pipeline serving the basin. So, long term, I don’t think it’s an issue. And this is the opportunity for the midstream business to participate in the growth and production in the area. The most recent news, as I mentioned earlier, is our exercise of our option as a result of the Wolf Flat well results to acquire the 12,000 net acres which are on the south side of the Gar Mesa and structurally low to the Flat Rock well. So, we’re off in new territory that is basically the other side of the trend that we’ve been playing. The fact that there’s gas in that section is an encouraging result. How are you doing? On the production guidance, I just wanted to make sure I understood. Is there any production from Vermillion in the production guidance with the dozen wells you plan on drilling next year? This is a modest contribution from Vermillion. Depending on the results, as we go through the year, we’ll ramp that up. When we build our forecast for the year, we put in obviously 100% of the forecasted capital, and we put in risked results for the production stream. Historically, we know that our results will not be as we predict them. Sometimes they’ll be better than we predict them, and sometimes they’ll be worse, but we don’t just take an average Pinedale well and insert it into the model without putting some risk on it. And that risk may be timing risk, and with wells like Pinedale that are high-rate wells, a month of difference makes a huge difference in the cumulative production for the year and for the quarter. So, at this point in time, we’ve got the Vermillion Basin pretty heavily risked, both from a timing standpoint and also from an initial-volume standpoint. And, as our confidence builds, as we drill more wells, as we continue to see results consistent with the first wells we’ve drilled there, then we’ll be updating our production guidance as we go through the year. The other big area that we’re concerned about is the Midcontinent because, as we’ve mentioned before, there’s a shortage of rigs. We’ve got an inventory, especially in the western Midcontinent, that is pretty deep, but we’re struggling to get rigs to drill that program. As we get rigs in hand and as we’re able to execute during the first half of ’06, we’ll hopefully boost our confidence in our guidance in the Midcontinent. So, we have a lot of timing risks built into our production forecast for next year, assuming that we’re delayed in getting rigs to drill the program. Okay. As you downspace to the higher-density wells in Pinedale, you talked about how the EURs might come down a little bit. Does the guidance assume a certain amount of EUR for each Pinedale well or are we still good to use about 7 b’s per EUR, or should we assume a lower EUR as you kind of move to the down-spacing location? We typically expected that the reserves on increased-density wells will be less than the original 40-acre parent wells. So, going back to 40- acre parent wells, we assumed an average EUR of about 8 bcf equivalent gross. About 75% on average on 20-acres of that 8 bcf gross, and about 60% on average of the 8 bcf gross on wells drilled on 10-acre density. Interestingly, that doesn’t have a big impact on guidance because there’s not a significant difference in the initial rate and productivity of a 40-acre well and a 10-acre well. It’s only after the first four or five years of production that you see a change in the decline rate as the wells begin to interfere with each other. We don’t have a lot of observation on 10-acre wells to back that up. But these rocks are so tight that the likelihood of an immediate interference in between wells drilled on higher density is pretty low. Not to split hairs, but you suggested that the water lines at Pinedale may be ready for the winter drilling. Is there something going on, or what remains to be done? Let me make it a little clearer. We expect them to be ready. We’re in the process of commissioning those lines. As Chuck mentioned, they’re full of liquids now. We’ve got a couple of key facilities, including the stabilizer unit, that haven’t been fully loaded yet. But we don’t anticipate any problems meeting the BLM timetable to have these facilities and service at this point. But again, we’re in a start-up mode, and things go bump in the night sometimes. So, if I used a word that conditioned it, it was just to reflect that uncertainty. Okay. Fair enough. And on hedging, in ’08, I mean depending on how you do the math, you’re roughly 15% or less hedged depending on production assumptions. Clearly, we’re still seeing some good prices, though less favorable in the outer years. Can you give us a little more flavor on how you’re thinking about layering on more hedges in the outer years? And, you know, if we saw some spikes this winter, what would be the max you may put on hedges in an outer year like ’08? I know you’re not going to be super-specific, but if you could just provide a little more flavor on your thinking behind that. Well, let me give you some current numbers, Jay, to help set context for the answer. The recent quotes from yesterday, as a matter of fact, calendar year ’06, natural gas NYMEX is $11.40. As you move out to 2008, calendar year NYMEX is $8.38. So the market right now has a $3.00 difference in average calendar year NYMEX between ’06 and ’08. And one of the challenges with hedging is that you’re typically hedging into that kind of backwardation. It’s even steeper right now. So, the market’s already assuming a very significant adjustment in prices over that period of time. So, mindful that we don’t know what future prices are going to be, in fact our hedging results today prove that we don’t know what prices are going to be, we take an approach that I describe as like dollar-cost averaging. When we put a hedge on, we don’t hedge because we’re betting that prices are going down. We hedge because that helps us reduce risk, lock in financial results that are as good or better than our plan, and help us protect the company and therefore offer that lower-risk play. The other thing that’s very important to keep in mind is that, as a matter of policy, we do not hedge production that hasn’t yet been drilled. We hedge only PDP volumes – Proved Developed Producing production. And the forward curve in terms of volumes that we’re going to produce is fairly steep as well. So, there’s a limit to how far we can hedge and how much volume we can hedge. All of that I think just imposes a discipline that reflects an understanding that in a commodity business like this, you can’t predict weather, you can’t predict hurricanes, you can’t predict other political events. So, we take an approach that’s fairly mechanistic, and we try to take the guess and speculation out of the process. Two sets of questions – one, probably for Steve – if you can guide us through how you guys are dealing with the collateral requirements, given these high levels of hedging which obviously locked in your economics but are now substantially under market. I’d be happy to. As you can see in our balance sheet that we’ll be putting out for the quarter, we had a lot of money out on collateral deposits – some $243 million at the end of the quarter. If you went back a quarter, that number would have been about zero. So, as these gas prices spiked up, it did have an effect on us. A lot of our collateral agreements provide substantial credit amounts before collateral is required, but we went up to levels that we hadn’t anticipated. As a result, we’ve pretty much solved that problem by going back to our counterparties and converting with our core traders to contracts that don’t require collateral. In other cases, we have hedges that are outstanding. We’ll live with those contracts until they unwind. The good news is that those unwind quickly as prices come down on the one hand, but also they unwind quickly just as time goes by. The average life to unwind those collateral positions, if prices stayed stuck at the September 30 levels, would be maybe seven months, six to nine months at most. And you’d really have the majority of the money unwound within about three or four months. So, it has an effect. We had a question earlier about interest and other income. The reason that interest income was up was because those collateral accounts do bear interest. And we were generating some earning from those, but still, it’s not a good situation to have to be raising money on your credit lines to hand it over to your counterparties, and we think we’ve taken action to avoid that in the future. And Steve, just between renegotiating and I guess what the strip has done even since the end of September, has that been roughly the high- water mark? And do you have ample liquidity if the strip bounces back up by a dollar or two? Absolutely. Today we have collateral deposits outstanding of about $60 million to $65 million. On those old contracts, in addition to having access to credit in the form of a bank revolver for Questar Market Resources, there’s something in excess of $150 million available there. We have credit lines to support our commercial paper with Questar in the $300 million level. And we’ll probably increase those another $100 million the next few weeks just to make sure we have lots of collateral in case we see more spikes. Now the next question: going back to your guys’ volumetric guidance that obviously doesn’t have much to do with the cost structure, just with the timing and I guess productivity of wells. It looks to me like volumetric guidance for ’05 and, more specifically, for ’06 really hasn’t changed much even though you’ll drill 35 wells in Pinedale this year and 42 next rather than the 30 wells that the guidance was originally based on. Are there disappointments relative to a year ago where you initially issued ’06 guidance that you guys are seeing, or is it just again being very conservative? Or is it something that Chuck, I think, you’ve talked about in the past, which is the split between QEP wells and Wexpro wells that is driving that conservative outlook? Three things: One I’ve already talked about – that is that the results that we’ve forecast are what we are very confident that we can achieve, the range that we’re very confident that we can achieve in the environment that we’re in right now with rig availability. A year ago, or a year and a half ago, when we initially gave guidance for ’05, ’06, we were in a different environment, in particular in the Midcontinent, with respect to rig availability. Rig availability has tightened significantly there since this time a year ago. And as a result, we’ve ratcheted down our forecast for volumes from the Midcontinent. Pinedale is pretty much right on track with where we forecast a year ago. The issue there is that the increased number of wells at Pinedale is being partially offset by lower expectations, risk expectations, out of the Midcontinent. Now I’ve got a group of folks in the Midcontinent who continue to think outside the box. And they’ve come up with some interesting ideas that we’re exploring right now on how to accelerate our drilling program next year in the Midcontinent. I’m getting more encouraged that we’ll be able to execute ahead of our risk guidance going forward. The other thing to keep in mind: We have a lot more volume coming out of Pinedale, and the drilling activity there, as you know, is still seasonal. We’re not able to complete wells that we drill through the winter until the summer when the winter stips come off. And, as a result, our production volumes are still back-end loaded. So we get a lot of volume at the end of the year that impacts future years. So, even though we shift from 35 wells this year to 42 wells next year, the benefit of that incremental drilling really occurs in the following year as a result of backward-loading of the production curve. And just one other point, Anatol. We started this year at the end of the first quarter in the hole in the Uinta Basin because of the winter- weather problems. We were about a Bcf in the hole. And we’ve had to climb out of that hole over the rest of this year. I think you’ve covered most things, but Keith, are you concerned with respect to the two major pipeline projects being proposed by Kinder- Sempra and El Paso that, because of the size of these, neither of them gets enough commitment and we wind up with either a delay or nothing? As I said earlier, Sam, we want to see both of these projects built and are looking at what we have to do to help make them happen. Yes, I am concerned, particularly with the bigger project which in scale and scope is a massive undertaking. But as I understand the development plan, it’s been phased, and they may be able to get the first phase of that off with volume commitments not much more than what they’ve already got now. Longer term, we think it’s vital for Rockies producers – and that’s where we look at this – to step up and find a way to get these projects built before the end of this decade. What bad debt expense is built into your guidance as a percent of revenues ’06 versus ’05? And then, what also is built into your guidance in terms of conservation and decatherm-per-customer use? What delta? On the conservation, as I indicated before, with price increases we are seeing, we are expecting a decline. We basically based plans for next year on something in that three-to-five-decatherm range. For next year, we are experiencing some amount of growing bad debt obviously with gas-price increases. We’re going to be in areas where customers will be seeing higher bills than they’ve seen before. We’re currently experiencing about a 1%-of-revenues bad-debt experience. We’re watching it, staying close to it. I would just point out that for Questar Gas, the gas-cost portion of bad debt is covered as a pass-through cost in our gas-cost pass-through. It’s only the non-gas portions that hit our bottom line. A couple of quick questions on Vermillion. I was wondering how many rigs you plan to have working in ’06 to drill those 12 wells? And then also, could you just talk about the winter restrictions there versus Pinedale, and is it a different answer if we’re talking about Wyoming acreage versus Colorado acreage? First answer, we’ll start out with the one rig we have drilling there right now and ramp it up through the year to the four rigs. That’s going to require that we bring some new rigs in from outside the area, and we’re working on that right now. The countryside down in the Vermillion Basin is a lot different than it is at Pinedale. There’s a lot less vegetation. The amount of habitat and range is substantially less. The other important point that I made earlier is we’re drilling in the middle of an old gas field that was developed by this company starting in the ’20s. So, there’s a lot of surface disturbance out there already. Lots of roads, lots of pipelines, lots of well pads, so we don’t view it the same way as Pinedale as far as overall disturbance is concerned. The final point is there are winter-wildlife stipulations on the Wyoming side but not on the Colorado side. So, it gives us some flexibility to move back and forth across the leasehold to be able to drill year-round. That’s correct. And we’re drilling in Wyoming on the Canyon Creek Dome through the winter as well. So, there is flexibility there. There’s not as much wildlife. It’s not in a big migration corridor like Pinedale. You can see that the deer out there must be pretty smart because they can figure out where the Wyoming/Colorado border is. And one other point I would make is that one difference between the Vermillion Basin and Pinedale is that you don’t have a major city or a significant town like Pinedale in the area where we’re operating. We appreciate you all hanging in on this call. Just a reminder, we’re going to be back in Boston and New York the week after next and hope to see some of you there at those presentations. We’ll go into more detail at that time on our E&P activities as well as the rest of our plans. Thanks for listening in today. Thank you for participating in today’s Questar Corporation third-quarter earnings conference call. This call will be available for replay beginning at 12:30 p.m. Eastern Time today through 11:59 pm EDT on November 4, 2005. The conference ID number for the replay is 3355609. Again, the conference ID number for the replay is 3355609. The number to dial for the replay is 1 (800) 642-1687 or (706) 645- 9291.

EarningCall_233986

Welcome to Nanophase’s third quarter conference call from “Sweet Home Chicago”, the home of the world champion Chicago White Sox. Nanophase reported the highest third quarter revenues in the Company’s history and record first nine month’s revenues. The Company had a strong quarter and first nine months and we are pleased that you are taking the time to be here today. Jess Jankowski, Nanophase’s CFO, and I will be hosting this session. As we normally do to begin our discussion, Jess will summarize the financial highlights of the quarter and the first nine months. Jess…. Jess Jankowski, Acting CFO and Controller As I review the financial performance of the Company for the third quarter and nine-month periods, I‘ll continue to do so at a strategic level. More details are included in the financials that accompanied our press release earlier this afternoon. Total revenues for the third quarter of 2005 were up $297K, or 22%, compared to the third quarter of 2004. For the nine-month period, total revenues were up $1.2M, or 28%, compared to the same period in 2004. For the nine months of 2005, Product Revenue was up 46%, to $5.1M, another new Nanophase record. This increase was largely composed of sales of sunscreen materials and growth in sales of personal care materials to BASF, plus the $375K in material that was shipped to a new customer in the medical diagnostics market. We also saw Rohm & Haas Electronics Materials taking product in keeping with their commitment for 2005. For the nine month periods presented, Other Revenue was down $447K. This decrease in Other Revenue, when compared to the same period of last year, related to the Company recognizing the first three quarterly payments of $150K, or $450K in aggregate, in technology development funding from Rohm & Haas during 2004. This funding was part of its $600,000 commitment to support Nanophase’s efforts in jointly developing slurry products for current and future semiconductor technologies during 2004. Rohm & Haas’ commitment to Nanophase for 2005 will ultimately be greater, and be in the form of product sales. As discussed previously, we began shipping to this product commitment in Q2 of this year. We have generated a positive gross margin of $867K for the 2005 nine month period. About $640K of this was margin purely related to product sales. We view this as an ongoing validation of our business plan and our financial modeling. As we continue to discuss, our margins have been impeded by not having enough revenue to absorb the manufacturing overhead that’s required to work with the customers we have and the new ones we expect to have. The additional product revenue this quarter showed that, as volume grows and manufacturing overhead is absorbed, our solid variable margins have an appreciable impact on gross margins. Nine-month period to period R&D Expenses were up $67K. This was largely due to increases in compensation expense. In SG&A, which was up 6% over the same period, we saw increases in auditing and SOX-404-related expenses and compensation, offset by reductions in legal fees, business insurance costs, and other items. Now I would like to take a moment to explain a non-cash charge we took in Q3 relating to recognition of straight-lined rent expense, referred to as a “Lease accounting adjustment,” in the amount of $280K, as a separate line item in the operating expense section of our P&L. In 2005, the SEC published guidance regarding the observance of the convention of amortizing rent expense over the same term as any underlying leasehold improvements. Beginning in the year 2000, we had amortized rent expense only over the first six-year term of our then current lease, while opting to amortize leasehold improvements over sixteen years, a term that included the two available five-year option periods in that same lease. This $280K item represents the portion of 2006 through 2016 escalated rent that we would have recognized over the past five years, at about $13K per quarter, had we calculated straight-line rent expense over the longer term initially. In a related issue, the lease amendment that we renegotiated and announced effective October 1st will result in a savings of almost $600K over the life of the original lease. This savings, as well as the $280K accrued liability we created to take the non-cash charge this quarter, will be recognized quarterly in rent expense reductions over the next twenty years. In total, the Company lost $0.23/share for the first nine months of ‘05 versus $0.27/share for the same period last year. Note that depreciation and amortization amounted to about five & 1/2 cents per share, or $980K of the Company’s loss for the first nine months of 2005. The non-cash rent expense charge accounted for 1.6 cents of this loss also. Moving to the balance sheet, Nanophase ended the third quarter with $8.5 million in cash and investments compared to about $11.6 million at the end of 2004. The Company also reduced debt by $355K in this nine-month period. Management expects the note to BASF, currently at $236K, to be paid off in mid-to-late 2006. Today, I intend to focus my comments solely on revenue growth since this is our highest priority at Nanophase and, I am sure, at least one of your top concerns as investors and shareholders. Before entering specifics, I would like to discuss the critical factors that, we believe, directly have and continue to influence the Company’s ability to grow revenue and the rate of growth. Based on several recent conferences and discussions, it seems to us that many in the investment community have an uncertain appreciation of the market situation. From an understanding perspective, we think it is worthwhile to communicate our views on revenue growth and the revenue growth rate. So, starting with the 10,000 foot view, consider this: nanotechnology is and remains a NEW science and emerging technology. Despite the promise of nanotechnology and all of the hype, this still is an emerging science and technology that should continue to grow at least over the next two decades and likely considerably longer. We firmly believe the adoption rate is increasing and the rate of revenue growth will increase accordingly. For discussion simplicity, I am separating the critical factors to revenue growth into roughly three piles: those where we have major or direct control, those where we have some control, and those where we have limited or indirect control. Let me speak to each of those and try to provide a qualitative assessment as they affect Nanophase and how we are managing these factors: Under the ‘major control pile’, at one time in history, revenue growth for Nanophase was hindered due to our limited ability to advance the nanomaterial to a readily usable format for the market or customer. We have, rather uniquely in the global industry, I believe, eradicated that hindrance with our technology advances that have resulted in our current and growing platform of integrated nanomaterial technologies where we provide nanoparticles, surface-treated nanoparticles using a variety of patented and proprietary materials, and nanoparticle or surface-treated nanoparticle dispersions in a variety of media featuring high stability and non-agglomeration of nanoparticles. While this platform of technologies may not be well understood or appreciated, we firmly believe that building a large, sustainable nanomaterials business requires a combination of all of these technologies to address market applications and be successful. We have taken a new science, created integrated technologies, commercialized these technologies, and continued to advance our expertise in these vital areas over the past two years or so. Again, we believe Nanophase is uniquely positioned. In our assessment, most of our potential global competitors still have much of this basic hindrance. Under the ‘some control pile’ is application development. This is THE current focus area for Nanophase because it is largely research in many targeted application areas, such as coatings, where the market pay-off is potentially significant. The difficulty involved in application development and testing (a non-trivial task in and of itself), product development, market introduction, and subsequent growth is the major reason that Nanophase has chosen to align itself with premier market partners – BASF, Rohm & Haas, and Altana Chemie – as well as other customer partners that we may not discuss, but where valuable development is underway and our partner brings vital application expertise coupled with detailed market knowledge. Appreciated or not, this a major advantage for Nanophase and the reason that in many corners we continue to be told that we are doing it right. However, understand that this is a critical, research, and time-consuming area with both a timeframe and success level that is difficult, if not impossible, to predict. Application development, or an optimal nanoengineered solution, remains a critical factor to revenue growth rate, but one where we have been fortunate to secure solid partners, increase the Company’s knowledge base – and let me emphasize how critical this is in an emerging technology company, and gather momentum over the past few years. Lastly, let’s consider the pile where we have ‘limited or indirect control’, which leads to revenue growth. While much is written about nanotechnology, especially related to universities and national labs that have received huge funding and write exciting, almost fictional, articles about future advances, the real measure of success for nanotechnology is industrial adoption and the rate thereof. Make no mistake about that. We influence the adoption rate through conferences, company capability presentations, articles, and similar measures, but the cycle for industrial acceptance and adoption is real for nanotechnology as it is and has been for all new technologies. Again, our market partners are an asset in this area since they push nanomaterial adoption in a wide variety of markets and create new nanomaterial-based products. The positive news is that we are seeing global acceleration in industrial interest across a broad variety of markets based on development of new or improved products, not a centralized R&D effort, which we have painfully learned is the ‘valley of lingering death’ for new technologies. From the amount of increasing effort, we perceive a growing industrial mass heading toward adoption of nanomaterials as part of their new product toolbox and fully expect this tend to gain further momentum. We are discussing this topic because we realize waiting is difficult and the plethora of publicity is confusing and tends to cause expectations. The factors just outlined are real – for Nanophase and everyone else in nanotechnology. But as industrial interest and adoption gains momentum, and it clearly is, Nanophase is uniquely positioned to exploit opportunities. Our assessment leads us to believe the rate of growth should continue to increase for nanomaterials over the next 5 years. This assessment is buttressed by a recent study by the Freedonia Group which forecasts nanomaterials to be about a $90B world market by 2020. Moving closer, Freedonia forecasts that metal oxides will comprise about 58% of the total market in 2008 with a reported value over $2B growing to about $6.5B in 2013. In summary, the factors that we believe influence revenue growth and the rate thereof have and are positively improving. It is this assessment that leads management to be quite positive about the 2-5 year horizon. Beginning with BASF, we continue to make progress building and expanding the base business with our initial product, Z-Cote, in both personal and sun care applications. Based on current forecasts, we now believe that this business will have increased approximately 20% in 2005 versus 2004. According to BASF, they are still adding customers for this product, most recently in Asia and Canada, and we expect moderate growth in this line during 2006. The new formulation for sun and personal care products, Z-Cote Max, which is based on our patented and patent-pending coating technology, is in the market introduction phase and, according to BASF, is receiving positive response. We expect this volume to begin ramping during 2006 and continue to build in 2007-2008. BASF has stated that they envision growth in this product to eventually equate to a level comparable to that of our current product. As announced, we developed a robust process to manufacture a 35 nm ZnO particle at the request of BASF, as well as BYK Chemie, which is now in the application development cycle. Again, to re-emphasize a point I made on previous conference calls, this is one of the values in having market partners; focused new product development and market introduction. BASF intends to introduce this product for high-end sun care and personal care applications during 2006. In parallel, BASF and Nanophase are collaborating on a second new product for introduction during 2006 that I am unable to discuss. Additionally, in another new product area, we are having success in oral care application development. Through BASF, our nanomaterials are currently used in oral care products, but we would like to increase and broaden the usage. BASF is working very closely with a major consumer products company in a joint development to incorporate nanomaterials in oral care products. In parallel, Nanophase is in co-development with another major consumer products company for similar products. While it is impossible to forecast revenues at this time, we have been told by both companies that they expect new consumer product introduction to begin in 2006. Finally, we have a new product development initiative with BASF outside of personal care in both thermoplastics and films. This initial effort has been underway for about three months and has demonstrated very positive results related to market needs. Going forward, we will be partnering with BYK Chemie, which already has a close relationship with BASF, to drive the product development into the market and revenues. Based on information from BASF, we believe this is a significant opportunity with a relatively short time-to-market and anticipate initial market introduction may occur as early as 2006. Moving to Rohm & Haas Electronic Materials, CMP Technologies, which I will refer to as RHEM, considerable progress has been made in market penetration. RHEM is beginning to see the predicted market synergies from their dominance in the pad and pad conditioner market extend to the slurry market. Rohm & Haas has stated that they have made a corporate strategic, long-term commitment to this market and intend to be a major player over time. RHEM’s current view is that they should have between 4-6 separate semiconductor fabs in various stages of ramping up actual production during the fourth quarter of ’05 and the first quarter of ’06. RHEM believes they are building market momentum that should lead to several customer wins over the next few years. We continue to believe that fine polishing applications, including semiconductors, represent a considerable revenue growth opportunity for Nanophase over the next 2-3 years. BYK Chemie continues to make progress in their NanoBYK product line area. We have made excellent progress improving scratch resistance for UV-curable coatings where we have improved abrasion resistance of the neat film by 10X with the addition of nanoparticles. We are currently working with solvent-based and aqueous-based systems and anticipate similar success over the next 3-6 months. Again, the primary market application focus at this time is scratch resistance and UV protection for industrial coatings and films. BYK Chemie is currently working on approximately 20 direct application opportunities with their customers in the US, Asia and Europe and continues to grow the effort on a weekly basis. We believe that penetration of this estimated ~$60B global market is a critical effort for Nanophase relative to revenue growth over the next five years. This market commitment and confidence in Nanophase’s capabilities is shared by Altana Chemie and BYK Chemie as evidenced by the $1.6 million loan to Nanophase announced earlier today to enhance Nanophase’s development and manufacturing capability. This is in addition to the $10 million equity funding from Altana Chemie in March 2004. This new funding will be used to purchase and install a dedicated NanoArc™ reactor to develop specific new nanomaterials for targeted markets and installation of a commercial dispersion line to manufacture high volume nanoparticle dispersions. We anticipate the equipment should be on-line and available around mid-2006. Note that this loan is interest free to Nanophase until approximately December 2006. In addition to our market partners, we continue to experience robust business development opportunities. We enlarged our business development efforts to include both tactical market attacks and specific customer application opportunities. From a tactical market penetration basis, we have plans in place for two markets where we believe nanoparticles and nanomaterial solutions bring application value in process or product improvement. We have developed highly targeted plans to develop and introduce products, directly and with our market partners, into a new catalysts market and antimicrobial market, which includes both industrial and personal care. We believe these are significant market opportunities, as was also noted in the Freedonia industry study on World Nanomaterials, where our integrated technologies bring a distinct competitive edge and value. We are in the process of implementing our plans and initial results definitely show impressive performance improvement on application testing. We plan to begin market penetration leading to initial revenues during 2006 and believe that both areas could be major contributors to revenue growth over the next five years. Another application area that has received considerable interest in recent months is fuel-borne catalysts in heavy fuel applications, diesel applications, and in fuel additives. We introduced and announced a new nanomaterial directed for specific applications in this area during the last quarter and will continue application development for at least the next 6-9 months with 3-4 different companies. Relative to company and application specific product development, we are currently engaged with over 100 different opportunities in a variety of markets. While this may seem like a large number, there are application synergies which allow us to progress with our current resources. Application development is progressing and we are optimistic relative to revenue growth. One such application that we have discussed before has moved during the last quarter. As you may recall this involved the potential of securing a major new customer with two distinct products for the consumer and DIY market that is sold through a big box retailer. The initial product is now on the shelves, noted as a nano product, and was recently featured in advertising at least in Chicago. The second product release in the big box, which has the large volume and revenue potential to Nanophase, appears to be early 2006. Again, relative to the timing of the big box, we have no control, but are positive it will happen sometime around this timeframe. Our direct customer has already scaled their production in three of their manufacturing facilities and is awaiting word from the box. Based on customer information, we anticipate this should result in a new annual revenue stream of approximately $1-2 million annually. Lastly, Nanophase has decided to broaden its focus relative to multi-faceted nanomaterial technologies that are synergistic with our business model, current technologies, and market partners. Our recent announcement regarding our exclusive arrangement with Competitive Technologies is part of this strategy. CTT has relationships with over 200 universities and national labs and will actively seek new nanomaterial related technologies that may be of interest to Nanophase. CTT provides a direct window into the research that is occurring throughout the US and some areas of Europe, which is a capability that Nanophase needs. We expect to continue pursing strategic initiatives to maximize the Company’s value to its shareholders and build a substantial, sustainable business.

EarningCall_233987

Here’s the entire text of the prepared remarks from Intersil’s (ticker: ISIL) 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. [Rich Beyer, CEO, President] Good afternoon and thank you for joining us on our third quarter earnings conference call. We are exceptionally pleased with the company's performance in Q3. For the fourth consecutive quarter, Intersil delivered solid financial results gaining steady and strong revenue and profit momentum. We exceeded our third quarter expectations and continue to experience ongoing success across many product families and many applications, further diversifying our revenue stream. For the third quarter, the company achieved record highs in both revenues and earnings as a high performance analog company. We also had record bookings again in Q3. We posted revenues of $157.2 million, and non-GAAP earnings per share of $0.21, surpassing the high end of revenue expectations of $148.8 million and EPS of $0.17 for the quarter. We experienced sequential revenue growth from all four of our end markets. Our computing market experienced the strongest quarter-over-quarter growth. Our consumer market continued to show rapid growth, driven by expanding portfolio of handheld and display product families. The communications and industrial markets also experienced solid sequential growth, surpassing our expectations. I will talk in more detail about the end markets after Dave reviews the financials. We continued our strong cash generation, delivering over $35 million in cash flow from operations during the quarter. We exited the quarter with approximately $691 million in cash and marketable securities. At this time, I would like to turn the call over to Dave Zinsner, Intersil CFO and Vice President, who will provide a financial summary. After that, I will discuss results from each of our end markets and provide some comments on our fourth quarter outlook. Thanks, Rich. Let me begin with the income statement. As Rich mentioned, we reported $157.2 million in revenue for the third quarter of 2005, up 24% from the same period last year and up 13% from a very strong Q2. In the third quarter, our book-to-bill ratio was once again solidly above one. Based on the profile of our backlog, we require an order turn rate during the fourth quarter of a bit less than 40%. On a GAAP basis, we reported net income of $27.2 million, or $0.19 diluted earnings per share. This compares to a net loss from continuing operations of $24.5 million or $0.17 per share for the same quarter last year, and net income of $17.3 million or $0.12 per share for the second quarter of 2005. On a non-GAAP basis, excluding the amortization of acquisition-related costs and other unusual items, net income for the quarter was $30.8 million or $0.21 diluted earnings per share. This reflects an increase of 90% from $16.2 million or $0.11 per share from the same quarter last year and an increase of 43% from net income of $21.5 million or $0.15 per share for the second quarter of 2005. We saw an increase in our gross margins for the quarter from 55.5% to 56.2%. The increase was driven by margin improvements in several product families by higher volumes in our internal FABs and by continued efforts across the company to reduce product costs. We expect margins to be in the range of 56% to 56.5% next quarter. As a percentage of sales, third quarter R&D expenses were 17.8% of sales, down from 20.2% in Q2. In absolute dollars, R&D expenses were relatively flat with the second quarter and we expect them to remain at this level for the fourth quarter, as well. Our SG&A expenses for the third quarter were 16% of sales, down from 17.7% in Q2. In absolute dollars, the increase of $600,000 from the prior quarter was due to higher incentive and commission costs result of our higher sales. For the upcoming quarter, we expect SG&A expenses to be similar to the third quarter levels on an absolute dollar basis. As a result of our rapid sales growth, gross margin leverage and cost containment, our non-GAAP operating income for the third quarter was 22.4% of sales. This represents a 480 basis point improvement from the second quarter. We expect to see further operating income expansion next quarter, as we continue to see leverage on our increasing sales. Our tax rate was 24% in the third quarter, and included a one-time true-up to bring our annual non-GAAP tax rate down to 24.5%. This true up did not have a material impact on our third quarter earning per share. We anticipate that the fourth quarter non-GAAP tax rate will be approximately 24.5% as well. Now moving to the balance sheet. As Rich mentioned, for the third quarter we generated over $35 million in cash flow from operations. Year-to-date, we have generated approximately $100 million in operating cash flow. This already eclipses our cash flow for the entire year of 2004. For Q3, we exited the quarter with approximately $691 million in cash and marketable investments and no debt. We also continue to focus on our working capital. Our inventory turns improved from 2.7 to 3 turns as we continue to work down end-of-life inventory, while continuing to improve our inventory position and our high growth product families. DSO increased slightly from 47 days in the second quarter to 48 days in the third quarter. Inventory levels at our distribution partners continue to be relatively low and therefore we remain confident that our sales are in line with end consumption for our products. During the third quarter, we repurchased approximately $30.4 million or $1.5 million shares of our stock. As a result, our fully diluted weighted average share count declined for the third consecutive quarter to $144.1 million shares. Now I would like to turn the call back over to Rich. Thanks, Dave. Intersil's success in 2005 is derived from our strategy and our investments to diversify into new and expanding markets, to broaden our product offerings and to increase our silicon content in major high-growth applications, while controlling our operating expenses. Going into 2006, we will stay this course. Many of the product families that we've introduced are in the very early stages of their life cycles. Therefore, we are very excited about the company's prospects for the next several years. Now I would like to discuss our highlights from each of our end markets. Let me start with a few comments about high-end consumer. Our sales to the high-end consumer market represented approximately 28% of third quarter revenue. We continue to experience strong sequential growth from our handheld and display products and saw continued strength in optical storage. Specific to our handheld business, we secured design wins at another top tier handset manufacturer. We are now engaged with four of the top five OEMs in the world. In addition to the ramping of existing designs and platforms, our families of handheld and display products are seeing increasing success rates in new applications in emerging markets. For example, we have secured several battery-charged design wins for Bluetooth headsets. These headsets are used in conjunction with some of the leading cell phones in the market today. Revenue from these products will ramp in Q4. We have also launched our new family of highly differentiated low dropout regulators, which promise to further increase our content in handsets. Revenues from this new product family will also begin in Q4. Additionally in the quarter, we further diversified this part of our business by securing design wins with significant MP3 player OEMs and ODMs with our power management products and analog signal processing solutions. In Q3, we began shipping our video line drivers in the consumer market, to enable customers to deliver high quality video signals from a handheld device to a display. This is a great example of how we are leveraging existing product families by deploying them into new areas and driving additional revenue expansion. With well over 250 customers, our handheld business is expected to show solid expansion in the fourth quarter and is poised for an exciting 2006. For our display products, we are also seeing strong quarterly growth due to seasonality and our expanded content of programmable buffers, display power, DCPs and analog frontends. We have been successful by working closely with panel manufacturers to jointly develop new approaches to existing as well as new applications that deliver better resolution video and higher picture quality. During the quarter, we launched and secured design wins on two new display product families, ambient light sensors and white LED drivers. As a result of our focus to expand our display portfolio, we continue to secure new design wins with top tier manufacturers on next generation displays, including LCD TVs, which are expected to grow significantly over the next year. Following a strong Q3 for our display products, we expect growth in Q4 and solid growth in 2006. Moving on to the optical storage market. We are seeing strong demand in 2005 as expected. And we have maintained our leading market position. Through the first three quarters of 2005, our unit shipments of laser diode drivers is up more 30% of first three quarters of 2004. We are actively working with our customers to deliver the most cost-effective solutions, like our spread spectrum LDDs to keep pace with the market's current pricing and technology trends. For the fourth quarter, we expect unit demand of our LDDs will be at approximately the same level at Q3. In total, the high-end consumer market is performing better than expectations. Our growth has been across numerous product families including battery chargers, display power, display buffers, DCPs, analog frontends and video line drivers. As we expand our portfolio and our silicon content within each targeted application, we expect to see continued exciting growth. Now let me turn to the computing sector. Our sale to the computing market represented approximately 24% of revenue in the third quarter. In a quarter that is seasonally up, we saw robust growth in both our notebook and desktop businesses. We continue to serve both of these segments with innovative solutions based upon several of Intersil's proprietary process technologies and our advanced designs. For desktop, we continue to be the market leader with approximately 50% share in core regulators. We are seeing our controllers with integrated drivers widely accepted in this market as these products offer real material cost advantages and area savings. In the area of notebooks for the current platform, we continue to see steady strong growth. During the quarter, we saw significant acceptance of our Lithium ion battery chargers for notebooks. Furthermore, we saw additional revenue growth for our core power solutions based upon AMD's Athlon platforms. Design wins continue to be strong on next-generation notebook platforms as well. In addition to the wins we've secured with major OEMs in North America and ODMs in Asia, we are now securing design wins with major Japanese notebook manufacturers. In the computing space, we continue to be strongly positioned through our technical leadership. We continue to be the only major high performance analog company to offer both analog and digital controllers for the computing market. Going into Q4, due to seasonality, we expect computing to demonstrate additional growth. Moving to the communications market. Our sales to this market represented 24% of third quarter revenue, a revenue increase sequentially driven by demand for our DSL products and our telecom and datacom infrastructure power management products. In the area of DSL we experienced healthy growth from Q2. Demand has been strong and we believe inventories in the channel remain lean. We are forecasting Q4 to be modestly down, due to normal seasonality in this area. We are also seeing strong momentum in several other communication product families, particularly in our infrastructure power management products, such as low-noise controllers, bridge drivers, isolated power, and PWMs with integrated FETS. We have added numerous customers, including several large OEMs who are using our solutions in various products such as satellite set top boxes, monitoring equipment, and base stations. This progress is helping diversify our general-purpose revenue stream and should benefit Intersil during a typical seasonal uptake in the first half of 2006. For Q4, we expect our communications end market to be flat to slightly down basically due to seasonality. And finally moving to the industrial market, our sales in the industrial market represented 24% for the third quarter. Within this segment, most of our product families experienced sequential growth. Over the past several quarters, we have secured numerous video design wins with KVM manufacturers in North America, Europe and Asia. Revenues from these customers started in Q3 and is expected to grow in Q4. Other product families are also showing consistent growth. For example, our analog switches and muxes and our RS45 transceceivers achieved solid revenue growth in the quarter. Our general purpose products have proliferated in Q3 into a broad range of applications, such as electronic biking motors, medical displays, in-flight entertainment systems, power-over ethernet, displays for the retail environment and instrumentation equipment. For Q4 we expect our industrial end markets to be flat to slightly down again, largely due to normal seasonality. Now let me turn to our outlook for the fourth quarter. Our broad-based market success has generated solid momentum as we headed into the fourth quarter. As a result, we expect Q4 revenue to grow between 5% and 7% from our already strong third quarter revenue of $157.2 million, which as you know, was up from a very strong quarter in Q2 where we grew sequentially by 9%. And in Q4 we expect non-GAAP earnings per share of approximately $0.23 to $0.24 per share, up from the record we just achieved of $0.21 in Q3. Before we open it up to questions, I would like to summarize with the following points. We believe our third quarter results demonstrate the power of Intersil's strategy and our execution. Our balance sheet continues to be extremely solid. And our operation strategy enables us to consistently generate sizable cash flow from operations each quarter. The broad-based strength that we are experiencing should result in a powerful, long-term business model that will produce consistent results, increase our profitability, and enhance shareholder value.

EarningCall_233988

Here’s the entire text of the Q&A from Adobe Systems' (ticker: ADBE) fiscal 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. At this time I would like to remind every one, if you would like to ask a question you may press “*” and then the “1” on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Ben Reitzes with UBS. Yeah, good afternoon, and Murray we’ll miss you. Couple of things, I guess, one is Bruce, with the new company what do you, you expect a similar, product development cycles with, with regard to, the typical ones at Adobe where it was 12 to 18 months, or 18 months and given your commentary about fourth quarter being, the high watermark for the year, I mean should that be coincident with, with new products or should it be more seasonal comment and then I just have one follow up? Ben, why don’t I take that? I think the comment associated with, the quarters was just to give you some color on the quaternization in terms of what we expected for revenue namely that Q3 would be seasonally weak given Europe and Japan and that Q4 would be the strongest quarter. As you know, we are not announcing product cycles due to competitive reasons, what I can say is that we’re excited about new products that will be coming from the combined company right through the year and so we are looking forward to a pretty strong product cycle. So, we shouldn’t assume anything, should we assume that the product cycles though are pretty comparable when we get back to the way, the companies were developing, all that throughout now you’ve combined. I think we will continue to focus on our customers and make sure that we are very close to them, vis-a-vis how we deliver products, I think we’ve demonstrated a history of innovation and being close to them then I am going to continue to do that. Clearly, I think, with the combination there are a lot of ideas about how we can continue to extend, what we offer our customers. Okay, and then was there any kind of demand, you think pushed into the first quarter ‘06 based on the merger, or is it hard to tell perhaps may be in the Creative Suite or something with regard to this new pricing maybe, maybe some customers sensed this was coming, did you think there is any kind of demand, that causing a strong 1Q, the revenue guidance a little better than we expected. You know, Ben, at this time, we don’t really haven’t seen something but there is some kind of demand in Q1, obviously if you have seen, seen continued momentum with Acrobat and Creative Suite and we would expect to see that continued force in the first quarter but no specific kind of demand which help in Q1. Obviously, we are only, I think we’re in Day 9 right now of Q1. Yeah, we will, we do anticipate the Acrobat business will continue to accelerate on a sequential basis and we also believe that when you look at the combined Creative Suite, Studio and the new bundle that we just introduced that that combined business will also increase on a sequential basis. So those are the two primary drivers for the Q1 ’06. Murray did currency, adversely impact the quarter or will it adversely impact the year and material amount that that was the one thing, I think you missed in your thorough overview there. If you missed it even but, I would assume that’s an adverse impact, so the organic growth rate may be even higher? That’s correct Ben and actually in Q4 we had an adverse impact to about $6 million. And as you look at 2006, I think there is sort of three components to the revenue; obviously you have given a target of 2.7 billion and that’s after the impact of purchase accounting. If you added the purchase accounting revenue back that’s about 50 million, I get you the 2,750. We also would say when you look at the currency, at the currency rate for Euro and Yen relative to Dollar stayed, at the similar levels they are today on a relative basis ’05 to ’06, we’re loosing, well over $150 million so you could then say if it was exchange rate neutral ’05 to ’06, we would plus the purchase accounting, we’d have at least a target of 2.8 billion for 2006. Good afternoon, thank you. Guys you’ve highlighted the, the headcount of, with reduction and the size of it. Can you help us understand, is this the bulk of what’s planned or is it definitively kind of a, the restructuring for the combination, or do you anticipate that might be something, something that follow later and then, and then following up on that, I would assume that there is very good cost synergies in the overhead expenses between the two companies. How much does it costs beyond the overhead? Well couple of things Tom, first of all our goal in this was that, we would go through an exercise of rationalizing resources, for there is a overlap and trying to reposition, rebalance the resources, very quickly and do at once. If you want to build this company, going forward and we cannot have successive rounds of trying to save money, we want to do it swiftly and do it once and then focus on building this company given the opportunities that it has in front of us for the next few years so this is it for the year from our perspective. In terms of where the reductions are coming from, they’re really coming across the organization but they are prominent in the areas of G&A, would be certainly one area we’ll see quite a bit of it. A sum in sales of marketing and R&D but R&D will be there, all right. G&A will be the area where we see the primary impact. Thanks a lot. Can you give the detail of what’s the impact of Macromedia was on your projection for non-GAAP EPS for 2006? And I have a couple follow-ups, thanks. Scott, no, we are not providing that information in terms of what that impact would be, I guess if you look at it standpoint of when announced this deal, we had mentioned that it would be breakeven to slightly accretive, that was back in the spring when we announced it. At that time, breakeven was probably around $1.18 per share, we’re targeting $1.26 to $1.30, the buyback is probably something in the $0.04 to $0.05 range, so you clearly see that the acquisition is accretive by few cents and so, if you wanted to look at it that way, there is an answer there but we feel that, we’ve delivered on what we’ve said in terms of breakeven to slightly accretive without doing the buyback, it is accretive and then with the buyback, it adds on to the, to the how accretive it is. Because of all of these synergies that we have between the 2 companies Scott, we’re running as one combined company and in a going forward basis, that’s how we did the business planning, the integration planning, that’s how we’ve set our financial targets for this coming year. So, it’s difficult to separate Macromedia, with the old Macromedia from the existing Adobe business. It’s now one company. Okay, fair enough, thank you for that. My second question involves stock option, you referenced stock option and based on my calculations I think there are impact for FY ’06 is expected to be roughly 12% to 13% something like that which is considerably lower than the impact in previous years for the both the Adobe and Macromedia and I was wondering if you could explain why this is the case and if you think this trend is going to continue in the out years? Well, I think it’s the combination of two factors, one is that the dilution from stock options in terms of the annual burn rate has come down from where it was a few years ago, clearly all over the industry, share holders have told us what they find to be acceptable and the supplying demand markets the labor has led to lower amounts of options being granted so you have that going on, as well as the volatility in the stock price has come down over the last few years after though the bubble period so combination of that leading to lower expensing. Okay and its fair to say that the amount options issuances should continue to trend lower, is that a fair assumption at this point? It’s hard to say Scott, we obviously are an IT based company, people are our business. We have to remain competitive in the marketplace, we compete for great talent, we want to retain great talent. We are competing with wonderful companies like Intel and Google and Cisco and then others for that talent. So, we have to be careful that we are not under compensating our brilliant employees and our passionate employees. So assuming the rest of the industry follow suite and decreases their compensation to their employees that something we will be able to do, if they don’t, we won’t be able to do, because we certainly don’t want our employees leaving and we want to continue to attract great employees, like Peg Wynn and Garrett llg and others. Sure. And actually this is, as I am sure you know, how is been the trend over the last couple of years for companies in the Valley. The last question I have is, do you expect to have a replacement for Murray in place by say, March 2006, is that kind of how we should be thinking about this at conjuncture? Yes, Michael (ph), fortunately Adobe is in great shape, Murray is leaving the legacy of his very disciplined and outstanding organization, he has great people who working for him, the company is very healthy, now look all the growth that we’ve had and systems in place, so my belief is given the outlook for the company both in ’06 and beyond, our ability to attract a CFO should be very high, it is a tough market for CFOs, the last time I looked, it looks like 5 or 6 was my pier software companies are all without CFOs. So, I am hopeful that we’ll have a replacement by the end of March, I am also thankful that Murray has agreed stay on a bit longer, as the search takes us longer. Thanks, good afternoon. Question first for Shantanu, with respect to how are you conceive with you can and should do in terms of long term product development and integration and in other words, what do you think it means to let’s say, Adobe 5, the combined products now. I know, if you go back to the old orders and prime acquisitions that took you about 2 to 3 years to fully unify the products and the interfaces, is this a 2 to 3 year effort as well, do you think Shantanu to bring the products together, at the MAX conference couple of months ago, whether there is some reference to the Apollo project, about unifying interface, so maybe you can elaborate on that? I think at the center of the combined company will really be the ability to deliver this engagement platform that Bruce talked about. You know combining the ubiquity of the flash player as well as the Adobe Reader and providing not just a client environment that’s going to work across PCs and non-PCs and mobile devices, but also the authoring tools also developer tools and the servers that are required for people to be able deliver, engaging experiences and immersive experiences across all these particular devices. Having said that, let me talk about, the strategy that we are looking at and I think the business units structure reflects that strategy somewhat, I mean, certainly in the Creative Space what we are going to be doing is looking at how can we combine the best of what Macromedia did with Studio and we did with Creative Suite. One of the advantages we’ve had in having a fair amount of time to plan for this is we’ve been able to engage with customers and they certainly want us to get a tremendous amount of file format compatibility between the 2 sets of products. So that’s what we will focus on. The reality is we have many, many cycles worth of great innovation and integration ideas that we’ve already developed. So that’s on the Creative side. On the Knowledge Work aside, I think looking at what Breeze has with respect to real-time collaboration in Acrobat with a synchronous and trying to merge that is going to be a key priority. On the server side, looking at the technologies associated with LifeCycle, Flex as well as ColdFusion and delivering more of an end-to-end solution to CIOs will be the focus. So clearly we demonstrated with Day 1 that we’ve had that work well underway and with bundles you will expect to see, innovation right through and we’re not going to be waiting for, one of the things many years out. So you expect to see innovation and regular product cycles from us. Okay. A question for Bruce and maybe for Steve if he’s there. Could you talk about sales integration, Macromedia how it’s been, you may be much more explicit about their direct sales, efforts and contributions and how do you see the other 2 enterprise and direct side of the business coming together? Yeah, I am pleased to say Steven is not here because Steven is busy motivating, inspiring and leading our sales organization, in fact this week we have our sales managers from around the world and Steve spent two days with them, talking about our strategy is going forward and the focuses that we need in order to execute against our plans. We clearly have been able to increase the size of our direct sales organization by a significant amount, Macromedia had invested heavily in that area, that was an area where we started to invest heavily, so our sales force with emphasis on the word force, has become much more significant for Adobe. It is not our intent for competitive reasons, to break that out but I can tell you is, very exciting to see we have a kick-off meeting with our entire sales organization in the not too distant future and I am anxious to get in front of them. And just I am, pointing on the bundles that you announced couple of weeks ago. To what extent can those prove to be incremental, I mean at this point of, there is really no new technology, it’s repackaged or reconstituted products. To what extent could these bundles really be incremental over and above standalone or CS sales? Well, Jay the way we are viewing at is, we just, I think that’s actually a tangible rate to highlight the benefits of the combined Adobe Macromedia and we do think its going to drive incremental revenue based on some research that we conducted vis-à-vis as we have looked at the creative community and Macromedia has looked at the designer developer community, looking at the penetration of each company’s products with the other sets of customers. Clearly it’s too early to tell in terms of direct results. But we do believe that it will drive incremental revenue. Yeah, I want to be here in full force as CFO until we have the replacement. So I will be here to keep answering any questions you might have. Good afternoon. Can you just give us a sense of how quickly, you think you can achieve the first stage of the channel integration, I know you just, you adversely spoke about the sales side but, just in terms of integration of what the Silver lab with Macromedias right now on the internet channel? Yeah fortunately, during the integration period Brent, we were able to look at the channel strategy, look at the channel synergies and they are overlapped. And we are well on our way of achieving those synergies as we speak it. Yeah. Just to give a little color on that, where we stand on the integrations at this point we’ve made tremendous progress on Day 1, our Infrastructure Integration of our network, Video Conferencing Firewalls, 5 digits phones all on Day1. We are processing orders on both websites in through SAP on Day 1, we had orders processed for our direct business, most companies as one company on Day 1. The channel for licensing and shrink wrap, we are processing orders on Day 1 with full supplies of products that we needed to have with in 2 days. So, we are in a tremendous position right now, operating as one company with our typical kind of reporting basically, every 6 hours or watching revenue flow around the world is basically any level of detail we want or the combined products of the company. So, the integration is off to a, tremendous start, we obviously have more work to do. We feel quite good about where we stand on Day 9. And Murray, just the timing of the billing to our buy back, which deserve a set course we should expect even when secured or will be more back and low, just to, towards the end of the year, how shall we expect to see that progress? Well no specific target to provide there, but we are committed to buying back that billion shares, million dollars worth of shares. Oh yeah, I don’t have much money. Yeah, we definitely can move to a billion to a billion share, billion dollars of stock in the 12 months it will be over the course of the year, but we don’t have any specific timing to provide on that. So as we move through the year we will provide updates. Good afternoon buddy and congratulations on growing these businesses, its kind of unheard to see big software companies come together and have some solid guidance like this. So, well done. And in terms of, I guess follow up on some other questions that have been asked. In terms of hypothetical timing of new products, I can think about lot of great products that the combined companies can put together. Should we generally be thinking about CS3 as the first kind of a event, Shantanu, you talked a little bit about it. Or should we think that there could be some combined products that could periodically find the way to the market, prior to CS3? Yeah, Gene I’d love to be able to be answer those questions, we don’t want to stall at the existing business, we don’t want to, perhaps that our competitors, as Shantanu has said previously, there are number of products that we plan rolling out through out the year, you will see more and more integration as we go through this year, as we move into ’07, and for something like the engagement platform, it will take us a number of generations for us to get to where we hopefully want to be. But I can give you confidence that we have done a great deal of planning and that of a one company the engineering teams are aggressively curving away. Okay, and just in terms of revenue per customer, I know that Jay’s question kind of touched on this bundle and you guys probably aren’t going to give us some of their research that you’ve given, so you guys have done. So, I am not going to even ask that question, but maybe can we look at this way as, that if we go back and look at this historical revenue per customer changes when Macromedia has gone up bundling strategy or when you guys first did, it was CS1. Is there any reason to believe that trend will continue as far as percentages, changes and revenue per customer, when you look at, what some of the web bundle that you have today is going to provide. Gene, what I can say is that as part of this integration effort we, really did a comprehensive customers segmentation of looking at people who are creating content for prints, for web, for video and for wireless. As well as not just to creative part of it, but also developer community, and we did find that, the penetration of all of our products, there was upside in terms of getting more people to standardize on the complete bundle kind of offerings that we are providing. So we certainly believe that there is upside, and, as just we will continue to deliver these bundles to address that opportunity that we believe we have. Well one thing that we are confident Gene, as long as the economy continues to be as stable as it is, our customers will pay for value. We are thrilled that the creative pro businesses is growing 20% year-over-year, and that is an example of that kind of willingness to pay for value. They appreciate what we have done with Creative Suite 2, we believe that we have the Macromedia products available to them that we can continue to increase our average ASP per customer. Okay, and just, I guess how are you, are going to be marketing that bundle. You don’t have the advantage of new product releases, where you go now with the bundle. Well I think we’ve started to market through the traditional channels that we have available to us. Certainly, on the website through the communities that we both have accesses to. As well as direct customer base Gene, I mean we have a fair amount of Macromedia, the fair amount of customer that they have. And we’re actively targeting those customers, certainly again as we talked about the video bundle that’s going to be coming out early in 2006. All these are opportunities for us to get the word out. And one last question obviously, Apple in the next year is going to be going through a platform change, I know Bruce you were at Apple’s Developer Conference last year talking about Rosetta. Any thoughts in terms of how quickly, although we could have products to capitalize on Apple’s new platform. Again Gene, our general philosophy with respect platform shifts whether it’s with Apples move to the Intel architecture or the Microsoft shift to Vistas. We stay focused typically on our own product schedule and making sure that as a result of a new product release that we do, that we support any new operating system, that might be available at that point on new hardware platform, and therefore as you can imagine we are well on our way of making sure that we support the Intel Mac platform in the next versions of our products. We do know that when customer switch, it is a greater opportunity for us to sell them more software. They typically will need to upgrade or buy new sets of products. But would there be a new version of Breeze that would come out after the Intel switch that would be CS2 for Intel, for Apple, Intel or something like that? Or would the existing CS work on, I could see a few Rosetta but maybe we expect kind of a dot upgrade and then to capitalize on the new platform? Again typically our philosophy has been do not introduce a specific release for a new platform rather to support that in our new version. There is no reason why our existing products should not continue to work on the new platform. I think, Gene its important to separate Apple’s customers from those that of both Apple and Adobe customers. Clearly they are more consumer-oriented customers will buy the new Mactel machines as quickly as they are available. Our customers will take the time to both evaluate them and also make sure that the software is right for that environment. For Adobe it does not, would make sense for us typically to do and operating system or architectural version only, we want to incorporate that into a wrap of the product. Okay, great. And finally Murray, I guess finally has deserved a vacation and see you after what you’ve financially done for the company, so congratulations and enjoy it. Good afternoon. I have question for you regarding OEM products right now, I guess new segment, we should know the product that I guess Macromedia was very excited about ending up being the other category, I guess the other categories will vary coordinate for building the past with earliest ones that was growing all that might bring Suite in particular. Does that mean that you’re going to be emphasizing these products or that is gap of this spend, sort of I guess maybe more narrating other categories in a different month? So, in looking at the business segment classifications, and when we came up with those Sasa, one of the things we had to do also based on the SEC requirements is to look at how we’re running the business within the company and making sure that the business segment classification support, how we are managing the process internally. I think as you look at, contribute especially for people who gone to update the website, it’s an important aspect of working and conjunction with, the website that exists. So we will continue to invest in that business. Okay and my second question will be sort of similar to the new Apple platform, regarding we’re kind of looking at this type coming out sometime roughly, a year from now, or so what sort of is your kind of position regarding what’s kind of a refresh that might be as far as your concern? I think it’s a little too early to tell just because I don’t know exactly when Vistas are going to ship right now Sasa so, our perspective is we are just going to continue to focus on delivering the next versions of our products, I think the innovation ideas associated with putting together this engagement platform a tremendous and so when this Vista comes we’ll support it. All right, great, thank you very much and Murray and let me join everyone and thank really for what you’ve done for Adobe. Thank you, a lot of questions have been answered but I am curious, you may answer this, sorry, but I was jumping from call to call, you talked all about the Intelligent Document Survey Business and also the relationships with SAP, IBM, EMC and others, how that’s going? Well, still Tom, again we did have record revenue, I think if you look at the performance in the year we continued to have the deals greater than 50,000 were a record 63. Clearly, the second half in 2005 grew significantly over the first half of 2005, its over 25% growth in the second half, and so, we continued to be excited about that business, we have more reference accounts now that are available across the verticals that we target at Government financial services and other regulated industries, we did say that SAP is now starting to offer interactive forms as well as part of NetWeaver platform and our relationship with EMC is also strong, from a revenue and marketing perspective. So, we continue to feel that we have momentum in that business going into 2006 and Flex and ColdFusion will just add to that as well. In terms of how those will add to it, as obviously some our relationship between, what people will do, with application web servers versus what they do with Intelligent Forms. Now how do you envision those things going together, will you have web pages that are combinations of both HTML and Adobe Forms, how do you think about that? Well, Tom I can give you a couple of scenarios that already seemed to be resonating with our customers that we’ve talked to. For example, in terms of being able to do the data capture and using Flex as an immersive way to create experience that can be used for data capture as a front end to the digit, as a front end to the PDF process, is gaining some interest. Macromedia also announced some very exciting data services as part of their recent MAX announcement which we can use to synchronize the data whether that comes from PDF or HTML back into the enterprise. I think having the FlexBuilder application enables us to also give more tools to developers who wish to build on this engagement platform that we’re talking about. So, what’s exciting as we’ve been talking to some customers who’ve been using Flex and using LifeCycle independently and they clearly see the benefits of us being able to put them together. Okay, so when we think about future product synergies, obviously there is a lot of synergy on the Creative Suite side, but you should also think if there’s going to be a fair amount of potential opportunities for bundles or suites, across over and intelligent document servers and they have several products from Macromedia? We certainly believe that the combination of Flex and ColdFusion and LifeCycle enables us to deliver a more comprehensive offering to the CIO as they think about how they want to have an experience either on web or on paper. How that is reflecting itself in products, it’s a little early to tell. Cool, made it in under the wire. I have a question for Shantanu, if you look at the new bundle, if we were look at the design bundle, from a designer’s perspective, what would you say with the value proposition other than the financial economics of that bundle, what other things would entice a designer to buy the design bundle over CS2? Well, what we are hearing Steve from our customers is the people who are today producing content for print, a lot of them want to start to deal with multimedia, they want to start to make their offerings available on the web. And, with video really exploding on the web as well as using DVD, I think the ability to use animation and take that content that they had produced for one medium and move it on to the web is what developers in particular found very exciting. The other example that I would give is a number of these customers use illustrator to create a vector content and then want to animate it and by having flash in addition to illustrator, allows them to integrate that workflow, so just, 2 small examples. I think, if you think about the Adobe customer, they have relied on us for many of their solutions, the fact that we can now provide them with flash authoring in the same box, gives them comfort in trying it and testing it knowing that, that’s an area of focus that is required for them to be successful in the future. This concludes our call today. We thank you for joining us. Have a great and safe holiday season and we’ll see you in January at Analysts meeting. 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_233989

Good afternoon, my name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the Amgen First Quarter Financial Results 2006 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 “*” then the number “1” on your telephone keypad. If you would like to withdraw your question press “*” then the number “2” on your telephone keypad. Thank you. Mr. Sood, you may begin your conference. Okay, thanks very much. Good afternoon everybody, and I would like to welcome you to our First Quarter 2006 Conference Call. With me today are Kevin Sharer, our Chairman and CEO, who is going to lead off the call, followed by our CFO, Richard Nanula, who is going to give you additional details on our financial performance during the first quarter. Also with us today is George Morrow, our Executive Vice President of Global Commercial Operations. And George will make some comments on the overall market and the current issues facing the commercial organization. After George, Roger Perlmutter, who is our Executive Vice President of Research and Development, will provide a pipeline update. So before I start, I would like to make the customary cautionary statements. Through the course of the call today, we are going to make some forward-looking statements. And of course, we can’t guarantee that they will be accurate and actual results could vary materially. So with that, I would like to turn the call over to Kevin. Kevin? Yeah thanks, Arvind. We are off to a good start in 2006 with total revenues for the quarter up 14% over the prior year, and adjusted earnings per share up 26% for the same period. Our marketed products continue to do well. You heard us say that even though we have achieved leading positions within each of our product categories given the current penetration rates, there is still a lot of room for additional growth. Richard will go into additional details on our performance during the first quarter as well as the outlook for the remainder of the year. Let me comment on the business environment in 2006. On the reimbursement front, things are simpler with the transition more complete to the ASP methodology. As we had anticipated, we are starting to see stability in our ASPs, as evidenced by the ASPs for the second quarter 2006. George will discuss this in more detail, including what we are hearing about the new CMOS oncology demonstration project. I would like to comment on some notable milestones during the quarter. First, we completed the filing of panitumumab with the FDA for third-line metastatic colorectal cancer. The pivotal study, which has been used to support this application was presented at the recently held meeting at the American Association of Cancer Research. I'm excited about the many key opportunities that we have in our pipeline. I believe our decision to increase adjusted R&D expenses by 30% to 40% this year is the right decision, given the many opportunities that we have. Roger will recap the panitumumab data together with a broader pipeline update, including information on the start of some major clinical trials involving our late-stage clinical compounds. We also successfully closed on our acquisition of Abgenix. This transaction will allow us to capture the full economic benefits of panitumumab and provide full access to the XenoMouse technology, which could lead to the development of additional novel compounds. As you know, there has been much talk of late about Roche and its peg-EPO product. Based upon Roche's public comments, we anticipate that Roche's BLA filing could take place any day. We believe peg-EPO violates six of Amgen's US patents, and Amgen is seeking to prevent Roche from importing and selling peg-EPO in the United States. On November 8, 2005, Amgen filed a patent lawsuit against Roche in federal court. And on April 11, 2006, Amgen filed a complaint with the International Trade Commission requesting that the ITC exclude peg-EPO from the U.S. market. Many of you have asked why we're pursuing these two actions simultaneously. While I'm not going to comment specifically on Amgen's legal strategy, there are some differences in timing and available remedies in the federal court and ITC actions that make it appropriate for Amgen to pursue both actions simultaneously to get the strongest possible response to Roche's actions. We believe this litigation will proceed in the normal course in the coming months. We have great confidence in our patent portfolio and a proven track record of protecting our therapies from infringers. We also believe that peg-EPO provides no additional clinical benefits versus Amgen's innovative therapies: EPOGEN and Aranesp. As you know, Amgen revolutionized anemia treatment with the introduction of EPOGEN and Aranesp, which have accumulated over 4 million combined patient years of experience. I would now like to turn the call over to Richard. Thanks, Kevin. I'm pleased to report that adjusted earnings per share, excluding stock option expense increased 26% for the first quarter to $0.91 per share. On a GAAP basis, earnings per share increased 22% to $0.82 in the first quarter versus $0.67 in the prior year. Effective January 1, 2006, we began recording expense associated with employee stock options in accordance with the Statement of Financial Accounting Standards Number 123(R). As a result, reported GAAP results for the first quarter of 2006 were negatively impacted by $66 million on a pre-tax basis from the inclusion of related stock option expense. Stock option expense in the first quarter was $0.04 per share versus $0.06 in the first quarter of 2005. Adjusted EPS, including stock option expense were $0.87 for the first quarter of 2006, an increase of 32% compared to $0.66 in the first quarter of 2005. Total product sales grew 14% to 3.1 billion over Q1 2005 sales of 2.7 billion. Total revenues also grew 14% compared to the first quarter of last year, reaching 3.2 billion. When we look back a number of years, we have consistently seen a sequential decrease in product sales from the fourth to the first quarter. For example, the first quarter sequential decline was 1% in 2006, it was 2% in 2005. Sequential quarterly growth rates can be influenced by a variety of factors, such as shipping shortages due to extended holiday periods and buy-ins tied to contractual discount incentives. More importantly, underlying demand for our products remained strong, and with the exception of Enbrel, is in line with our expectations. George will discuss our products in greater detail in a moment. With respect to Aranesp and Neulasta, we exited the first quarter with wholesale inventories somewhat below our normal expected range driven by strong demand at the end of the quarter. Our other products' inventories ended the quarter within the normal range. First quarter U.S. sales totaled 2.6 billion, an increase of 15% versus the first quarter of 2005. Total international sales were at 556 million, an increase of 10% versus the first quarter of 2005, and were negatively impacted by 46 million from changes in foreign currency exchange rates. However, this impact is offset in our bottom-line through our non-US operating expenses and our foreign currency hedging program. Excluding the impact of foreign exchange, worldwide product sales increased 16%, and the international product sales increased 19%. Now I'll turn to operating expenses, which as usual I will discuss on an adjusted basis. Cost of sales rose 13% primarily due to higher manufacturing costs, in part due to higher sales volumes. Enbrel costs in the first quarter were higher, as we shared the costs related to the ramp-up of our partner Wyeth's Grange Castle facility under our global supply agreement. Higher costs of sales substantially offset lower royalty expenses as our contractual royalty obligations on NEUPOGEN and Neulasta with Amgen clinical partners expired in December of 2005. R&D expenses rose 20% during the first quarter over Q1 '05, mainly due to higher staff levels and increased funding necessary to support clinical trials for our late-stage programs, including higher clinical manufacturing costs. As a percentage of sales R&D rose 1 percentage point to 20% compared to 19% during the first quarter of 2005, which contributed to the 1% decline in our operating margins to 44.4%. In January, we indicated to you that R&D expense would increase 30 to 40% this year, as we continue to initiate numerous large-scale trials throughout the remainder of the year, we expect to see accelerated growth in R&D expenses, inline with that guidance. As Kevin mentioned, given the opportunities we see in our pipeline, we believe this increased investment in R&D is the right strategy for long-term growth. SG&A expenses rose 13% in the quarter, primarily due to higher staff level to support the growing organization, higher legal costs and higher Wyeth profit share expenses related to Enbrel sales growth. Our adjusted tax rate was 25.1% for the quarter versus 26.4% in the first quarter of 2005. For the full year, we now expect our adjusted tax rate to be lower than 2005 versus our previous guidance of a rate comparable to 2005, due to expanded manufacturing activities in Puerto Rico and what we believe may be some likely favorable tax settlements. During the first quarter of 2006, adjusted EPS growth of 26% exceeded revenue growth of 14% by 12 percentage points. This earnings leverage was driven by a higher interest income, a lower-than-planned tax rate and a lower share count. This leverage is expected to moderate by the end of the year as we incur higher R&D expenses as well as absorb the dilution related to the Abgenix acquisition, beginning in the second quarter. The Company now expects 2006 adjusted EPS in the range of $3.60 to $3.70, including expected dilution from the Abgenix acquisition but excluding stock options, up from a range of $3.55 to $3.70 per share, which excluded both the impact of the Abgenix dilution and stock-option expense. In the second quarter, we expect to record a significant charge for acquired in-process R&D and development, so in-process research and development related to the Abgenix acquisition, which we will also exclude from adjusted earnings. In February, we completed a $5 billion convertible debt issuance. These notes carry interest rates of 1/8th of a percent on the 2.5 billion five-year notes and 3/8ths of a percent on the 2.5 billion seven-year notes. In connection with the bond issue, we entered into a bond hedge and warrant transactions which had the economic effect of raising the effective conversion premium to 50%. Concurrent with the debt issuance, we repurchased a total of $3 billion of company stock. Aggregate repurchases for the quarter were 47 million shares at a total cost of 3.4 billion. This reduced our absolute shares outstanding as of March 31 to 1.178 billion. For purposes of calculating our adjusted EPS, the weighted average shares used this quarter were 1.214 billion versus 1.29 billion in Q1 of 2005. This reduction reflects our aggressive share repurchase program as well as the repayment and term modifications of our prior convertible debt issuance. Turning to the balance sheet, capital expenditures were $225 million for the quarter. During the quarter, we announced major manufacturing expansion projects in Ireland and Puerto Rico, as well as the global expansion of our R&D capabilities. Our cash and marketable securities were 7.1 billion at the end of the first quarter, and just after quarter end, we funded the $2.1 billion Abgenix cash purchase price, thereby lowering our cash balances. Next, George will provide commentary on our products and business. Okay as Richard mentioned, total product sales rose 14% during the first quarter. Overall, with the exception of Enbrel, our product performance was in line with our expectations. So let me turn to the key factors affecting our performance, starting with Aranesp. Worldwide sales of Aranesp increased 24% in the first quarter of 2006 versus the same quarter of 2005. In the U.S. Aranesp continues to exhibit strength, due to both share gains and market growth, where we saw 33% growth in net sales in the first quarter compared to the first quarter of 2005. We believe that our recent approval for every-three-week dosing will be a significant benefit for patients allowing them to synchronize their anemia treatments with their every-three-weak chemo, further strengthening Aranesp's position in this segment. In the EU, Aranesp's share increased to 45% in oncology and 46% in nephrology. We continue to drive the uptake of extended dosing regimens in both settings, which is important in our preparation for the entrance of biosimilars in coming years. And we currently don't expect to see any biosimilars in the EU in 2006. We have seen good adoption of SureClick, our auto injector, in the EU since its launch in the summer of 2005. This device further differentiates Aranesp in both indications, as well as Neulasta, from the competition. Speaking of NEUPOGEN and Neulasta, worldwide sales increased 13% for the quarter, driven by focused efforts in the U.S. on expanding first cycle utilization in moderate-risk chemo regimens. In the U.S., net sales for the Filgrastim franchise grew 15% during the quarter versus the same quarter last year, and Neulasta currently has a 74% share. Regarding the label expansion, we currently estimate that only about 22% of chemo patients in the clinic setting are receiving a colony-stimulating factor in the first cycle. Furthermore, there are potentially 100,000 total patients undergoing chemo regimens with a febrile neutropenia risk of 17% or greater who, according to our label, could benefit from Neulasta in the first cycle. Our field force is focused on continuing to get this important message out to our customers. In the EU, we are still actively converting patients over from NEUPOGEN to Neulasta, and Neulasta's share increased to 46% by the end of the quarter. It is now the segment leader. Before I move on, just a few points about the U.S. reimbursement environment. In 2006, due to the combination of stable product discounts and smaller incremental price increases, we have seen a flattening of ASP figures. In fact, the second quarter '06 ASPs just released by the CMS reflect a small increase for Aranesp, Neulasta and NEUPOGEN versus quarter one. The 2006 oncology demonstration project is not linked to the administration of chemotherapy, as the 2005 version was, but rather to evaluation of management visits. This helps CMS meet its objective of having oncology payments focused increasingly on patient-centered care rather than on chemotherapy administration. It has targeted about half of the funding originally targeted for the 2005 demo. But because it is seeking information on the state of patients' disease, and whether treatment is following clinical practice guidelines, we believe that this demonstrates CMS' continued commitment to quality cancer care and established guidelines. The Competitive Acquisition Program or CAP that has been proposed as an alternative to the buy-and-bill model for oncology is scheduled to begin in July. As physicians have not yet begun to enroll in this program, we do not have sufficient details to assess its impact, if any, on our business. Beginning in 2006, CMS final rules adopted ASP for the hospital outpatient setting and discontinued the application of an equitable adjustment to the payment rate for Aranesp. And the last point on the reimbursement is to date, we have seen limited but increasing adoption of ASP by private payers. So, picking up with EPOGEN, sales were up 4% in quarter one '06 versus quarter one '05. The major driver of the year-over-year sales growth, as Richard mentioned, was wholesaler inventory changes. Demand increased in the freestanding dialysis centers, consistent with patient population growth of 3% to 4%, but was offset by the increased use of Aranesp in hospital dialysis. Aranesp used in the hospital setting is being driven by pricing and a preference to stock a single red cell booster. As a reminder, the vast majority of EPOGEN business is currently in the freestanding dialysis centers, as compared to the hospital-based dialysis centers. We expect that for the full year of 2006, Aranesp use in dialysis will stabilize at approximately 200 to $240 million. The revised CMS EPOGEN policy, the erythropoietin monitoring policy, was implemented on April 1, 2006. We believe that this policy will enable physicians to continue their focus on effective anemia management, and will have no significant impact on utilization of EPOGEN. Turning to Sensipar, worldwide sales increased 126% versus quarter one '05, continuing the strong momentum from launch. In the U.S., demand has grown steadily through appropriate dose penetration and market penetration. We continue to see greater use in patients with parathyroid hormone levels less than 440, which we believe is a sign of physicians' increased comfort with the drug. We believe that adoption could be further enhanced as a result of the broader coverage by the new Part D Medicare benefit. In the EU, sales growth is demand-driven and reflects the ongoing strong momentum from launch, which occurred about a year and a half ago. As in the U.S. market, we are starting to see usage earlier in the disease progression, which also reflect increased comfort with the drug. I will finish up with Enbrel. Sales grew 11% for the quarter versus the same quarter last year. The rheumatology segment grew 16% and the dermatology segment grew 18% during the quarter versus the same quarter last year. We have seen a slowing in both segments this quarter. We believe that a portion of the slowdown can be attributed to a sharp decline in enrollment of patients in the demo project at the end of quarter four 2005. Doctors decreased enrollment of patients in the demo project in anticipation of Part D beginning in January. In addition, as I'm sure you all know, patients experienced difficulties with Part D enrollment in the first quarter. Last year, we began activities to assist patients with enrollment. In February, we launched an even more specialized program to assist seniors to enroll in Part D. We believe that the majority of issues with Part D are behind us, and going forward, we should see continued growth in the number of Enbrel patients, as a result of access to Part D benefits. Rheumatology sales were also impacted by an increase in competitive activities. In September, Humira has gained an expanded label for psoriatic arthritis and increased their spend. In addition, J&J approached rheumatologists with new REMICADE contracts, which included higher discounts in the fourth quarter. Although we have maintained our lead share position at 41%, we are down from 43% in the second half of last year. In the dermatology segment, Enbrel's share for the quarter was 83%, down from 85% in the prior year, and sales were negatively impacted by the slowdown in the growth of this segment. Our market research efforts have shown that the number of patients asking their dermatologist for Enbrel declined after pulling our TV ad last May. We believe that informed patients actively seek new treatment alternatives and partner with their physician to move through the prior authorization reimbursement hurdles. On a positive note, we currently have a branded DTC campaign on the air in rheumatology, and plan to be back on the air with dermatology in the next few months. We will continue to use direct-to-consumer advertising to increase patient awareness on the benefit of biologics and, more specifically on Enbrel. We remain confident in the long-term growth opportunity of Enbrel. Rheumatology and dermatology are large, dissatisfied and underpenetrated segments. Enbrel is a valuable option for patients, based upon its well-established clinical profile of safety and efficacy. I will now turn it over to Roger. Thank you George. Well, at our annual investors' meeting in January, I outlined the key components of the clinical programs for both our currently marketed products as well as our registrational products, their expected timing and the associated increase (technical difficulty). Before beginning this afternoon, I would like to note that for purposes of this earnings call and the others to be made during this year, I will concentrate our update only on those programs with significant activity. During our year-end call and corresponding investor presentation next year, we will again provide a comprehensive update similar to the press releases back in January. Now let me take you through the key programs and update you on our progress. As George mentioned with respect to Aranesp, the FDA has approved every-three-week dosing of Aranesp for the treatment of chemotherapy-induced anemia in patients with nonmyeloid malignancies. Aranesp is the only erythropoiesis-stimulating agent approved by the FDA for every-three-week administration. We also received approval in Australia for Aranesp extended dose in the nephrology and oncology setting, and have submitted a BLA for Aranesp nephrology extended dose in Canada. The submission and approval of extended dosing protocol for Aranesp in these disease settings is an important milestone, allowing anemia treatment to be synchronized with the practice of care, for example, both weekly and every-three-week chemotherapy, which are the most commonly used treatment regimens. This schedule flexibility offers improved convenience for patients and less injection-related burden and burden on health-care professionals compared to current anemia treatments. Data on extended dosing regimens using Aranesp in patients with anemia due to chronic kidney disease were filed with the FDA at the end of 2005. These data cover monthly maintenance dosing after de novo Q2 week correction of anemia. The data should support a U.S. label for Aranesp similar to the label in Europe. With respect to denosumab -- denosumab, as you will recall, targets RANK Ligand and acts at the level of the osteoclast to inhibit bone resorption. We're studying denosumab for its potential in a broad range of conditions associated with bone destruction including osteoporosis, treatment-induced bone loss, prevention of bone metastases and amelioration of the effects of these metastases, treatment of multiple myeloma and amelioration of structural damage in rheumatoid arthritis. As I previously mentioned, more than 10,000 patients are now enrolled in denosumab clinical trial. This program includes our pivotal Phase III trial in women with postmenopausal osteoporosis, where the primary endpoint is reduction in vertebral fractures. It is a three-year trial that will not be finished until 2008. As I stated previously, we believe that three-year fracture data will provide the basis for regulatory approval, based on the novel mechanism of action of denosumab and, hence, the desire to accumulate substantial information about chronic treatment of osteoporosis with this new molecule. In addition, we want to have the best possible chance of demonstrating a reduction in hip fracture with denosumab, which requires longer-term treatment to achieve statistical significance. It is our expectation that we will file for denosumab in postmenopausal osteoporosis in both in the U.S. and the EU, using three-year fracture data. We are conducting three additional Phase III trials on the prevention of osteoporosis and the protection against the reduction in bone mineral density seen in patients undergoing hormone-ablative therapy for breast or prostate cancer. On the oncology side, as previously discussed, denosumab has the potential to prevent bone metastases, as well as to inhibit and treat bone destruction across all cancers with metastatic components involved. Data from a previous Phase II study supporting the ability of denosumab to suppress pathologic bone turnover in patients with metastatic breast cancer indicated that the safety profile of denosumab is favorable at all doses and schedules tested, but suppression of bone turnover with denosumab in these patients is rapid, and that skeletal-related events, although infrequent at this early stage, are reduced to an extent at least similar to that seen with intravenous disphosphonate. These data were obtained from a randomized Phase II study comparing subcutaneous denosumab to IV disphosphonates, including primarily but not exclusively celedronate (phonetic). The study focused on measurement of bone turnover but also included measurement of skeletal-related events, and was conducted globally in women with breast cancer metastatic to bone who are IV disphosphonate naive. Additional detail from the effect of denosumab on bone turnover in patients with metastatic breast cancer will be presented at the American Society of Clinical Oncology meeting in June. This quarter, the first of four Phase III studies in oncology on the prevention of bone metastases in patients with prostate cancer was begun. The remaining three studies, which are designed to show reduction in skeletal-related events in patients with metastatic bone disease, are on schedule to begin in the second and third quarters of this year. In addition, a Phase II study in multiple myeloma is underway, where the primary endpoint is the reduction in serum M or myeloma protein. Finally, in the rheumatoid arthritis setting, data from a Phase II study measuring the impact of denosumab on bone erosions in rheumatoid arthritis and, hence, the potential for denosumab to ameliorate structural damage in this disease, will be presented in the fourth quarter of this year at the American College of Rheumatology. Now, as Kevin noted in late March we completed the BLA submission with the FDA for panitumumab in third-line metastatic colorectal cancer. This rolling BLA submission was initiated last December. Our indication for panitumumab is the treatment of metastatic colorectal cancer in patients who have failed prior chemotherapy, including oxaliplatin and/or irinotecan-containing regimens. The FDA had previously granted fast-track status to panitumumab for this indication. Accordingly, we hope to obtain approval in either the third or fourth quarter of this year. On April 3, 2006, results from the pivotal Phase III study used in the BLA submission for third-line metastatic colorectal cancer were presented in a clinical plenary session at the 97th annual meeting of the American Association for Cancer Research. Based on data from this randomized Phase III trial involving 463 patients, those who received panitumumab every two weeks showed a 46% decrease in tumor progression rate versus those who received best supportive care alone. The mean period for progression-free survival was 13.8 weeks in the panitumumab group versus 8.5 weeks for best supportive care alone, and the most common side effect was an acneform rash. Other side effects that's commonly observed were fatigue, nausea and mild diarrhea. Finally, we continue to enroll patients in our PACCE trial, a non-registration enabling trial evaluating panitumumab in first-line treatment of metastatic colorectal cancer. Patients are randomized to treatment with Avastin plus chemotherapy, with or without panitumumab. This open-label multicenter study has endpoints of progression-free survival, response rate, overall survival and safety, and more than two-thirds of the patients are currently enrolled. Also in the area of targeted therapies, our progress on AMG706 continues. You will recall that this is a small molecule that entered at several pathways simultaneously, including the entire family of VEGF receptors, c-Kit and the PDGF receptor. In early clinical studies, AMG706 has shown significant biological activity, and we have embarked upon a number of trials designed to demonstrate that AMG706 is active in the treatment of malignancy. Importantly, AMG706 had previously shown activity in gastrointestinal stromal tumors in patients who had failed Gleevec therapy, and we have an ongoing study in this disease. The recent full approval of Sutent in gastrointestinal stromal tumors removes the prospect of accelerated approval for AMG706 in this setting. Nonetheless, we're very anxious to see interim data from our Phase II study, and we expect to see these data later in the second quarter. We have also completed enrollment well ahead of schedule of a Phase II study of metastatic thyroid cancer. We expect data from this study to be available either late this year or early in 2007. In January, we also discussed plans to conduct a Phase III head-to-head study against Avastin in non-small-cell lung cancer that was commenced later this year. During the quarter, we received input from leading authorities regarding our plans for the study. They would like to see the study broadened in order to understand the impact of AMG706 in non-small-cell lung cancer circumstances beyond those currently treated by Avastin. And consequently Avastin, cannot be used as a global comparator for this study. We will be conducting a second narrower Phase II study against Avastin, which will begin in late 2006 or early in 2007. And finally, we're conducting studies of AMG706 with other therapeutic regimens in a number of major tumor types, for example, in colorectal and non-small-cell lung cancer, and these studies are being, in part conducted in combination with panitumumab. Turning now to AMG531, you will recall that this is our first peptibody in clinical development. A Phase II study of AMG531 in immune thrombocytopenic purpura show that we were able to double platelet counts in 94% of patients and treatment with AMG531 was effective even in patients who had undergone splenectomy, and was in all cases well tolerated. During the first quarter, we completed enrollment of the first of two Phase III studies in ITP. The second study is nearly completely enrolled, and we expect to complete patient enrollment very, very soon. The primary endpoint of these studies, the incidence of a durable platelet response, defined per protocol as a doubling of baseline platelet counts and greater than 50 billion platelets per liter for six of the last eight weekly assessments in a 24-week treatment period. We had previously received fast-track designation from the FDA for this indication for AMG531. Additionally, during the first quarter, we initiated two Phase II studies, the first in chemotherapy-induced thrombocytopenia with the primary endpoint being the improvement of platelet count, after the first cycle of chemotherapy, and the second in myelodysplastic syndromes with the primary endpoint being the evaluation of patient safety in this study. I need also to mention, as Kevin did, that at the end of the first quarter, we completed the acquisition of Abgenix, thereby gaining full ownership of panitumumab and access to important manufacturing facilities for panitumumab in Fremont, California, as well as additional research space both in Fremont and near Vancouver, British Columbia. In welcoming our new Abgenix employees, I note that we have acquired the XenoMouse technology, a highly competitive platform for fully human monoclonal antibodies. In the past, Abgenix has made this technology available under contract to several biotechnology and pharmaceutical companies, and we continue to receive inquiries on availability of this important antibody platform from a large number of firms. We are currently developing strategies that will permit partners to work with us in developing new therapeutics using this technology. We will customize our approach to these relationships, recognizing that great ideas can come from anywhere and that our ultimate goal is to produce the best possible human therapeutics. I should mention that we're getting close now to ASCO, which is always an important platform for presentation of clinical data. We expect data results from several of our programs to be presented at the 42nd annual meeting in June. Included among them will be details from the Phase II study of denosumab in patients with metastatic breast cancer who have not been treated with intravenous bisphosphonate, and also a Phase II study of denosumab in patients with bone metastases who have been treated with intravenous bisphosphonate, but where the bisphosphonate had failed to suppress their bone turnover markers. There are also studies involving Aranesp given on the Q3-week extended dosing schedule in patients with chemotherapy-induced anemia, as well as in myelodysplastic syndrome; two Phase II studies of panitumumab in patients with metastatic colorectal cancer; a Phase II study of AMG706 in patients with thyroid cancer; and a Phase I study of panitumumab and AMG706 in combination with chemotherapy in patients with advanced non-small-cell lung cancer. In addition, we expect data to be presented from our Apo2L/TRAIL ligand Phase I program in solid tumors and hematologic malignancies. This is a program that is being developed in collaboration with our colleagues at Genentech, and I will provide more updates as we get closer to ASCO. I would now like to turn it back to Arvind to commence the Q&A session. Okay. Thank you, Roger. Operator, would you please review the procedure for the Q&A session? And I would like to make a request. I would like to ask that each of the participants limit themselves to one question so we can accommodate everybody. Hi, thanks. In your 10-K, it says that EPO biosimilars may be improved in the EU this year. So in the same call you mentioned '07. I'm wondering if anything has changed? Thanks. As you know, a few people have dropped out. They felt that the expenses associated with meeting all the EMEA requirements, as articulated in the guidelines, and the capital and the fact that there's not a tremendous amount of pricing room in the market, necessarily, has caused them to back away. And so at this point, we don't feel there are any submissions that will lead to an approval this year. Thanks very much for taking the question. Roger, could you clarify on the denosumab postmenopausal osteoporosis? Previously, you had indicated that there may be an opportunity for taking a two-year look at the data sometime in 2007 and potentially even filing in Europe, since their standard is two years, rather than three years. That now appears to be shelved. Could you confirm, then, that we won't see any data in the postmenopausal osteoporosis indication until 2008, or is there still the opportunity for an early look? Thanks. Well, Geoff, there are always opportunities that could come, for example, from a data monitoring board, but after considering the matter for some time, we decided that we wanted to get the best possible look at the data. This is a completely new mechanism, and after discussions with the FDA, we felt that the right thing to was to look at the three-year data, which would give us the longest-term exposure and to harmonize our US/European submissions. That's our current plan, and that's what we're going forward with. A question on AMG706. As you have modified your trial programs, is this have to do with a feeling that a patient should not -- not get Avastin, or is this looking at different indications? What drove your decision, I guess, to change your trial protocol? Well, a number of things, Steven. But as you know, there is a exclusion in Avastin treatment for patients with squamous cell carcinoma, and I am referring now to the non-small-cell lung cancer study. And there is our -- in evaluating the data and having discussions with our advisors, they were very anxious to see the effects of AMG706 in the totality of lung cancer patients. We really can't give lung cancer patients Avastin, so we wouldn't be able to use those with squamous cell carcinoma, we can't give them Avastin, so we wouldn't be able to use it as a comparator throughout that study. And so we decided to split it into two studies, basically, taking advantage of the fact that Avastin can be used in the adenocarcinoma setting. I have a question for George. On the CAP program, as you said, it's supposed to be starting in July. And my understanding is that this quarter, physicians are supposed to be getting familiar with the program, and we are pretty late. Do you think that program will actually being implemented in July, or will it be delayed? You know it feels like the CMS is committed to doing it, but we really haven’t seen much activity to-date making so. I think we just have to watch and see what happens, this been surprisingly quiet. Certainly, if you kind of look at the implementation, what is involved, it doesn't look like July would be the timeframe. Hi, thanks a lot for taking my question. I hate to ask this question, and I hate to waste my one question on this. But I am reading from your 4Q release, where you said your guidance of 3.55 to 3.70 did not include the $0.05 to $0.10 from the Abgenix acquisition. And then I read from your release tonight -- it says your guidance of 3.60 to 3.70 includes it. So did you actually raise the upper end of the guidance, if you call it apples-to-apples, by $0.05 to $0.10? Okay. The question I had had to do with the Enbrel outlook. Obviously, you’ve indicated a variety of different, I guess, metrics that are occurring in the market related to the dynamics on a competitive front and then some, perhaps, slowing of demand. What is, in fact, your outlook in the near term about the dynamics going forward around the Enbrel market opportunities that are out there? How should we look at that? Well, I think we see this market as being very big and very much untapped, both in rheumatology and dermatology. Rheumatology, 27% of the patients who are on DMARDs are now on biologicals, so tremendous room for expansion. And in the dermatology space, only 6% of patients with moderate to severe psoriasis are on a biological. So, fundamentally, the patients are out there. Let's just talk about dermatology first. There are more co-insurances and co-pays, and so there are more reimbursement hassles now, to get a -- for a dermatology patient, a psoriatic patient to get on Enbrel. And so we really need to have both the patient and the office staff, including the physician, highly motivated to work through all the prior authorization. So going dark with our DTC campaign basically took the wind out of our sails, we believe. But the patients are there, and we're committed to getting that ad back on TV as soon as possible, and driving those patients back into the office. Having said that, the reimbursement environment does get tougher and tougher every year in the dermatology space. On the rheumatology side, we had a lot of patients in the demo project, and actually we just -- as I said, we saw a sharp decline in the enrollment of the demo project in the fourth quarter of last year. And so that took a little bit of growth out in the fourth quarter. And then when the converting of demo patients who were paying customers to Part D in the first quarter didn't happen the way we thought it would happen, that also created a little bit of an air pocket. In March, we started to track back towards what we thought we would eventually obtain, but you lost basically two months of sales for a lot of patients that we assumed. So hopefully Part D will begin to smooth that, I think our sense of it is, in terms of enrolling patients, and we can compete for our fair share of those patients down the line. As far as REMICADE is concerned, they did really sweeten their contract in November of last year, and we noticed that some of the very high-writing doctors took advantage of that and probably pulled some patients away from Enbrel. But as you know, with ASP, that's a zero sum game -- so pay me now, pay me later. So their ASP will be affected, and that will probably squeeze some doctors back towards us, eventually. So that ought to all come out in the wash, eventually. Thank you for taking my question. I have a sales strategy question. It seems that you have at least two or three new molecules that will be coming to market over the next three to four years, including some cancer compounds and denosumab. How are you planning to change the sales force of Amgen for that? Okay, I'm not going to answer specifically that question, partly because we have not finalized how we will launch denosumab. What I have said in the past is that we can do it very effectively and more efficiently than the typical Big Pharma approach. Big Pharma, for a product of this magnitude, would probably have 2,000 reps in the U.S. alone. We don't think we would need to take that approach, because we think we're going to have, thanks to Roger's great efforts, a well-differentiated label. So it's not a share or voice game. It's really a game of promoting and explaining the real benefits of this product. So you have got to watch this space. We will provide guidance on that when we reach the appropriate point. On the cancer side, we have got great sales forces in the marketplace today around the world, and I think our feeling right now is for the most part, that group can handle anything that Roger can get to them in the near future. Thanks a lot. You guys said on the call that more private payers are using the ASP reimbursement methodology. I was wondering what kind of impact we should expect as more of them start using that methodology? Well, first of all, not many are using it but it is increasing, and they are not necessarily going to ASP plus 6%. Particularly in the oncology setting, the private or commercial payers have to negotiate with the oncology clinics, and some oncology clinics have a lot of negotiating power. So that's put a little tension in the wire out there. So I think, as they move to ASP environments, we think we have felt we can handle that situation. Our products have performed well under them, and we don't think it's going to be a major trend-breaking event for us. Hi, thanks for taking the question. Just to clarify, George, you mentioned, I think, that Aranesp use in dialysis had stabilized around 240 million. Can you just clarify – does that inclusive or exclusive of CKD? CKD, as far as -- really, any EPOGEN that is used in CKD really comes out in the spillover audit, and those sales are given to J&J, just as any pro quid sales in the dialysis segment come back to us. Hi, guys. Just a follow-up on Enbrel, trying to understand the moving parts here. Can you just help us understand generally the Enbrel performance in the quarter? Quantitatively, what was more impactful: competitive dynamics or Part D issues or market growth? I don't know, honestly. We don't have enough information to parse it explicitly. I would say, probably Part D demo project had the most impact. And then just as a follow-up to that, what signals do you have that the problems with sign-ups are behind us? I was wondering, on Enbrel, what percentage of patients are Medicare eligible or Part D eligible? I mean what percent have been historically using the drug? I don't have a figure off the top of my head. I can tell you, prior to the demo project and prior to Part D, because REMICADE is an infusion product it was covered under Medicare, under Part D. And really, we do not have access to those patients. So I just don't happen to have the percent of RA patients who are over 65 years of age. I can tell you it's pretty small in dermatology, but I don't have that figure right off. Roger, do you know that? Hi, thanks. I was cut off on that last question, so I just wanted to clarify. So George, the question was, can you sort of give some directionality or indication of what the impact of CKD is on the Aranesp sales number? Okay. So, just taking away dialysis, yes, if you would give me just a second. I don't have those numbers off the top of my head. So the Aranesp in nephrology grew about 34% in the first quarter, so still pretty robust growth. Thanks for taking the question. I was wondering, you mentioned that there were 22% of chemo patients currently receiving first cycle Neulasta, and then that there was 100,000 patients with a 17% or greater risk. I was just wondering, what the overlap between those two? I think it's 100,000 incremental that could benefit. So I can't do the math right now, but the opportunity is 100,000 patients. Hi, thanks for taking my question. I had a question about denosumab, now that you have indicated that it's going to be three-year data that you probably used to file in CMO. I was wondering if we might see a filing in therapy-induced bone loss maybe from the HALT trials, since you indicated the two-year data would be available in 2007. Yeah, I don't want to speculate on filings. So much depends on what the data look like. And there will be some interesting data to look at, at ASCO that we talked about a little bit with respect to the effect on patients with metastatic bone disease. And we, of course, have this ongoing myeloma study. So if you ask the question, is it possible that we could have a dataset come forward that we would think was so compelling that we would feel as if we needed to file in an oncology setting, as an example, before we filed in PMO. Certainly that is a possibility, or that we would feel that some combination of that plus the chemotherapy hormone ablation-induced bone loss would make some sense; that's always a possibility. But we really are -- in looking at the PMO setting, we really have, after considering it for some time, in light of the novelty of the mechanism, the importance of having long-term data, we have settled on a three-year filing strategy in that particular indication. Hi, so another denosumab question. I guess I'm not entirely sure whether you have actually amended the protocol for that study, so there is not any kind of analysis that would be done at two years, or if that is still to be done but, regardless of that data, you would not file? The protocol currently has a prespecified two-year interim analysis that was structured in such a way as to have the minimum possible effect on the statistical power of the three-year data, which is the primary endpoint. With our decision that we in fact are going to use three-year data to file, there's not much point in doing a two-year interim analysis. Why take the statistical penalty? So we revert to the primary endpoint, which was the goal in the first place. Yeah, good afternoon, I know you are not going to comment on your legal strategy vis-a-vis Cera, but maybe you could comment on the litigation milestones that we should look forward to, the next one or two steps for both the ITC and the District Court? Thinking about litigation in terms of trying to predict key events is more speculation than we wish or are really able to do. What I can say is this is not an endless sort of proceeding. In the next months, we're going to find some things out. We are going to be talking about this case for a while. But I do want to make it very, very clear that these two actions we’ve taken are indications of the aggressiveness with which we're going to pursue this case, and we are anxious to get our day in court as soon as possible. We want the federal court to opine on our patents versus the peg-EPO product, and we're confident in our position. So this will keep playing out this year and next year, but I think we are starting to get into a place where we're going to see how it plays out. But nobody should mistake our confidence or aggression in this matter. Thanks for taking the follow up. Wondering if you would just clarify -- you mentioned the inventory fluctuations for NEUPOGEN and Neulasta in the US. Could you tell us the number of days of inventory outstanding at the end of Q4 and at the end of Q1, so we can see what that fluctuation was? It's normally the case and one of the reasons why we were sequentially down in the first quarter as a rule, is inventories go down from fourth quarter to first. So they were down for all of our products, Q over Q. For all of them -- for all of them, Q over Q. My comments sort of on inventories for NEUPOGEN/Neulasta were really year over year, and that's where there was a significant decline. Hi, I really appreciate that you taking the follow up. Maybe in follow-up to some of Kevin's prior remarks around peg-EPO, do you know with certainty exactly what Cera is, and exactly how it is made? I just wanted to get a little better understanding of the quarter-over-quarter trends for some of your drugs. They tended to disappoint, but if you look at IMS after January, they seemed like they might have been a little bit lower. Is it fair to say that, as the quarter progressed, your Aranesp/EPOGEN/Neulasta programs accelerated, maybe due to some end-of-the-year contract issues of physicians? Is that a fair conclusion? So once you take out Steven, all the little wrinkles in quarter-on-quarter changes, there's a rock-solid trendline for NEUPOGEN, Neulasta and Aranesp. So that trendline, there has been no fundamental inflection point coming out of last year. So we have maintained that growth. EPOGEN, pretty rock-solid, Enbrel is the one where we saw the inflection point occur in the fourth quarter last year, and I have discussed how we're going to go about dealing with that. Okay. So thank you, everybody, for participating in our call this afternoon. If you have any follow-on questions, I will be in the office, so please feel free to call. Thanks again.

EarningCall_233990

Here’s the entire text of the prepared remarks from 1-800Flowers.com ’s (ticker: FLWS) Q1 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Good day and welcome everyone to the 1-800Flowers.com fiscal 2006, First Quarter Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introduction I would like to turn the call over to vice president of investor relations, Mr. Joseph Pititto. Please go ahead sir. Good morning and thank you all for joining us today to discuss 1-800Flowers.com’s financial results for our fiscal 2006 first quarter. My name is Joseph Pititto and I am vice president of investor relations. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our website at 1-800Flowers.com or you can call Patty or Donna at 516-237-6113 to receive a copy of the release by email or fax. In terms of structure our call today will begin with brief formal remarks and then we will open the call to your question. Presenting today will be James McCann, CEO and Bill Shea, CFO. Also joining us today for the Q&A section of our call is Christopher McCann, our President. Before we begin I need to remind everyone that in a number of statements that we will make today may be forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For detailed description of these risks and uncertainties, please refer to our SEC filings including the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. The company expresses to disclaim any intent or obligation to update any of the forward-looking statements made in today’s call and according to today’s call the press release issued earlier today or any other SEC filings except as may be other wise stated by the company and I will now turn the call over to Mr. James McCann. Good morning everyone. As we announced in this morning’s press release. Our fiscal first quarters revenues were $112.8 million an increase of almost 16% from the period a year ago. This is the continuation of the double-digit revenue growth that we achieved in the second half of the fiscal 2005. Importantly we achieve this growth in what is traditionally our lowest revenue quarter. Due to the lack of an existing college during this summer months. We also improved our gross margins by 20 basis points to 14.8% during the quarter, continuing the trend we saw in our fiscal 2005 fourth quarter. We anticipate the gross margin will continue to improve during our growing forward primarily as a result of our enhanced product re-sourcing our product mix and operational efficiencies. On the customer front during the quarter we attracted more than 500,000 new customers with 66% of them coming to us online up from approximately 450,000 and 62% of first quarter last year. In addition we further deepen the relationship we’ve with our existing customers as evidenced by the 61.1% weekly quarter rate achieved during the quarter compared with 60.5% in the period a year ago. From an operating perspective our fiscal first quarter is a very busy time as we prepare for the upcoming holiday season. During the quarter we enhanced our outlets in several key areas. First we continued the strong turn around began last year in our Home and Garden category marketed under the Plowandhearth brand where we achieved the sales growth of about 10%. With the significant increase in new product offerings and enhanced greater design in its catalogs in website we believe Plowandhearth is positioned to perform well in the current fiscal second quarter traditionally its largest. Second we further developed our Bloomnet business, mailing our first directory to our Bloomnet florist members in September, this was followed by successful advertising sales effort for the second directory which is scheduled for mailing later this quarter. The directory represents the first in a range of new products and services for our florist members that we plan to introduce going forward. And third during the quarter we made significant progress in the integration of our most recent acquisitions while the seasonality of the Winetasting Network and Cherly & Company impacted our operating results for the first quarter we anticipate that they will provide significant contributions during the current fiscal second quarter for both of our custom existing and our fast growing business gift service operations. Combined with the popcorn factory and other offerings in Candy, Gourmet foods especially Gift Basket collection, we believed that we are well positioned to be a leading player in the food, wine and gift basket category this holiday season. I will now turn the call over to Bill so that he can take you to the details of our financial results and the key metrics for the first quarter, Bill. Thank you Jim. During the fiscal first quarter we saw the continuation of several positive trends in our business. In particular solid double digit revenue growth and an increasing gross profit margin. Importantly we expect these trends to continue during the current fiscal second quarter and throughout our fiscal 2006. Additionally the higher loss per share in the quarter compared with last year reflects, our stepped up marketing programs, which are helping us to drive accelerate revenue growth, our Bloomnet initiative which are progressing nicely. And integration and seasonality of the acquisitions we made last year the Winetasting Network and Cheryl & Company, which generated the majority of the revenues and profitability during the current quarter. We believe these investment position as well for strong top line growth and significantly faster bottom line growth in the current quarter as well as full year fiscal 2006. Regarding specific financial results and key metrics for the quarter. Total net revenues reached $112.8 million, an increase of 15.6% compared with $97.5 million in the same period last year. Online revenues grew 17.3% to $62.3 million compared with $53.1 million in the first quarter last year. These online revenues equal 61.9% of combined online and telephonic revenues for the first quarter fiscal 2006 compared with 58.5% in the same period last year. Telephonic revenues were $38.4 million up 2.1% compared with $37.6 million in the prior year period. Retail/fulfillment revenues were $12.1 million compared with $6.8 million in the year ago period. This increase primarily reflects revenues from Bloomnet and the contributions from the Winetasting Network and the retail stores of Cheryl & Company and Plowandhearth. During the quarter, our combined online and telephonic orders totaled a 1,596,000 compared with a 1,407,000 orders in the year ago period. Average orders cited during the quarter was $63.8 down slightly compared with $64.46 in the prior year period. During the quarter we added 58,000 new customers with 337,000 or 66% of them coming to us online. Gross profit margins for the fiscal first quarter was 40.8% up 20 basis points compared with the same period last year primarily reflecting product mix and pricing initiatives. Operating expenses as a percent of revenue increased to 50.7% compared with 45.6% in the prior year period. This increase could be attributed primarily to the investment areas that I mentioned earlier as well as the effective non-cash stock based compensation expense as calculated on the FAS 123R. For the quarter, stock based compensation expense added 937,000 to operating expenses. To break this down further, the 500 basis points increase in our operating expense ratio can be attributed 50% to the combination of stock based compensation expense and the seasonality of the our recent acquisitions and 50% to investment in Bloomnet and stepped up marketing programs. As a result of these factors, our proforma net loss for the quarter was $5.9 million or $0.09 per share compared with $2.7 million or $0.04 per share in the year ago period. We defined proforma earnings as GAAP net income or loss excluding stock based compensation, non of them related tax effect as calculated on FAS 123R. We provide proforma earnings but we believe it offers a more meaningful year-over-year comparison for reduced in corresponding per share amount, do not less than importance of comparable GAAP amounts. Including the after tax stock based compensation charge of 727,000 our GAAP net loss for the quarter was $6.6 million or $0.10 per share. Regarding our balance sheet our cash and investments position at the end of the quarter was approximately $11 million. This was in line with Management expectations and reflects the investments we’ve made in preparation for the upcoming holiday season. We anticipate having a cash and investments position of roughly $70 millions at the end of the fiscal second quarter and to grow our cash position during the second half of the fiscal year. Inventory at $46 million was also in line with management expectations and reflects the build up for the holiday shopping period. Including the requirements we recently acquired companies. Regarding guidance, as stated in our press release this morning we have reconfirmed our guidance for fiscal 2006, which calls for revenue growth of 14%-16% compared with the prior year. We expect an increase of gross profit margin by approximately 150 basis points while operating expense ratio will be inline with prior year. As a result of these factors, we expect to achieve proforma earnings per share growth of more than 75 % compared with fiscal 2005. In addition to the strong earnings growth and as a result of our relatively low working capital expenditure requirements, we anticipate cash from operations to be more than $40 million during fiscal 2006. Regarding the current fiscal second quarter which includes the calendar year and holiday period, we expect this period will represent approximately 35%-37 % of full year revenues. In summary, we believed we are well positioned to execute against our plan to grow revenues cost effectively and significantly enhance our bottom line results, in terms of getting greater EPS and cash flow growth. I will now turn the call back to Jim. Thanks Bill. What you see is that we are pleased that like during the first quarter we were able to grow revenues almost 16% continuing the double digit pace we achieved in the second half of last year. In addition during the quarter we cost efficiently attracted more than a half a million new customers while concurrently increasing our refill order rate from the existing customers to more that 61%. We believe these results reflect the effectiveness of our stepped up marketing efforts and the success our “your florist of choice” message which conveys our unique ability to provide our customers with choices including how florist design gifts, how freshen our grower offerings, our exclusive expert designer collections plus all the other great gifts that our customers expect to find in their favorite florist. Candy, Giftware, Bakery gifts and a broad range of gift baskets and gift sets, all available under our great family of brands. In terms of operations during the quarter, our Plowandhearth business continued to do strongly down with 10% sales growth for the period compared with the prior year. We believe this works well for the current fiscal second quarter, which is traditionally the largest. During the quarter we continue to develop Bloomnet, expanding our florist membership and introducing our first member directory. Going forward, we plan to introduce a range of new products and services to help our Bloomnet members enhance their productivity and their profitability. Also during the quarter we made significant progress of integrating the Winetasting Network and Cheryl & Company, which we acquired in the last fiscal year. These businesses are poised to deliver solid contributions during this upcoming holiday period, for both our consumer gifting channels and our business gift services group. Combined with our existing offerings in Candy, Gourmet goods and Gift baskets, we believe we are well positioned to be a significant player in the Food, Wine and Gift Basket category this holiday season. Looking ahead while we remain cautious regarding the potential impact of higher energy cost on consumer spending as well as the impact of the severe weather we are seeing in major markets in the Gulf Coast, Texas and now Florida, we believe we have a effective marketing orders in place that leverage our large and growing customer base, the strength of the 1-800Flowers.com brand in our growing family of brands and the expanded range of choices we offer our customers in terms of products and services. While we believe these factors will enable us to achieve our targeting guidance for the current fiscal second quarter and for the full fiscal 2006 year which calls for top line growth with 14%-16%. At the same time, we will be increasing our bottom line by 75% well above five times our top line growth rate. This illustrates the significant leverage in our business. That concludes our formal remarks and we will now ask Glen, if she would turn the call over to queue for your questions. Glen would you please open the call to Q&A now. 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_233991

Here’s the entire text of the Q&A from Electronic Arts’ (ticker: ERTS) Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Thank you, sir. At this time, if you have any comment or any questions, please press “*” “1”, on your touchtone telephone. If you are using a speakerphone, please turn your mute function off to allow your signal to reach us. Once again, if you have question or any comment, please press “*” “1” now. And, we will pause for just a moment to assemble our roster. Your first question comes from Gary Cooper from Banc of America. Please proceed sir. All right, thanks. So a couple of questions, guys. First, the competition, particularly in NBA basketball. Looks like, they are probably going to cut their price. I am wondering if you anticipate you will cut your pricing on sports games, and specifically do you think that you will take Madden down to $39.99 by, say, Thanksgiving. I got a couple more. Thanks. In terms of the Madden price break, we have not made that decision to move to $39. We are looking at all titles in our mix right now and the timing of price moves versus what’s going on in the marketplace. We feel very good about our sports positioning overall. All of our titles are performing extremely well. Specifically if you look at NCAA and Madden they are up double digits year-over-year. In basketball we feel very good about our competitive positioning and on the 360 we have four new sports launching in the channel that we believe will set a momentum in November and December that will be very positive for our sports brand for the rest of the line. Okay. Two more. So it looks like the Q4 guidance is pretty robust here. Godfather still in there. Can you get us in the ballpark of how large you expect that game to be and secondly your advertising line. Last year in the holiday quarter, the advertising spend was way down due to the price reductions and we heard from several people in the industry that EA is not being aggressive in terms of its advertising spend. Can you get news the ballpark of what you think your second half advertising will be like? I will take the question on Godfather. We will not give you a specific number but we're feeling very good about the title and it is progressing well in the development process, and, again, we are very bullish about that title and its prospects during Q4 in the launch period. I will take at least the first part, the first part of the question, Gary and then I will ask Frank to provide a little bit of color. I think the good news is, as we look into Q4, we like what we are seeing. When you look at where the PSC is, how it is launching in Europe, and how well our titles are performing, we think that is a positive. I think, you know, by way of, it is more of a factoid as opposed to a trend per se, but for the month of September I believe our segment share on the PSP was over 40. Last week looking at chart track in the UK, six of the top ten games were EA’s games on the PSP. So, one, we like what we are seeing in terms of the entertainment quality that we are providing. We like the increased momentum of the PSP. Two, is we like what we are seeing from our Xbox 360 titles. So whether it's the addition of the next three titles in looking ahead to Q4, we like what we are seeing. So we think there are, there are several positives that bode well hopefully for the fourth quarter. I don't know, Frank, if would you like to add any color to that. The only color I'd like to add on the advertising and sales and marketing support front is that wWe are very confident in the span and positioning that we have for our holiday releases. If you look at the Xbox 360 rollout plan, we will be supporting that with dedicated advertising and marketing that will trumpet the high quality of the titles, as well as the deep and innovative game-playing technology. If you look at Harry Potter, James Bond and our Need for Speed Most Wanted launch, all of those are premium titles with very substantial media spends and support across the board. Hey, guys. Congratulations on a good quarter. Can you talk about what you have learned from the development of the Xbox 360 platform? Are efforts and costs coming in better than your expectation? And then, just a quick comment on, thoughts on possible price cut for existing consoles this holiday season. It doesn't seem likely, but can you maybe handicap the chance for that? Thanks. I think it is unlikely that you will see price cuts on the current generation consoles. And I would add to that, I think it is really good news that the channel seems like we will be fully supplied with Playstation 2s this year which was not the case last year. I think that is a positive for the overall business. With regard to development costs on Xbox 360, it is a little too early to draw any conclusions. The first round of titles is probably costing us in the range of $10 million to $15 million, but, again, I don't think that is predicted for the long term. It is too early to make any predictions about exactly what next Gen is going to cost. Hi, good afternoon. A couple of quick questions. You mentioned you are seeing some softness North America. I was wondering if you could be a little more specific in whether that is any specific, you know, market or types of games, and then following up on the Xbox 360 and maybe the Playstation 3, I wondered if you could comment. There's been a few game delays and I am wondering if perhaps, we all know costs are going up, but if there's been any sort of learning curve that's been steeper than was thought and we might see more delays and then finally R&D spending, you know, if we could, if you could comment on the rate of growth and whether or not this will be the peak year in terms of percent of revenue or maybe we have some more spending in next year. Thanks. I'll take a cut at the softness in retail. I don't think it is any surprise that retail in general has been off to some degree in the month of October. I think that is across the board in all categories. It has a lot to do with the continuing aftermath of the national disasters that have occurred and $3-per-gallon gas. I think in our particular category, there are also some people sitting on the sidelines saving their money for the launch of Xbox 360. So having said all those things, I think there are some real positives ahead for the overall, for the overall industry in our category, and as I mentioned earlier Playstation 2 hardware will be fully supplied. We have the PSP platform we didn't have last year, and once the Xbox 360 launches, there is going to be a lot of excitement around that in the channel both in North America and Europe. There are many positive things that we will see happening in the months of November and December and through the holiday season. I would add just one thing to that plan, and I will jump into the second part of your question. The other thing to make note of is, is Europe is also performing very, very well, whether it is the month of September or the month of October for that matter. They are pacing strongly and in a great position across the board, so whatever that weakness is that we are seeing in North America that has not been evident in Europe. Secondly, on, on the delay side. First, I would say that, look, we are always cautious, but yet we are, we believe in what we said relative to our SKU plan for the year, and, and we are cautiously optimistic and feel that our titles will ship as planned. Could there be future delays or delay? You bet. This is entertainment. It's software. And also as it relates to these next generation titles, we are really inventing how to build a title today for the Playstation 3. On the cost side for next year looking at our fiscal year, I, I won't, I don't think we are in a position that we can be pinned down today. We really haven't, we are just really ramping into the full-scale development of the Playstation 3. If you had to, if I had to put a number around it, I would sort of say that 10% to 15% year-over-year growth, but again that's just sitting here today well ahead of our planning process and well ahead of really understanding what it will take to build a Playstation 3 game. Great. Can you get a little more clarity on the fourth quarter? It looks like a pretty big revenue growth quarter on a year-over-year basis. Can you talk a little bit about what the key titles are for that beside Godfather. Anything else, in that quarter? The other title we are very excited about is Black, which is being developed by our Criterion Studios. That is finishing extremely well. We have high expectations for that. That is wholly-owned intellectual vorts that makes it doubly important for us. FIFA Street will be launched on five platforms in Q4. Fight Night III will be launched on four platforms. That product looks extremely strong as well. Expansion Pack on, The Sims 2. NCAA Baseball in that quarter. So it is a very strong line-up with some exciting new products that are debuting from Electronic Arts. I think Frank mentioned that earlier, Godfather, Black, arena football, coach, and NCAA Baseball is all brand new and the two that we are focused on are Godfather and Black. We think those are going to be home runs. Great. Okay Larry and one more, on Playstation 2, when that launched you guys came out with I think 40% market share, really had industry leadership which would carry through for a couple of years. Can you discuss any similarities and differences you are willing to talk about the Xbox 360 launch as it kicks off the cycle? We intend to be prolific in terms of the number of titles that, that we will publish for that platform. I think we mentioned we will have five during the launch window. We will have eight in the marketplace by the end of our fiscal year. And I would say that next fiscal year, although we haven't finalized our planning process, you can expect something in the range of 20 to 25 titles on the Xbox 360 platform next year. We expect to be aggressive, we expect to be prolific. We think our products are very high quality relative to, to everybody else that is launching in the introductory window, and I am not going to predict that we will have market share that begins with a 4, but we expect to have a significant market share. Hi, guys. A couple of questions. Has there been a profitability drive for some of the Playstation Portable products that you put in the market. It looks like you captured the market share that you were looking for and I guess I was wondering how development expenses are playing out. Are they coming in below plan? Second question. You talked about the Xbox 360 titles. Do you anticipate that all of those will launch at the $59.99 retail price point and then I have a quick follow-up? Tony, I'll take the first part. I would say, you know, overall pretty much as planned on the PSP. Growth margin wise, we are pretty much in line, slightly ahead of the average for the quarter. On development side, as you know, one of the things that our studio team did very early on was we built an organization that we call Fusion. And the reason that we did that was we wanted to figure out ways to build economies of scale around the development of high quality titles for the PSP and I think that early investment while painful from an income statement to make early on continues to pay dividends in terms of overall long-term profitability. Development costs, I would put titles on average sort of in the $2 million to $3 million a copy. And that's where we stand today and look to get, continue to drive more synergy and higher quality as we go forward. What I would add to that with regard to market share. First, for year-to-date in North America we are running about a 26% market share. That actually exceeds our internal expectations when we originally planned the business on the PSP. I think Warren mentioned we had six out of the top ten titles, most recently in the UK. We also have the top four. So, our PSP titles are performing very, very well in Europe and North America. We are very happy about that. The second question on the 360 price point, we will be launching our lineup at $59. When you look at the titles and the incredible breakthrough quality that they have, the $59 price point does match against what we are providing as entertainment. On a broader, broader response, our form of entertainment is still the most competitive that there is out there on a price-per-hour basis even at the $59 price point. Good afternoon. A couple of questions. First of all, Frank, can you give us a little more color of the retail environment going into the holidays, specifically if there are platforms that are at risk, such as, how is the Xbox performing with the 360 launch is about to come and then other couple of long hedging questions. Okay. In terms of platform mix right now, year-to-date the Xbox platform is performing very well. You do see a bit of cross ownership between the Playstation 2 owners and Xbox owners. What they are doing is buying the Xbox version of games. Now how the 360 introduction changes that, we don't know yet, but to date that's where we have seen some strength. In terms of the handheld, the PSP is doing quite well with the recent releases of Liberty City and Madden and we anticipate a strong Christmas with the handheld mix but the NDF is doing very well with the product and hanging around very competitively at several accounts. Hi there. Thanks for taking the call. I was hoping you could give us a little more detail on the catalyst for moving FIFA in Europe into the quarter. I know that we always like to think on this side of the Street because the quarter is light, but I know that is not the case. Also I wanted to know what the primary driver was for lowering the bottom of the revenue guidance. Would you say that was specifically the weakness in the North America retail environment? I will take the first part of that question. It is really simple. The product was finished. It was, we thought it was extremely high quality, and we wanted to get to the market place first ahead of Pro Revolution Soccer and that strategy has worked extremely well for us. We are exceeding expectations an the title is performing extremely well but it was simply get to the market first. And as to the guidance question on the top line, if you were to point to a single factor, it was recognize, recognizing the weakness we have seen in North American retail during, say the month of October. And or just exercising caution around that weakness. Thank you. Warren, I want to see if I can go back to that. You just indicated in the last comment "the month of October." Can you be a little more specific? I have been hearing that PS2 hardware sales were stronger at the end of October versus the beginning of October. Any granularity around that would be helpful and I assume the guidance you have now given on the top line for December incorporates the October sell-through. That kind of weakness as you put it staying the same for the quarter? I would say in, and I will ask Frank to provide, to jump in, too, here, Shawn and give more, specifics around this. But what I would say is, you know, for us, we saw some ups and some downs. While we clearly feel that there was weakness in buying, and we saw it, I think, overall at retail, and we are also sitting here with sell-through rates on Madden that are pushing 20% and NCAA, that it was over 15%. Furthermore, you take a look at Europe having had the strongest launch in our history on FIFA, and we continue to see a very robust environment, so my point would be there are still ups and downs within that overall weakness of some buys being consolidated, and I think some launches across the board, we are talking more the breadth of the industry not being as expected. With respect to our guidance, what we try to do, as we always do, is we go through and look on a title-by-title basis, a SKU-by-SKU basis, and country-by-country basis and look to analyze what we expect the sales to be based on the marketplace and we believe what we will expect. This quarter was no different. What we felt was relevant, though, was the softness that we have been seeing, and we felt that that warranted lowering our revenue guidance for the year just on, on the bottom end. And specifically, on Playstation 2, with regard to hardware sales. They've sold about 3.3 million year to date in North America. I think I have seen that Sony has projected something like 6 to 6.5 million units for the calendar year. We agree with that sort of outlook. That means a lot of hardware will get sold in the last three months of the year and a lot of software will get sold behind that. I think that is a potential plus for the business. Great. Two questions, guys. You know, if you look at the North American weakness, if it continues, can you talk about your strategy as it relates to kind of combating that or kind of offsetting it. Would it be primarily through pricing? Or do you think advertising kind of represents your biggest point of leverage as you go forward, especially this holiday season when, you know, I think a lot of retail demand will be out there for 360 and kind of spillover to the rest of the category on the existing console side. Second, your guidance implies about 30 to 35% growth for the fiscal fourth quarter. Is there a, you know, heavy orientation of SKUs in that particular quarter? Is that a pretty good kind of growth rate to kind of think through as you look at, kind of the ramp-up of the next cycle or is it more specific to Godfather kind of landing in that quarter from previously being in the December quarter. I will take a cut at the first part. We will look at all things in the mix, including pricing and the marketing support that we are plan for our titles, but let's not forget that a very significant part of our business is generated by our European organization and our company in Asia. Close to half of our total business, and those, those markets are both performing extremely well, specifically in North America. Again, we will take a look at pricing and we will take a look at marketing support, but as I mentioned earlier, I think there are a lot of positive catalysts, not the least of which is plenty of Playstation 2 hardware, the PSP as a new platform and all the excitement generated around the launch of Xbox 360. And then I would say and my partners here can jump in looking at the fourth quarter, Larry went through a lot of our SKUs and titles that we have planned and Jeetil as we went through our planning, just as we did for this quarter, we look at our forecast for both hardware or our titles based on the quality we are seeing, and based on what we see, that's, that is the right call. Thanks. I was wondering if you can talk more about your online business. You mention a million subs on POGO at this point. Can you talk about, an overall sub number you can talk about to help the persistent state world business. Also you talked about on the handheld side or the mobility side; you talked about Playstation 2 Oregon Playstation Portable and DS. Are there any revenues at this point to talk about from, from the cell phone side of things and just where are you right now or where would you have us thinking right now in terms of when that part of the business starts to become meaningful? I think in, Heath, I will try to take a stab at the first question, because I think it is, it is a fairly broad one in its totality. When, when we think of the Internet, and the online business, I think you have to segment it into a lot of different businesses. There will be an Internet-based business on the console as there is today on Xbox Live. There is a community-based online business like you might have at a IGE or even at a POGO, you have casual games, you have MMO games, mid session games, like you might find with the Next-on (ph) in Korea. What we have been working to do is lay a lot of foundation for the building of our online business over the coming years. You know, ultimately what we do know is that content will rule, and so what we are doing now is trying to get our foundations laid in place so that we can take advantage of our content in an increasingly connected world. So what do I mean by that? Well, we have POGO in place which is building out of subscription bases. We are building out our online infrastructure to be able to deal with what we would perceive more online connected players through EA Nation and through EA Sports Nation as an example. We are working to build our online base capability today although still very much in its infancy globally in Asia. So when it comes to online, what I would say our strategy is right now is to build out these foundations that will enable us over the coming years to take advantage of our content, to take advantage of, of our content. I think it is important to note that, because it is so overshadowed by really the packaged goods business and strength of our console business that we have an Internet presence today that when you look at our online revenues, it is pushing $100 million bucks. So it is not, it is not by any means we are a significant player today in online. So Frank, if you want to add anything to that? I think over time, you know, the multiplayer category is something of interest. If you look at wait the PC business is working in North America, the worlds of warcraft and, is shifting dollars of retail into online. We recognize that and see that as an opportunity and believe we are well positioned to start to build into that category. And finally, on your question on mobile-based, mobile-based revenue. I would say that what you are going to see is this build, Heath, over time. Today it is very, very small, but we are expecting for the year to be somewhere in the neighborhood of 20 or so million. In our income statement, we talk about 2 million bucks coming through cellular handsets in our second quarter. There's also likely going to be a few million still coming through the licensing line as we roll into more of our own production. But over time, we would expect that will, that will build as we believe this will be a significant source of revenue both for the carriers, as well as for the game industry. And in terms of product or publishing on the cell phone platform, we released about five titles in Q2, and in Q3 and Q4 combined, there are probably another 15 titles that we will launch. Good afternoon. A couple of broader questions looking out a few years. I was wondering if you can comment on the growth that you expect in the next cycle. Just broadly speaking, do you think you could look back the last cycle and view similar trends, you know, we could see more penetration and more International presence and things of that nature. And then second question is on the margin. Again longer term, as you look at EA, you know, specifically. I think it took you only three years to get to the, the high 20% type operating margin last cycle. Should we expect a similar trajectory? Is there any reason trends on the operating margin side will be any different as you look out a few years? With regard to our market outlook for calendar '06, we are not prepared to talk specifically about that yet. We will probably get into that on the next call. But at a macro level, I think next year will be pretty interesting year. You will have the PSP install base continuing to grow. I think you will see Microsoft very aggressively try to grow the installed base on Xbox 360, and we are expecting Sony to launch the Playstation 3 and Nintendo to launch the Revolution. So a lot of new hardware will be delivered to the marketplace in calendar '06 in Japan, and North America and Europe and we think that is going to be pretty compelling and beneficial to all of the third-party publishers. And I would add, you know just one thing to what Larry said and I will attempt to address the margin question. I think what is increasingly becoming clear and will over the next, increasingly becoming clear and will over the next 12 to 24 months, our initial measures for measuring this marketplace will become obsolete. Heath already touched on this. A huge business today in online that is not really being captured, in what we would all call traditional market measures. Increasingly, there will be micro-transactions that need to be factored in trading-based revenues. Increasingly, you also will see mobile become a factor. One of the things when we talk to market growth very quickly we have to adapt to is sort redefining who we are as taking into account all of the opportunities that are fundamentally being created by technology. Looking at margins, sitting here today, again, I am not willing to predict out. I think what I would tell you is that margin upside is, on the gross margin side is going to come from a, factors of where do you see pricing, how quickly can these high margin revenue high margin income streams, revenue streams develop like micro-transactions, in-game advertising and the like, and then ultimately, how we can take advantage of our scale in order to build scalability down through our operating costs. And you know, one other thing which I guess I should absolutely add in here which is number one focus is new and wholly-owned intellectual property, because ultimately at the end of the day, the Q2 higher gross margins are owning the IP and not renting it. Hey guys, thanks for taking my call. Just a couple of questions. Could you update us on the, out of RenderWare? And are you realizingthe initial cost savings that you expected? I think, I want to say something out of the box on cost savings. I don't think that is the way to look at render ware. Renderware for us is capacity. When, we think about it if, if you look at our industry or EA, the industry has never been idea constrained. It has never been capital constrained. It has been capacity constrained as we are learning to build newer and better games given the changes in technology. What we try to do, what we are working to do with Render Ware is to build this platform and put it in place that fundamentally allows us to do more and increase our throughput as opposed to per se save costs. Ultimately, should margins benefit as a result of that, yes. As you drive higher levels of throughput. That is the philosophy behind Render Ware. I don't think you're going to really see the payback on this until we get right in the middle of next Gen development because that's when it kicks in as a platform as all of our titles start to move to this common platform. The final thing that I want to be clear about with respect to Render Ware is that at its heart on top of being about capacity, it is also about innovation. And the reason why it is about innovation is it allows us to consolidate the things that are repetitive. The things that can be standardized and free up more time for our engineers to work on the creative and on the core game skills such as game play. Again, we will have to build our way into it. There is a lot of learning that goes, as part of it. And we are right in the middle of that as we focus forward into Next Gen. Thanks. I have a couple of quick questions. First, with respect to the holidays, I am wondering what your expectations are, more specifically for Need for Speed and Harry Potter, at least in comparison to last year's titles or for Harry Potter, perhaps versus the last holiday title that accompanied a movie release. And regarding your comment again on the reason we missed North America. And we have heard a lot about less up-front buying from retailers, and I am curious if that's consistent with what your, with your comment, or if you were talking about something else more specifically for up sell-through. And then lastly, Catalog sales, what percent was catalog in the quarter and what percent are you modeling for the March quarter for catalog. Thank you. Catalog versus new releases, in Q2 was approximately a 70-30 split. And I would say that it's probably more heavily weighted toward new releases in Q3 and Q4. On the, other two aspects of your question. On the first, we are very bullish on Need for Speed. It doesn't have a direct competitor on the majority of the platforms it is shipping on. It takes a very new approach to the game design that we had from last year, which was Underground 2 and are brings into a new area that's proving to be very exciting to customers. We feel very strong about it. We have a great campaign behind it. Harry Potter, we are looking at a movie release in holidays, which is great for product. It is also our highest quality Harry Potter game to date. It really follows the movie and is very innovative on its design and execution. Additionally the sales and marketing effort on that is going to be extremely high. With regards to retail open to buy, we are seeing some caution amongst retailers given the conditions in the channel. The good news for EA is that our brands in our products are proven historically to be performers at holiday and to be successful with customers. So in a sense a lot of the titles that we are providing to retails are Safe Harbor for customers and for retailers so when they are making their showses on their open to buys, I think we will do very well this that context. The other thing that I want everybody else, I think we should also remember is that when both of these titles are extremely global. Two, is, remember that if you go back a year ago, we weren't talking about launching on the PSP. We weren't talking about an Xbox 2 launch. And we weren't talking about the NDF. So you've got some pretty powerful new platforms over which we can market these products. Hi. A couple of questions. First, Warren, can you first tell us the tax rate assumption for the rest the year and what the share count is that we should be using. Second question. Larry, if you can kind of give us a road map through the next year, if you'll look at your expectations for Xbox hardware, you know, generally it seems $1.5 to $2 million worldwide in December. Do you think there is more supply than that in the March quarter. Timing of a PS2 cut. Do you think you get a hardware cut on the PSP next year. Weighted thinking is revolution is some time in the summer before the PS3 maybe and just take us through what next year is going to look like so that we can get a better idea of how the year shapes out? With regard to the Xbox 360, I think the range that you just mentioned for calendar year '05 is probably close to reality. I think what is more important is what's going to happen in calendar '06, and my expectation is that Microsoft is going to work very hard and very aggressively to get to a 10 million unit install base on a global basis as fast as they can, and in their mind, probably hopefully before Playstation 3 launches. And, you know, we can't make announcements for Nintendo or Sony, but our expectation is that in North America and Europe, those are probably both second-half launches. And I frankly don't anticipate a price reduction on PSP next year. Mike, on share count and tax rate. Tax rate, you should expect for the year 28%, and, you know, and just to understand that I think increase league you will see volatility in that line. So give or take 28%. But that's where I would model it and then on share count, I would put it right around 315. Operator, we will take one more question. Sure thanks, Just a couple of quick questions in terms of PSP exposure in Q3 and Q4, it was 7% this quarter. Should we be thinking of double-digit kind of exposure to PSP or at least a growth in the percentage of PSP from a platform perspective? And then just to follow-up on the retail question. Clearly there has been some weakness in retail, not just in the sector but in other sectors as well. Could you just talk a little bit about specifically the kinds of titles that you are seeing retailers be a little more cautious about this holiday season? Thanks. I would say on the PSP, I think it is a little bit early and just trying to do a little bit of math relative to percentage of mix. I would put it sort of in the same category given the strength of when you think of all things that are going on in the third quarter from the 360 launch to just the strength of our overall title line up. I think it is probably going to, sort of hold there, and I don't know, 7% to 10% or so category. I think the way we look at it which is, is that this is a brand new segment for us. Fundamentally, we’d never had an overly strong position in the hand-held market. It really hasn't met sort of our, it just hasn't been where we have played. Now today as Larry said we are sitting here in North America at 27% total share and number one on this platform. So that has put us in a whole new world as far as handheld. I think as far as our numbers go, we are, 11% or so year to date. Just looking at the NPD data for the hand-held. With regards to your second question, it looks like what's happening is that known brand names and sequels are doing well in that mix. In addition, titles that don’t, don’t have the demand indicators that are saying that it is in the top 20 a ring also getting hurt a little bit. So games that feel like they are outside the top 20 aren't doing so well with retailers and new ideas that don't have proven track records and brandings seem to be at risk. 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_233992

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to Seagate Technology’s Fiscal Second Quarter 2006 Financial Results Conference Call. At this time all lines are in a listen-only mode. Later there will be an opportunity for questions. Instructions will be given at that time. If you should require assistance, please press “*” then “0”. This conference call is being recorded. Portions or the subject matter discussed in the call to follow related to the proposed transactions between Seagate Technology and Maxtor Corporation will be addressed in a joint proxy statement prospectus to be filed with the SEC. We urge you read it when it becomes available, because it will contain important information. Information regarding the persons who may under the rules of the SEC, they considered participants in a solicitation of stockholders in connection with the proposed transaction, will be set forth in the proxy statement prospectus during when it is filed with the SEC. The conference call contains forward-looking statements with in the meaning of section 21A of the Securities Act of 1933 as amended. And Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements include but are not limited to statements related to future financial performance price and product competition, customer demand for our product and general market conditions. These forward-looking statements are based on information available to Seagate as of the date of this call and current expectations forecasts and assumptions involving number of risks and uncertainties that could cause actual results to differ materially from those anticipated, of these forward-looking statements. That risks and uncertainties include a variety of factors some of which are beyond the company’s control, in particular such risk and uncertainties include the impact of the variable demand and the aggressive pricing environment for disk drive. Attendance on the company’s ability to successfully manufacture an increasing volume on a cost-effective basis and with acceptable quality is current disk drive product. The adverse impact of competitive product announcements and possible excess industry supply where they expect particularly disk drive products, the impact of the announced transaction between the company and Maxtor Corporation on current customer demand during the period prior to a closing of the transaction, the possibly that Seagate’s depending acquisition of Maxtor will not be (indiscernible) on a friendly basis or at all. And the possibility of that the combination of Seagate and Maxtor will not provide the anticipated benefits of the combined company. Information concerning additional factors that could cause results to differ materially from those productive in the forward-looking statements is contained in the company’s annual report on Form 10-K as filed with the US Securities and Exchange Commission on August 1, 2005 and in the company’s quarterly report on Form 10-Q as filed with the US Securities and Exchange Commission on October 28, 2005. These forward-looking statements should not be relied upon as we are representing the company’s views of any the subsequent date and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances, after the date that they were made. I would now like to turn the conference over to our host, Mr. Bill Watkins President and CEO. Please go ahead sir. Thanks Lynn. Welcome and thank you for joining us. On the phone with me today, are Charles Pope, Executive Vice President and Chief Financial Officer, Dave Wickersham Executive Vice President and Chief Operating Officer and Brian Dexheimer, Executive Vice President, World Wide Sales and Marketing. Seagate closed the calendar year with the strongest quarter in the company’s history. In fact, the strongest quarter by any company in the history of the disk drive industry. Demonstrating the consistency of our financial and operational performance, we achieved record revenue and record earnings and we delivered new products for all market segments for shipping a record 28.8 million disk drives. Over the last 12 months, we’ve reported revenue of $8.5 billion and net income of $1.1 billion. Strong performance continues to result on our unique business model that has delivered a broadest product portfolio in the industry, with consistent technology, product can cause leadership. We expect this performance to continue and positively impact our earnings for fiscal year 2006. Clearly, global demand for mass storage is accelerating, with significant growth opportunities in new emerging applications as well as traditional computer applications. In fact, in the December quarter, we increased shipments 19% year-over-year. While the industry delivered its first 100 million-unit quarter, we estimate the industry shipped 380 million disk drives last year totaling 35 million terabytes, an increase of 60% from the previous year. The most exciting growth area continues to be the consumer electronics space, where new applications are constantly emerging and software makers are building new business models designed to unlock digital content for consumers to use in their home or hand or in the car. Hard drives are central to these new models, where storage-intensive applications require high capacity, cost effective solutions to store, protect and access these new flow of digital content. The annual Consumer Electronic Show clearly demonstrates that we were well in our way to roll robustly into every consumer electronic application that has a storage device in it, on it or around it. Whether it’s a car, a cell phone or a handheld video applications, it's all about delivering a beneficial consumer experience that simplifies the complexity that exists today. And Seagate is continuingly working to improve this consumer experience. These new consumer markets are now large enough for our portfolio and serve markets broad enough that Seagate has a greater degree of financial stability and predictability along with greater opportunities for growth and than are available with in the traditional IT markets. Well, a primary growth driver for our industry has been the consumer electronics market, we are also very pleased by the strong growth we are experiencing in our core markets and the opportunities ahead. The desktop market continues to see strong growth where Seagate saw an increase of 16% year-over-year unit shipments. The notebook market has shown phenomenal growth as higher capacity drives are allowing more powerful and cost effective notebook computers that are equipped to handle tasks traditionally left to desktop systems. Last quarter, the averaged capacity of notebook drive shipped by Seagate is nearly 70 gigabytes, up from 64 gigabytes the previous quarter. We expect this capacity trend to continue, and the enterprise higher capacity, higher performance drives continue to power the world’s most demanding computer systems. And they are now providing solutions for content providers to deliver capacity-intensive applications such as video through broadband, the unit around the world. As you are all aware Seagate entered into a definitive agreement to acquire Maxtor. As previously stated, we believe the combinations of the two companies will leverage to strength the Seagate significant operating scale, to drive product innovations increase operational efficiencies and realize significant cost synergies. These capabilities will enable the combined company to compete more effectively as the higher competitive data storage industry addresses the challenges and opportunities for significant growth that lie ahead. We will also uniquely position the combined company to accelerate delivery of a diverse set of compelling and cost effective solutions to the growing customer base for data storage products. There is no question that this is a growth industry and Seagate is leading the way. We are uniquely positioned and excited about what we see across all markets, as the leading disk drive manufacturer in virtually all markets and in environment which the demand for storage is at record levels and growing, we are optimistic about the future. Now, I would like to turn the call over to Brian to provide further detail on our performance during the quarter. Thanks Bill. The December quarter reflected the growth dynamics results throughout the calendar year 2005 and expect to see continue in 2006. As Bill mentioned, the industry surpassed 100 million units in quarterly shipments for the first time and achieved over 380 million units during the calendar year representing a robust year-over-year growth of 26%. In the quarter, Seagate experienced growth in all markets as shipments grew faster than the industry rate of 15%, reaching 28.8 million units, a 19% increase year-over-year. In the consumer electronics base, Seagate shipped 3.5 million units. We expect to see a substantial increase in this volume sequentially as product transitions in the game console space reached full stride and we continue to see robust growth from the DVR market. In the DVR market, shipments grew 93% year-over-year to 2.4 million units. This segment of the CE space remains one of the greatest opportunities for Seagate. With high definition content continuing to penetrate large markets and Olympic and World Cup events upcoming, we expect to see additional demand and an improved mix towards high capacity drives in this space. In the 1-inch market, Seagate shipped just over 800,000 units in the handheld media players, GPS systems, branded portable storage and planner applications. While down sequentially, we continue to see growth opportunities in the space. We believe has higher capacities are achieved in business models for video distribution materialized. This market will experience additional growth represent new opportunities for Seagate. The mobile computing space continues to grow rapidly as the Seagate’s participation in that space. We believe the market grew 36% year-on-year to 21.4 million units. While Seagate shift 2.9 million drives in December quarter, an increase of 136% year-on-year and 20% sequentially. As the result of our expanded product line and technology leadership, we believe we gain share on this market, marking the 6th straight quarter of share gain. During the quarter, we began limited volume shipments of the industry’s first 160 gigabyte 2.5 inch disk drive for high-end notebook applications. We believe there is a significant trend to our higher capacity drives in the notebook market and Seagate is very well-positioned in this regard. In fact, Seagate’s shipments of capacity is greater than 80 gigabytes grew 39% sequentially. We do believe the industry access December quarter was some unmet demand in the space and believe it’s likely that underlying media capacity for these products will continue to be in tight supply in the March quarter. Seagate had another strong quarter in the enterprise market. We shift 3.5 million units during the December quarter, an increase of 16% from the September quarter and 6% year-on-year. We believe the industry has the whole shift approximately 6.7 million drives during the quarter representing the 6th straight quarter of over 6 million units shift. Once again, we believe our product leadership drove share gain in this space. We expect overall enterprise demand in the March quarter to be seasonal and therefore slightly lower than that of the December quarter. We’re also experiencing an improved product mix in the enterprise space as shipments of our highest capacity drives increased sequentially. As we mentioned last quarter, our SAT and Fibre channel new line products were in qualification at 10 OEMs. These products are now qualified with 5 of those OEMs and we began volume shipments during the quarter. We believe this is a fast growing applications base with continued growth opportunities for Seagate. In addition, we continue to be pleased with the customer integration on Savvio our 2.5 inch enterprise drive, where we saw shipments increased 30% quarter-over-quarter. Moving to the desktop, we continued to lead this market with record shipments totaling 18.9 million units, an increase of 16% year-on-year and 8% sequentially. Once again, our product mix continued to improve the shipments of products 200 gigabytes and greater from the 33% sequentially. As we outlined last quarter, our 160 gigabyte for flatter drives are now shipping in 4 volumes. We were very pleased with the customer acceptance of this product throughout the quarter, which resulted in a 130% increase in shipments. Moving forward, we are confident that our industry leading aerial density and cost position will continue to deliver growth opportunities in this market. As it is the case historically with March quarters, we expect overall list out demand to be seasonal and therefore slightly lower and than that of the December quarter. Overall, the industry experienced balance supplying demand for desktop products and pricing for the quarter was in the range of expected levels. Next is the quarter with under 4-weeks and channel inventory for desktop products. Finally, our Seagate brand solutions revenue grew nearly 80% year-on-year and action at 2005 at a run rate of over $250 million annual. We’re pleased with the progress we have made to date and expect further opportunities as more and more consumers see to store, share and project the valuable digital content. Brand and solutions will continue to be a high growth area in strategic focus for Seagate. In summary, we are very pleased with our performance in the market expectance of our product during the December quarter. We believe we have best position for continued growth opportunities and are excited about new opportunities in 2006. Now, I would like to turn the call over to David to provide an update on our key product programs. Thank you Brian. We are very pleased that in the December quarter, we began shipping our first perpendicular drive an 80 gigabyte per player 5,400 RPM, 2.5 inch notebook drive ahead of our internal schedule. We will continue to focus on successful OEM qualification and volume ramp over the coming months. As discussed previously, perpendicular recording is a complex integration of the recording head, the desk, the recording channel, drive software and furthermore as a system. As a vertically integrated company, we are uniquely positioned to optimize the overall drive system. Our technology has maturing; our process already and we are exceeding our internal targets for component and drive yields. Given our platform strategy and successful deployment we are well-positioned not just on this notebook drive, but well prepared to integrate perpendicular recording across all product markets over the next 12 months. Last quarter, I also updated you on the progress we are making, extending Seagate longitudinal aerial density leadership, with the introduction of a 160 gigabyte per flatter desktop drive. As with the introduction of perpendicular, we are very pleased with our progress ramping to industries, first 160 gigabyte for flatter product and will complete the majority of our OEM qualifications this quarter. In the December quarter, we more than doubled our shipments of drives with neither capacities of a 160 gigabyte for flatter or 80 gigabyte for surplus and will significantly increase our outlook again this quarter. Now, I would like to turn the call over to Charles to provide further detail on our financial performance during the quarter. Thank you, Dave. You will find companies press release 8K and additional financial information related to Seagate’s financial performance in the Investor Relations section of Seagate’s website at seagate.com. As stated in the press release, Seagate reported revenue of $2.3 billion, net income of $287 million and diluted earnings per share of $0.57 for the quarter ended this December 30, 2005. The $2.3 billion of revenue we’ve reported today reflects a high water mark for Seagate. These GAAP financial results include cost related to our employee stock purchase plan and stock options. These costs total $20 million with $7 million in cost of sales and $13 million below the line in operating expenses. Also included in the December quarter’s financial results is the $6 million charge for R&D for licenses related to advanced storage technology and a $2 million charge in other income and expense related to the early payment of the $340 million term loan. Seagate’s operating expenses defined as restructure development and send; Selling General and Administrative expenses in the December quarter were $307 million which includes $13 million for non-cash stock-based compensation and the previously mentioned $6 million charge for the technology license. Cash flow generated from operations was very strong a $562 million in the December quarter. Our cash balance is approximately $1.75 billion down only $41 million from the September quarter even though repayment of the $340 million term loan occurred in mid-October. Because of the announced Maxtor transaction, the company did not buyback any shares during the quarter. The full $400 million previously approved by Seagate’s Board of Directors is still available. Inventory turns for the December quarter were 13.5 up from 13 in the prior quarter. The total inventory balance at the end of the December quarter was $505 million up $28 million from the prior quarter. For the first 6 months of fiscal 2006, capital investment was $353 million with December quarter capital investment being $184 million. As demonstrated this past year, we used customer demand as the gauge to determine the proper level of capital investments. Based on the strong demand, we are experiencing for Seagate’s products during the remainder of fiscal 2006 and to position the company to serve our customers during the seasonally strong quarters beginning in September, capital investments for fiscal year 2006 will need to grow to between $915 million and $1 billion. This is a meaningful increase to our prior expectation of $700 million to $800 million and reflects strong broad base demand for Seagate products along with the need to restore some flexibility in our factories which have been running at virtually full capacity during all of the last calendar year and are anticipate the top rated phone capacity during the March quarter. Relative to the company’s outlook for the March quarter, we indicated in our press release the company expects revenue of approximately 2.25 billion and diluted earnings per share of approximately $0.55 excluding expenses related to non-cash stock-based compensation of approximately $21 million or $0.04 per share which equates to approximately $0.51 per share on a GAAP basis. Gross margin is expected to contract modestly as compared to the December quarter as normal price declines in all the markets are expected to be offset somewhat by the continued improvement in product mix and the margin improvement, our 160 gigabyte per platter desktop drive provides. Operating expenses for the March quarter are expected to be approximately $290 million excluding non-cash stock-based compensation cost. The tax rate for the balance of fiscal 2006 is expected to be 5%. Due to the dynamic nature of the disk drive industry, the outlook for Seagate’s fiscal year 2006 is subject to greater variability and less certainty. Seagate’s outlook for earnings per share for fiscal 2006 has been raised to arrange at $2.20 to $2.25 excluding expenses relating to non-cash stock-based compensation of approximately $80 million or $0.16 per share, which equates to a range $2.04 to $2.09 per share on a GAAP basis. Our full-year outlook anticipates a balanced supply demand environment and therefore normal levels of price competition, additionally our outlook incorporates executing to our plan for the production ramp and customer qualifications of the 160 gigabyte per platter desktop and 80 gigabyte per platter notebook drive and sequential growth in notebook near-line and gaming unit shipments. Finally, I would like to briefly provide an update in regards to the proposed acquisition of Maxtor. On January 13, we made our Hart-Scott-Rodino pretty much in notification filing and we will be meeting US Federal Trade Commission to discuss the merger in the coming weeks. The FTC has 30 days to complete their review or request additional information. For a transaction such as the Maxtor acquisition, it would not be unusual for the FTC to a second request for additional information as they conduct a review. The preliminary joint proxy statement is expected to be filed in the middle of March and we expect subject to SEC review in comment process that the shareholders books longer term in late June. We continue to expect the transaction to close sometime in the second half of calendar 2006. We have been very pleased with all this transaction has been received by the investment community. Even at today’s valuation, we feel that Seagate’s ability to generate earnings and cash has yet to be fully recognized. That concludes my remarks. Now, I’ll turn the call back over to Bill. If you would like to ask a question at this time, simply press “*” then the number “1” on your telephone keypad, if you would like to withdraw your question, press “*” then the number “2”, we’ll pause for just a moment to compile the Q&A roster. Now, thank you. A couple of questions. Can you maybe comment what do you think on the outlook for 1-inch drive as going forward. And then if you might be looking at having a 1.8-inch drive in the future is seeing, is that where, that’s seems over that, where most of the, some CE stuff seems to be going? They are still in and I don’t want make any product announcements Kevin. But we were very excited about the whole mobility space. So, years talk about things going on in the hand holding card, really this addresses the hand space and so, I have which is my comments, the 1 inch market is very much alive and we continue to find new application spaces for that, and our technology leadership and our ability to put very high capacity in that phone factors interesting provided those reasons in those applications. The 1.8 inch space we are looking at that with very keyed level of interest, we believe that’s a very robust market at this point in time. And that’s got nice growth, potential in front of it. Not only in the BES space, but also potential in the notebook space in the future. So, I think you are going to expect that you will see us continue to look at that with a lot of interest and continued to make investments in that space for the next several quarters and at some point we will be making a product announcement. Okay and I have follow up for Charles, actually couple of things. I think, thought you would say 5% for the tax rate for the remainder of the year, that is the first things and the second thing is, can you give us an indication on new product contribution in this quarter then kind of things, probably in the next couple of quarters. Okay Kev, and in the guidance that I gave in my prepared remarks we have modeled in 5%, we believe that’s kind of at the high end of the range where it will be, but for conservative reasons, felt that it was prudentially heading model at the end of 5%. You know a year ago when we had a complete turn over of our products. We talk continually to flip the difference shown margin less for the new products versus the older sets. That has largely turned over this point in time and trying to distinguish some of the incremental margin, on saving 160 gigabytes 2.5 inch which just really started shipping, versus some of the owner’s note. It is not a meaningful number. So, I think that at this point in time you need to kind of look at the blended number and we still feel good about operating in this 24% to 26% margin range, as we have. Yeah a couple of questions Steve, first on the notebook side, your notebook business is obviously is one of the biggest incremental contributors in the last couple of quarters. You made some comments that suggest some pretty strong notebook growth combined with the back that you are saying that, there was unmet demand exiting the quarter and media remains tight. Are you suggesting with that kind of comment that we will potentially actually see non-seasonal growth sequentially in the March quarter. And then once you start to see some of the media listen up. What is your expectations, since the other side of that, the offset to that is that, is your technology as well as your ramping market chair. So is it possible in the slower quarters of March and June, you actually could see some growth on the notebook side. And then finally can you help us understand, perhaps even quantify, what your technology leadership means as far as your cost advantages and also margin opportunities are, are you beginning to see any of these in share gains. No, let me try and deal with the notebook. As the matter that we see in front of us, 3 things I will point you to, one is clearly in the client space we’ve seen product transmission and demand patterns based on OS, processor transitions as well as seasonal opportunities. I think what you have to do on this notebook underneath that because this point on gear is very structural shift to mobility away from stationary client computing. So, in addition to the normal things we are use to seeing in client 2 which are these processor and OS transitions as well, seasonal buying patterns. Underneath that in this one we’ve got that structural shift going on. So, we think that will give this one more strength than maybe some of the other of supplying demand in balances we’ve seen different segments in the past. Second thing I’d tell you is competing for the supply chain cool, there is also new applications coming into 2.5 inch space, mainly in the gaming console environment, there are a few others, they are now competing for this supply chain. So, if you just look at 2.5 inch drives then there is more reason to believe that there is more demand for those and I think the answered question about sequential growth, quarter on quarter I think she include those types of products in all 2.5 inch, and we varied much to expect to see sequential growth from December to March. Actually the, I am sorry, I was not including gaming I was really trying to think of the traditional business, where you are ramping your market share there anyway and you’ve got a technology edge. Right, so in the notebook space I think still that structural shift is true and we look for the market to be just looking at notebook flat maybe slightly up quarter-on-quarter. The third thing I will tell you that’s the specific benefit to Seagate, maybe addresses some of your technology question, I will hand it to Charles is, we see from a share perspective more home pull of products because of this technology leaderships. So in addition to the 2 things that I gave you that were structural for the industry and I think we see an additional benefit, because of the technology where we should be on the product. So I let Charles to answer a margin question. Okay, Laura to try to answer your question of quantifying further technology leadership is doing for Seagate, let me give you 2 specific example. One if you sit and look at the 160 gigabyte for flatter drive we are able to do that capacity point with 1 disc and 2 heads. All of our competitors at this point in time are required to do 2 discs and 4 heads. You have available to you market data on discs and heads and they, if they are purely dependent on the merchant market, the average price per disk is a little more than $6 per disk. And a little more than $6 per head, and so there is an $18 cost differential for the same capacity point that exist on that drive, which, when you are talking about entry level products, that is a very large differential to work with. When you said you talked about the technology leadership on the notebook, you don’t measure it in terms of margin, you probably measure it in terms of share, because with the new notebook product that we just introduced, the 160 gigabyte 2.5 inch, you don’t have the ability in that form factor to put it additional heads and disks and so it just becomes a matter, what leverage does that can give you to increase your market share, what opportunities to increase your market share within your customer base, which again drives the increased gross profit dollars, you don’t really have a gross margin comparison out in the industry to match it again. And so those are the types of things that I think the technology leadership are driving. Thank you, a few question, I guess first, perhaps this best for Brian, regarding Maxtor in general terms which capacity points are even ends with the market. Do you think are most interesting for you to try and maintain a presence then we, when you break up their share. And you look at the opportunity is their for perhaps a capacity point, would you want to make sure you stay such as, high cap, near-line, the low cap business in Latin America, any thoughts there? This is Bill actually; it’s too early for us to really talk about products strategies with Maxtor and what we are going to do. So, we’re just not going to comment on that time and them probably can’t, and that walk pretty more forward thinking about this as we get closer to the deal. Okay, fair enough and then, I guess secondly just to dive in a little bit deeper on the 160 gig platter, traditionally there has been obviously a very compelling advantage as you, Charles you were talking about the cost differential. But there is also always a reason to perhaps lower price to try and gain share, the industry is very different now it’s effectively two large players on the desktop last. Can, do you think that perhaps this time around you might be able to broaden that 24% to 26%gross margin range, because you don’t need to price, you are going to get the share you are going to get as it is and you can just actually pocket the difference this time. Well that’s the way that actually turns out, that will be great and that would be our hope is that we can do something like that. Because the expectation strategy, we would be able to accept market pricing and there is really no incentive with in the market for people to get overly aggressive on the 160 gigabyte capacity points which are together. Some improved margins to offset some of the very entry level products that have very low margins. Thank you, I have few questions within me, I don’t want to beat up on the 160 question, but I want to see if you can give us spend at least now; what is the average capacity you are targeting with your 160 gigabyte per platter. Is that only 160 or you also going after higher capacity as far as even from the 320, 400 or 500? I ask you that and trying to get a sense of what can really be the true margin impact as we think about higher capacity trials become the greater peaceful mix going forward? Hey, Mark Moskowitz let me take that one. The 160 today is a 160 and that’s where we are targeting it forward, we have plans in the future to incorporate that into a higher capacity drives in that point of time, when the technology is incorporated, while others will be targeting capacity is during excess of that. Sure to think about things like 500 gigabytes. Okay, thank you. And then as far as the enterprise environment, it seems like you’ve pretty much enjoyed the nice steady momentum in the December quarter. I wonder if you can first give us a sense of how that broke across fibre channel versus SCSI, and then as far as the typical seasonal growth for the March quarter should expect SCSI and fibre channel fall that or can get less than that, given your near-lines data exposure, what’s common? Well, Mark, this is Brian, I’ll take that one again too. When we talked about the enterprise, we really are capturing just the SCSI and fibre and classic, and what we call mission critical enterprise business. So, really address the fibre and SATA, near-line space somewhat separately from that. So, when we talk about 3.5 million units, that’s the classic definition that we’ve always used to define enterprise shipments. So, I just want to be clear about that. In terms of distinguishing what happened in the December quarter, I’d say we saw a good strength across all product lines; one was not particularly stronger than the other. Through out the quarter, certainly was waited more until December, we saw more strength in the back half of the quarter, which gives us some confidence around the March quarter being, maybe less seasonal then it has been in the past. So, we will be hopeful that the disclosure being flat. As we look at this March quarter, again, I wouldn’t distinguish it for you between SCSI, SATA or fibre in terms of any differential levels of strength. Okay, and then lastly Charles if you could, do you have sense of how we should think about the tax rate a longer term given with the industry outlook, do you think its the same to be on improving track and honestly your profit outlook is improving by the day, should we expect this tax rate to move up towards 10% I know you have a good deal packs holidays and some of the programs, and then keep that down by, maybe you should way in their please. Well, I’ll need to address this question on the Seagate standalone basis; we don’t really have a basis yet to evaluate what the tax rate would be on a combined basis between Seagate and Maxtor. But as we sat and look out the, where our revenues and profits associated with the companies are, they tend to be very strongly concentrated outside of North America, and consequently given the structure to company, we believe that we can probably maintain a tax rate out the 5% to below level for an extended period of time since we sat and look at it. Since, no one else said so, congratulations on another record quarter, very wonderful quarter. Just 2 questions here, you’d Charles want to some detail to discuss the end managers from component, lower component counts, we will have 160. Mostly, we’ve also have the advantage since you will be several quarters ahead of your competition. In terms of learning curve efficiencies, which translates in the better yields, I am just wondering how much cost to manage that is since I assume you will be the ahead of the yield curve , because you’ve been producing 160 gig longer. All right that’s absolute, the accurate, we began shifting the 160 gigabyte per platter product in volume in August last year. And so given the fact that we’ve only heard a sched on the map from one another competitor, and it was kind of, somewhere this time it seems we may, will have a year lead on the competition there. Its been a while since I’ve calculated it, but to drive level 1% point of yield can be anywhere in the range from $0.08 to $0.12, $0.15 or something. And so you are right, maturing and getting the yields up and then coming down the cost curve with your suppliers and everything else gives you an incremental advantage beyond just the lower component count. Sure, the second question is guess, the two questions about merger of Maxtor, is revenue attrition and certainly I, was bullish as anybody about your retrained more of it. But I just wonder if you can address, how ready how are you, compared to your competitors, who were at full capacity and won’t be buying a new plant in China and elsewhere. Already are you to be able to produce including components, I see you raised a CapEx. Virtue have an event or simply because you are getting this plan all the people that have the build news plans, ad capacity your fine new sources for components. I am just wondering if you can talk about that? Its Dave, Mark let me take, its Dave Wickersham. So as far as how we are prepared to begin it, it’s a little early and the apple outlook that we provide, I want to clarify that is a kind of organic, Seagate Pro. So with Charles outlook, it likes purely the Seagate organic growth that we’d anticipate given our customer fallen demand. As far as our ability to leverage going forward, one of things that we highlighted as significant assets of Maxtor brings to the table is media capacity as well as the China facility that you’ve mentioned. But from our perspective, that perhaps bring another advantage to leverage the fixed assets that we have today as well as some of the assets and resources that Maxtor would potentially bring to the combined company. So the other thing again, back to our model that your familiar with that I think it just a very unique opportunity and that is it’s just a whole deal is about leverage and scale and it’s ramping the process is we know, the products we know, the assembly lines, the test lines we know. So, we think that takes the considerable amount of risk out of the deployment and transition to the share volumes going forward, so I would think that we’re again uniquely positioned because we’ve got both Intel components additional capacity for one of the precious and constrain commodities namely in the media, as well as some of the assembly capacities that the China facility will bring to the combine company. Mark this is Charles, let me elaborate on that one that was in the call we had when we announced the acquisition, the question was that whether or not we might be bringing out some capacity to facilitate the transition of products suppose to go and we indicated at that times that would certainly make sense and that we would look at that it’s a little bit to early to evaluate with you have finalize evaluating, what that means to us and how we might go about doing that certainly as we go throughout the next few months and I would hope that if I, the time we have our April call, we would have some meaningful information to give everyone on that depending on the status of the close. But that I guess from not much what you said with you certainly you have a I assured a rule to go where the someone who is trying who gain share from Intel who is not inherited the plan that you guys double to and the advanced even retrain good deal of that shares simply version of how to do as much is I believe you could comment as like to do is that correct? Mark, Dave again, let me, I would say I agree with that I think, the other point I would make and is the unique advantage in terms of being a head of the curve on product transition and technology transitions, so while folks are contemplating what’s your ramp and where to ramp we know that technology as Charles indicated we maturing the technology, so we’re I believe in a comparative advantage likewise and we’re not behind the curve from a technology or product perspective. Quick question regarding the 160 gigabyte platform, how long before you believe you will be close to a 100% utilizing that platform on both the 160 and then the 80. Wow, and so then that wouldn’t would to be logical did that without making product and so it will logical that of course we would take a bladder out of the 320 and a flatter out of this 500’s would be able to tweak the heads too 167 platters that logical? Hi thank you. I think you mention that script that feedback from the investor community on the proposed merger was really positive and I am just curious what feedback have you gotten preliminary from your end customers? Yeah Frank this is Brian, we set a pretty expensive dialogue as you might imagine with customers globally and I would characterize that feel very supportive the rational behind the, those acquisitions. And with respect to, and that feedback, does it change your thoughts all about the potential revenue impact, about the share loss? All right, this is pretty consistent with what we announced today we announced a merger which is just those transaction believes highly accretive that it relatively aggressive to assumptions around revenue attrition and as we said in that call we reiterate again, we think we can do much better than most aggressive assumptions. Okay, I thank you and my last question would be to ensure not that we seen any change in the computer dynamics and how they might be rank into that? No I don’t things to like if your questions where on price behavior or any product announce from competition, I’ll think we seen any thing at this stage it’s early, we certainly would expect that our customers are competitors with viewed us propose acquisition in the same light than you may have used once in the past, a little enter something difference since here in the past competitors have been from mergers of this type and so you can expect that they will try to anticipate where they may identify so acting the code loan that’s so far we haven’t seen any movement. Hi thank you. Perhaps I missed if could you go through by-product segment the directional change in blended ASPs and then about what drove the overall increase in the ASP and then finally I don’t know if I missed it but did you provide new revenue guidance for the full fiscal year for 2006. Thank you I’m trying to take him in reverse order okay. We didn’t provide new revenue guidance for full fiscal ’06 and the ASP let me address the overall blended ASP first it went up about $2 quarter-over-quarter that was absolute a product mix result because in everyone of the product categories there was price erosion from the September quarter to the December quarter and in fact there was a little bit more erosion in the December quarter and there was some in September quarter but it’s a still at the low end of the historical ranges so that it was represented the environment that we have described to you where there are some component tightness of relatively balanced environment for us there is not abundance of product down the channel either. So and we’re expecting a normal environment it relative to pricing in the March quarter kind of that low end of historical ranges that it still again price erosion with them all the various product category. Hi thank you. You commented on the type of the class media, but I didn’t hear anything on a aluminum can you give us any detail on the tightened send that, and I have follow up. Yes, Hi Sherry, Dave Wickersham, I’ll take that yes in addition to last subsidiary constraints we continue to see very tight supply on the little bit on both subsidiary finish media capacity so despite the fact that Seagate and other independent media suppliers have had a capacity that some of the growth and mix of the Brain describe with us coming from PBR or near-line in our case, we continue to see very, very strong mix up and demand on components so we continue to see our storage in aluminum as well through this quarter. Describing that storage I want to emphasize that the outlook for the given to your completely independent with components for the guidance that we have given. Okay and then also on the inventory I noticed that the finish goods number picked up a little bit sequentially can you give us any color on that and what maybe in that number. Sure, periodically we find it’s appropriate to place some product on surface and in this particular case ocean transport in set of air particularly on entry level products where there very low margins and we have an opportunity to save some money so that even looking at the time value of money it’s very worthwhile to use promotion shipment. We choose to do that towards the end of December to position some products for the month of January. Hi I am sorry it’s Stanford Bernstein. Thanks for taking my question, a couple of things. First on, it seemed that inventories grew significantly faster than sales in a quarter and finish goods where there 50% as you reported, Hutchinson also increased inventories and last Intel said channel inventories was up. My question, I guess is did your channel inventories increase in the quarter? Sorry for the confusion. Yeah I’ll just have to take a look, and second with respect to placing you seemed to employ in your release, placing on a rate basis was down and can you just talk about why that’s reverse versus recent kind of trends. I am sorry the finish goods just for clarification in your release though it’s finish go through up on year-over-year 56% did I miss to read that is there some miss statement in that release? A large part of the pricing is actually determine that the end of the September quarter and I think that, that was an expectation that there would be more capacity and more products available in things like that so we did find the environment for the pro-pricing in the December quarter to be a little more aggressive. It help during this quarter well but it was, see for the declines than in the September quarter and thus you can see those declines were upset by product mix and, and cost reductions. Yes, I, just a couple of things to qualify. Did you say that the SEC filing was complete on January 13 or is yet to be completed on January 19? Okay, and you said that the proxies for the merger as well as the, of the share insurance fully acquisition will be solved in mid March, is that correct? Well we have a number of things that we need go through you have Maxtor and Seagate both running to get their in RK 10-Q and RK 10-K out and have finalized to review in the audits of all of those and so that’s probably been biggest stake in the sign line of the preparing these documents. So my question is for your Seagate standalone 2006 guidance. Do you expected in any market share loss as the result of the potential merger is next to… Robin, this is Brian let me take the attendance, answer been definitive no we don’t, we don’t see any organic should allow some Seagate site because we announce acquisition for 2000 service. Hi guys thank you for taking my question. I guess just a sort, two things 1) getting back to the mediate tightness, term I guess on the last earnings call sort of have been stimulated that substrate tightness, might persist, I guess the way you made it sound buyer is as well as lies was for the portals, you know the calendar years fix because the time that you get equipment from the substrate equipment manufacturers its kind of, it sounds like, we’ve pushed out I mean by two quarters, so given the pricing it looks like, sort of I guess it’s the, the high I guess in a lower end of seasonal in December quarter and may even see to next couple of quarters, so I get here your thoughts on, what we should expect from a substrate media, I guess capacity situation. I know it’s a toughest job but this is just what you’re seeing here right now as we head into this year? This is Dave, let me take that again. In the case aluminum substrate like glass substrate we have to add incremental capacity. We as an industry both the components of Fire, Seagate and others so that seems consistence that in our 30 delays and these as a ramps sort of that’s for in terms of getting capital equipment on in terms of coming up yield curves, qualifications et cetera, there is this time such business for in but it is tight and we remain tight. And I would say that, that would continue through the balance of the calendar ’06, that’s correct. Okay thanks a lot. And then I guess last question enterprise business sort of take it that in previous conversing result. Enterprise business I guess, mark a wide seems to be a little bit and expect the December quarter and, three year results and other results of others, is there any I guess incremental positive demand that you guys are seeing I mean, which you think will carry through, or do you think it’s a sort of a like a December quarter budget flash last and something was peculiar going on here? You know, other than the comments that Bill made his opening as, the evidence of the 60% year-on-year growth and had to buy some sort of reviewing measure that you want to make. But I think a lot of times, people confuse our success and growth in the consumer electronic industry as, only attributable to that segment, and in fact if you look at where the content and flows from and in some cases to, which enterprise how much of that was well and so some of our enterprise customers I believe are benefiting some facts, the content is moving rapidly and proliferating more rapidly as per se evidence in the, in the kinds of numbers that we offer, which I think there is somebody enterprise growth as you can attribute to been associated with growth and consumer electronics and specifically current improvement. Other than that it’s not found anything secular from the IT industry that will be causing any unusual growth clearly I think, where we say mostly in December was seasonal as we see in most December quarters. So, on behalf of the entire Seagate management team I like to thank our Seagate employees around the world for the contribution from that outstanding quarter. Thank you all for joining the call and afford to see in next quarter. Thanks.

EarningCall_233993

Here’s the entire text of the prepared remarks from iVillage’s (ticker: IVIL) 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 iVillage Third Quarter 2005 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. Thank you, Operator. Good afternoon, and thank you all for joining us today for iVillage's third quarter 2005 financial results conference call. I am Diane Smykowski, Vice President of Finance. With me today are Doug McCormick, Chairman and Chief Executive Officer; Steve Elkes, Chief Financial Officer and Executive Vice President of Operations and Business Affairs; and Jane Tollinger, Executive Vice President of Operations and Strategy. Before I turn the call over to Doug to review the results for the third quarter, I would like remind you of the Safe Harbor provisions of the Private Securities Litigation Act of 1995. The statements made during this conference call, which are not historical facts, including future earnings guidance, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in the Company's Form 10-K for the year ended December 31, 2004, as well as in other Securities and Exchange Commission filings. The Company's presentation this afternoon is complementary to the related press release issued today announcing iVillage's financial results for the third quarter ended December 30, 2005, and certain other information. This press release was also included as an exhibit to a Form 8-K furnished today by the Company to the Securities and Exchange Commission prior to the commencement of this conference call. Please refer to this Form 8-K, which is available on iVillage's Investor Relations website located at www.ivillage.com/investor for the financial and statistical information contained in today's presentation, together with any other information required by the SEC's Regulation G. A replay and/or transcript of this conference call will also be available on the iVillage Investor Relations website beginning approximately one hour after the conclusion of this call. Thanks Diane. Thank you for all joining us on this call. Today I'm very pleased to discuss with you iVillage's strong 2005 third quarter performance. As you know by now, we reported record revenues of $22.6 million in the quarter, with iVillage.com revenues increasing by about 80% when compared to the same quarter one year ago. We think these results reflect the strength of both our underlying business, as well as the exciting and rapidly growing online advertising market. This, combined with the solid iVillage brand and our dominance in the women's market, are the key growth drivers to our business. We are pleased with comScore Media Metrix's October ratings which were released just today, showing iVillage's monthly unique at 15.6 million visitors. Our ranking grew from 49th to 39th most visited site on the Web. We believe our quarterly performance shows that the initiatives we undertook during the first half of the year to build our brand and strengthen our product offering are taking hold. Our investments during the first two quarters, which included the relaunch of a more functional and user-friendly iVillage.com, and our expansion into the high CPM generating health verticals has proven to be an excellent game plan for success, creating record revenues during a traditionally challenging period. Pharmaceutical advertisers are looking for models other than traditional media broadcast and print to connect with their most valuable customers. And iVillage is able to offer them a broad range of choices. Not only through the iVillage.com health offering, but also through the distribution model of Healthology, and the destination diagnostic model of Health Centers Online. This allows us three opportunities to capture revenue in this ever-growing and lucrative space. And in fact, some pharmaceutical companies do purchase all three entities from us. In addition to health advertisers, we continue to add advertisers in other verticals as well. We're billing more dollars by writing bigger orders at higher CPMs, indicating the strong demand from both new and existing advertisers who are finding our editorial product and our interactive tools increasingly attractive for reaching our coveted audience. Third quarter 2005 sponsorship and advertising on iVillage.com grew an impressive 132% over last year. And when factoring out our 2005 acquisitions, we still grew a very strong 44% when compared to the third quarter of 2004. Many of our existing advertisers opted to increase their spending, such as Procter & Gamble, for whom we're now running add programs for Crest, Tide, Dawn Direct, Clairol and Pantene. At the end of the quarter we also began to feature P&G video ads in the iVillage video environment. In addition to Procter & Gamble, other blue-chip advertisers who made commitments during the third quarter of 2005 include Unilever, Johnson & Johnson, Kraft, General Mills, Quaker Oats, Kohl's, Amgen, Wendy's, General Motors, McDonald's and Target. Further, some advertisers have allocated nearly 100% of their six-figure plus online budgets to us. And we are proud that the strength of our brand continues to inspire this degree of advertiser confidence in iVillage. Our year-over-year core page views saw a 9% increase, allowing for the discontinuation of some marketing alliances. During the third quarter of 2005 we delivered 367 million total average monthly page views. We are pleased with our substantial increases in billing during the third quarter, and while page views were more or less even with those during the prior year. We're also pleased with our comScore Media Metrix results for October, which as I said just released today show that we're now delivering 15.6 million unique visitors for the month of October. This demonstrates the success we continue to enjoy at iVillage as a premium advertising environment with valuable inventory and a coveted audience that is where worth an higher than average CPM. We expect that increased traffic to our site, which already commands high CPMs, will contribute meaningfully to our financial results moving forward. And that is what we are focused on delivering. On that front, we have identified various measures that we believe will add to user and page view growth for Q4 and beyond. We plan to employ an aggressive search engine optimization strategy, both paid and natural, while remaining focused on our top-notch editorial and multimedia content to attract users and leverage with advertisers. We also plan to relaunch some tools and editorial features, which we believe will increase the reach of the iVillage brand. While our site redesign has resounded well with advertisers and users, we continue to work to make a few adjustments on the editorial and technology aspects of the site to be sure it conforms with the conventional search engines. This is an ongoing process that makes us stronger every day. Also, due to the addition of Healthology and Health Centers Online, iVillage is strengthening its position as a leading provider of health information online. Our strategy is clear. iVillage is a top destination for women who are seeking health information for themselves and their families. Healthology, the number one physician sanctioned distributor of health information videos, while Health Centers Online is a diagnostic destination that answers users' questions, and helps them cope with everyday questions and conditions. This quarter we added to our already robust health offering by launching several new conditioned specific sites, including those focused on diabetes and cancer. We believe our depth in the health vertical makes iVillage not only more relevant to our users who are looking for current health information, but also makes us more relevant to key pharmaceutical and wellness advertisers willing to pay a premium for our coveted audience. In addition to the augmented health content, our multimedia video team has been very successful in executing on our strategy to develop and distribute original video features. As we have noted in the past, Healthology is a leading distributor of health videos. In the third quarter we actively continued to increase our video production, creating 20 consumer and professional videos. Healthology continues to gain distribution on video sites earlier in the quarter. The Viacom Television Stations Group, which consists of 40 stations, announced it would be partnering with Healthology to provide our health content to Viacom TBS Station websites. This move shows exactly how in demand iVillage's health offering is. It also speaks volumes about our video and our multimedia capabilities. Also, during the quarter we completed five audio shows, two multimedia features, and six original videos. We have recently completed substantial work on a new online vignette series featuring TV veteran, Dr. Bob Berkowitz. The program features experts in psychology and other fields, all focused on explaining men to women. We continue to update and upgrade the video experience on iVillage. And we're just a few weeks away from the launch of a new in page video player, which is designed to make video more convenient to view, and which we expect to increase video usage on iVillage. Video is an extremely in demand medium and it sells at a premium. IVillage is at the forefront of this trend, and is focused on developing innovative content to suit video advertisers' needs. To further capitalize on this growing trend, we have created more visibility for video and multimedia on iVillage, through a new featured promo tout on iVillage's home page that features a daily video news story. Another third quarter development which we plan to leverage to further expand our brands' reach is the search agreement that iVillage announced with Yahoo!, effective September 1 of this year. We are pleased to partner with Yahoo!, and believe that working together we will further enhance and customize both our users' and our advertisers' experience. We are proud of our accomplishments during the third quarter, and believe that the Company is in an excellent position to finish 2005 on a strong note. We are already experiencing strong advertiser demand in the fourth quarter. And today we're maintaining our previous full year 2005 financial guidance on the EBITDA side. Thanks Dough. Today we reported third quarter 2005 revenue of $22.6 million, approximately a 35% increase when compared to revenue of $16.7 million in the same period one year ago. Third quarter of 2005 iVillage.com revenue was up approximately 80% on a year-over-year basis. More importantly, iVillage.com sponsorship and advertising revenue grew approximately 132% for that period. Adjusting for acquisitions, third quarter 2005 iVillage.com revenue was up approximately 26% on a year-over-year basis, and iVillage.com's sponsorship and advertising through an impressive 44% year-over-year. We feel this revenue growth translates into impressive EBITDA growth. Third quarter 2005 EBITDA of 4.2 million increased approximately 113% when compared to an EBITDA of $2 million for the third quarter of 2004. We reported third quarter 2005 net income of 2.2 million or $0.03 per share compared to net income of $1.1 million or $0.02 per share in the second quarter of 2004. We ended the third quarter of 2005 with $53.5 million in cash and cash equivalents. I would like to provide a brief update on the acquisitions we made during the first half of year. The addition of Healthology and Health Centers Online has made iVillage a leading provider of health information online. Healthology is a leading distributor of health video. And Health Centers Online provides diagnostic information regarding every day health issues. We're realizing the financial benefits of being a key space for lucrative pharmaceutical companies to advertise. Integration is progressing smoothly. And one recent advancement is that the Health Centers Online sales responsibilities have been consolidated into iVillage, thereby streamlining one of our key business functions. Now I would like to go over the business outlook for 2005. For the fourth quarter of 2005 we're raising our revenue guidance, and currently expect to generate revenue between 26.1 million and $29.1 million. We anticipate reporting EBITDA between 11.1 million and $12.1 million for the fourth quarter of 2005. Additionally, we expect to report net income between 8.4 million and $9.4 million during the fourth quarter of 2005. We continue to believe that the Company is well positioned for growth, and expect iVillage to continue to benefit from our strong sales efforts, quality brand and acquisitions. Today we're raising our fiscal '05 business outlook. We currently anticipate reporting revenue for 2005 of between $87 million and $90 million, an increase of approximately 30 to 35% in revenue as compared to 2004. Our EBITDA outlook for 2005 remains 17 million to 18 million, an increase of about 119% as compared to 132% as compared to 2004. We also currently expect to deliver net income between 9 million and 10 million for the full year of 2005, more than triple that of 2004. Thanks Steve. The second half of 2005 started off on a strong note. And we're very proud of our results, which we believe demonstrate the success of our investments in iVillage. Our site redesign and acquisitions have enhanced our product offerings, positioning iVillage as a valuable online property, delivering high-quality content to its user base, women, while delivering a targeted and highly desirable audience to its advertisers. Furthermore, we continue to develop product offerings, in particular in the multimedia and video space, that advertisers are increasingly enthusiastic about. We remain focused on the drivers for growing traffic like search engine optimization, editorial enhancements, and original Mayfair Village video, all of which are poised to deliver enhanced value to our advertisers and incremental functionality to our users. We are pleased that our business is strong and keeps getting stronger. And that the product and the brand continue to play an important role in the Internet evolution for its users and advertisers, making iVillage "the Internet for women." 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_233994

At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation. Our speakers for this morning’s conference call are Gerald Rubin, Chairman, Chief Executive Officer and President; Christopher Carameros, Executive Vice President; Thomas Benson, Senior Vice President and Chief Financial Officer; and Robert Spear, Senior Vice President and Chief Information Officer. The agenda for this morning’s conference call is as follows. We’ll have a brief forward-looking statement review, followed by Mr. Rubin, who will discuss our third quarter earnings release and related results of operations for Helen of Troy, followed by a financial review of our income statement and balance sheet for the quarter by Tom Benson, our Chief Financial Officer. And finally, we’ll open it up for questions and answers in a session for those of you with any further questions. are based on management’s current expectation with respect to future events or financial performance. A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results. Generally the words “anticipates,” “believes,” “expects,” and other similar words identify forward-looking statements. The Company cautions listeners to not place undue reliance on forward- looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results. Factors that could cause actual results to differ from those anticipated are described in the Company’s Form 10-Q, filed with the Securities and Exchange Commission for the third quarter of fiscal year 2006, ended November 31, 2005. Before I turn the conference call over to our Chairman, Mr. Rubin, I would like to inform all the interested parties that a copy of today’s earnings release has been posted to our Web site at www.hotus.com. The release can be accessed by selecting the “Investor Relations” tab on the home page, and then the “News” tab. Helen of Troy today reported results for the third quarter and the nine months ending November 30th, 2005. Sales in the third quarter were $197 million versus sales of $205 million for the third quarter of the prior year, a decrease of four percent. Third quarter net earnings were $22, 666,000 or 72 cents per diluted share, from 31,135,000 or 97 cents per diluted share for the third quarter a year ago. Nine months sales increased 0.3 percent to 455 million from sales of 454 million in the previous year. Fiscal year-to-date net earnings were 42,666,000 or $1.34 per diluted share, versus 64,466,000 or $1.98 per diluted share for the comparable period last fiscal year. While we have seen some improvement in personal care sales over the last quarter, it is still less of an improvement than we had hoped to see. Net sales in our housewares segment have increased 20.7 percent and 25 percent over the same quarter and comparable year-to-date periods in the prior year, while net sales for our personal care segment decreased 8.3 percent and 9.6 percent over the same quarter and year-to-date periods of the prior year. It’s interesting to note that in the second quarter personal care was down 14.8 percent, but for the third quarter it only decreased 8.3 percent. increase in selling, general, and administrative expenses for the quarter and year-to-date reduced our operating results compared to the previous year. A number of the same economic factors we experienced last quarter continue to impact our business today. We currently believe that these factors may continue to impact fourth quarter results as well. range of 120 to $130 million, compared to last year’s fourth quarter sales of $127.6 million. Earnings per share for the fourth quarter are currently expected to be in the range of 15 to 25 cents per diluted share, versus the prior year’s fourth quarter earnings from continuing operations of 37 cents per diluted share. 575 to $585 million, with earnings per share from continuing operations for the current fiscal year anticipated to be in the range of $1.49 to $1.59, versus our previous guidance of $1.80 to $1.90 per diluted share. in SG&A expenses, primarily in warehouse, distribution, and freight expenses, and an increase in product placements with retailers, and should therefore see a more positive year-over-year comparison of operating results. for the third quarter. Third quarter net sales decreased four percent year-over-year. Net sales in the third quarter of fiscal 2006 were 197.5 million, compared to 205.7 million in the prior year quarter. This represents a decrease of $8.2 million, or four percent. I will discuss the reasons for the sales decrease under our segment “Net Sales Information.” in the third quarter of fiscal 2006 was 28.6 million, which is 14.5 percent of sales, compared to 42.8 million, or 20.8 percent of sales in the prior year quarter. This represents a decrease of $14.2 million, or a 33.1 percent decrease. It’s also a 6.3 percentage point decrease year-over- year. the third quarter in fiscal 2006 was 22.7 million, 11.5 percent of sales, compared to 31.1 million, 15.1 percent of sales in the prior year quarter. This is a decrease of $8.5 million, 27.2 percent. $8.2 million that had an impact of 3.9 million. There was an increase of cost of goods sold of 4.4 percent, and a reduction in net selling prices, which had a negative impact of 8.7 million. SG&A expenses increased, which had an impact of 1.6 million. We had an increase in interest expense, which had an impact of 1.2 million. We had a reduction in other expenses, which was a benefit of 1.7 million. And we had a decrease in taxes and tax rates of 5.2 million benefit. In total those are 8.5 million. OXO is a leader in providing innovative consumer product tools in a variety of areas, including kitchen, cleaning, barbecue, barware, garden, automotive, hardware, storage, and organization. Brands that we sell include OXO Good Grips, OXO Steel, and OXO SoftWorks. This business will be referred to as our housewares segment. Appliances – products in this group include curling irons, thermal brushes, hair straighteners, hair dryers, massagers, spa products, foot baths, and electric clippers and trimmers. Key brands in appliance include Revlon, Sunbeam, Health-o-Meter, Vidal Sassoon, Hot Tools, Wigo, and Dr. Scholl’s. the following brands, Brut, Sea Breeze, Skin Milk, Vitalis, Ammens, Condition 3-in-1, Final Net and Vitapointe. Brushes, combs, and accessories are also included in the personal care segment. Key brands in the product category include Revlon, Vidal Sassoon and Karina. compared to 175.5 million in the prior year quarter. This is a decrease of 14.5 million, or 8.3 percent. Net sales decreases are a result of pressures to lower prices, additional costs associated with trade programs, selected loss of product placement, and a weaker market, especially in our European operations. While we are disappointed in an 8.3 percent decrease in net sales, this represents an improvement in the 14.8 percent decrease we experienced in the second fiscal quarter. million in the prior year quarter. This represents an increase of 6.3 million, or 20.7 percent. Sales increases have been primarily driven by continued new product introductions with existing customers, and the addition of a new hand tool line, which had significant initial shipments in the quarter. 98.6 million in the prior year quarter, which represented 48 percent of net sales. This is a decrease of $12.6 million, or 12.8 percent. The decrease in gross profit percent of 4.4 percentage points is primarily due to a combination of higher cost of customer promotional programs, and a reduction in selling prices on certain items. We have also experienced some product price increases. sales. The SG&A was $57.4 million for the third fiscal – for the third quarter of fiscal 2006, which is 29.1 percent of net sales, compared to 55.8 million, or 27.1 percent of net sales in the prior year quarter. This represents an increase of 1.6 million, or two percentage points. Advertising increased 1.2 million. The impact of exchange rates was 1.7 million. Personnel costs increased $1 million. And we had a decrease in incentive compensation of 5.1 million. That’s what makes up the $1.6 million increase in SG&A. handling costs are up due to more utilization of outside warehouses, higher inventory levels, and higher transition fees for the – for the housewares business. Depreciation is up due to capital expenditures during the year. Exchange rate is mostly due to falling British pound and Euro exchange rate versus the U.S. dollar this year, and the opposite last year. Personnel costs are up – are up due to additional personnel to handle the housewares business. Incentive compensation is down due to lower net earnings. debt, and higher revolving debt due to 39.1 million of capital expenditures during the quarter, mostly due to the purchase and equipment for our new 1.2 million square foot warehouse in Southaven, Mississippi. taxes, compared to 6.3 million, or 16.7 percent of income before taxes in the prior year quarter. The effective tax rate is down 12.1 percentage points compared to the prior year due to the movement of Hong Kong activities to Macau, which is a jurisdiction in which we are tax exempt, lower taxable income in the United States, and tax losses in European countries, both of which are high tax rate jurisdictions. credit in place, of which we borrowed $60 million, leaving us with 15 million of available borrowings under this credit facility at November 30th, 2005. We anticipate our revolver balance to be paid down significantly by the fiscal year end as a result of the normal seasonal reduction in accounts receivable and inventory during the current quarter, and the anticipated sale of our old 619,000 square foot warehouse in Mississippi. accounts receivable days outstanding increased to 85.7 days at November 30th, 2005, compared to 73.6 days at November 30th, 2004. On a current sales basis, accounts receivable days outstanding are 74 days, compared to 77 days a year ago, an improvement of three days. from a year over increase of 60.4 million at August 31st, 2005. Inventories are up due to new product introductions, and to buffer against disruptions that could occur during the fourth fiscal quarter as we relocate certain inventories in connection with the consolidation of our warehouse operations into our new Southaven, Mississippi distribution facility. We also increased inventory purchases to delay the impact of possible future price increases. equipment in our Southaven, Mississippi distribution facility in August 2005, we entered into a loan agreement with the Mississippi Business Finance Corporation for up to 15 million of bonds. We borrowed five million of these funds over the last quarter, and anticipate additional draws over the next six months. Thank you. The question and answer session will begin now. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, press star one on your touch-tone telephone. Should you wish to withdraw your question, please press star two. Your question will be taken in the order it is received. Please stand by for your first question. Good morning. First of all, can you break out the components of the gross margin decline? I think you mentioned it was negative pricing and increased promotions. Can you give us a split between the two of those, even if it’s just a rough magnitude? OK, but is it the majority of it pricing pressure on your products? Or because it seems that since you outsource the majority of your manufacturing from overseas that you’re not going to have as much of a raw material cost impact, even though I think you mentioned that that was slight. So, I’m just trying to gauge a sense on your – on your top line, and if the pricing pressures are more on the personal care appliances, or if they’re on your like Brut and Sea Breeze, your Idelle Labs’ brands? The decrease in the gross profit percent is more driven by top line impact on the net sales. And that’s made up of a combination of, you know, it could be pricing pressures, where customers are asking for lower prices, but there’s also a whole array of different trade programs that go into net sales that have the same overall impact in the financials as price decreases. So, it could be, you know, increases in trade allowances they want. It could be direct price decreases. We have had some increase in the cost of our materials. There hasn’t been significant increases, or very much increases on the products that we are bringing out of Asia. We do manufacture through third parties some of our products in the United States. And there has been price pressures on the price of plastics and alcohol in that business. This is Chris Carameros. Just in the case of the Idelle pieces we’ve had increases in the – in the – in our costs, but we’re also having some price – actually raising some prices on some specific SKUs going into February of this next year, so. OK. Second of all, I think you mentioned that on your personal care helping – or I guess relating to the eight percent decline in sales, that there was some lost distribution. Can you elaborate a little bit further on that? And if it was on the professional side, or if it was on, I guess, just the base hair care appliance business? This is Chris Carameros. To comment on that, on the appliance side, as we’ve said before, we had some decreases in some overall sales. But on the professional side, we did have some decreases in some distribution pieces, as we’ve commented before. But introduce some new lines and new product to take up some of that decrease, where some higher price point items and SKUs have kind of displaced some of our other items we had within the professional appliance line. OK. And just with that, that was, I think, something you mentioned on your last call, that you had a new line of Vidal Sassoon studio tools, which I believe is not professional. I think that’s just regular consumer. Did that ship out on time? I think that was supposed to ship at the end of your third quarter, and to help your fourth quarter results. OK. And lastly, can you just let us know what the – your new interest rate on your floating rate debt – I think it reset at the end of December? Good morning gentlemen. With regards to the new hand tools business, I think it’s been on Lowe’s store shelves for a little over a month now. Could you just share with us what you think retail uptake has been of that and consumer acceptance? Got some great consumer acceptance of the – of the new tools. And Lowe’s is pleased with it, and we’re pleased with it also. OK. And also just a sort of bigger picture question. Jerry, I think you attributed some economic indicators that you continue to see, you know, are adversely impacting you. But we’ve seen actually consumer confidence pick up and oil prices come down a little. Can you maybe just share with us what specifically you’re referring to for economic indicators? Well, many of our retailers are resetting in the – in our first quarter fiscal year next year, and that’s when we believe that comparisons will be positive as we get more SKUs on the shelf. Well, at the present time, but we will have more placement come the – come our first quarter of next year. I think you can take a look at also, look at the European market, at least in the appliances, European market has been down overall, so there’s a little bit more macro effect at that particular piece of the business. But in the U.S., as Jerry said, we should have some better business as we have better SKU placement. We basically had a 12 percent tax guidance going forward, and we still maintain that. Depends on where it is on quarter-to-quarter, and you try to true that up towards the year end. But still – we’re still forecasting a 12 percent tax rate. OK. So, the first of the three tax factors that you mentioned was the, you know, from Hong Kong to Macau, that’s reflected in the 12 percent. And then the rest would have to do with the mix of sales in different jurisdictions? It’s more complicated than that, but to answer your question, yes. But as you make money in different jurisdictions around the world, it depends on where you make it, and how you do it, and where you’re accruing for it. So, it would drive the tax rates up or down where you’re making it. But at this point in time we believe 12 percent should be an adequate amount. OK, great. And just the other question is in housewares, which it’s nice to see your good results there, I mean you had good sales but you had some gross margin compression. So, could you give a little more color on that? You know, I heard what you said in the description, but in other words, if sales are strong, then normally that wouldn’t cause gross margin compressions. But it looks like you had some promotional activity and so forth, so could you just tell us what should gross margins be up in the coming quarters in housewares, or? This is Tom Benson. We do not disclose our gross profit between the personal care and housewares segment specifically. And when you look at the Q you can see operating income by segment, and we also in the Q explain that currently we are not allocating some of our overhead cost to the housewares segment until we fully integrate it into our business. So, when you look at the operating income you need to make sure you keep that into – keep that in mind. OK, so if it’s not a perfect number. But, I mean, operationally are gross margin trends, you know, a good deal more solid in that – in the OXO area, let’s say, than in the … Yeah, in the OXO area we have good sales and good margins, and we have a good trend. So, I think that we’re very pleased with the way the sales are going, and where our costs are lining up. Yeah, could you give some comments on competition and market share in some of your core appliance areas? And also you mentioned competing for some additional shelf space or increasing your shelf space. If you could give some color on where that is? Well, as far as market share, you know, it’s hard to measure because we have the same SKUs on the shelves that we had the first and second quarter. But, you know, we believe that talking to the retailers that we have not lost any market share. That the – that there is a slight decrease in the amount of appliances – it’s actually not the amount of appliances sold – I think it’s just the prices that they’re sold at. We’re very hopeful with the new planograms that are coming up that will start in the first quarter of our fiscal year, we’re going to have more placement and they’ll be higher price points, and so we believe that there’ll be increases there. Plus in the professional business by the second quarter, we’ll have our new line of high end professional personal care products that’ll compete against others with a high price. It just seems that the market in professional has gone the reverse of retail. That the price points that we need to be in are higher price points, much higher price points, than we currently are. And that’s what this new line is going to be. And we have approximately 23 new products that we’re introducing that should be a success for us. All right. And then you had mentioned in your press release about increasing shelf space. Is there any additional color we should get on that? Well, as I mentioned we will have additional SKUs at major retailers starting with our second quarter – our first quarter coming up, fiscal year. Comment on the sales of your hair and beauty care products within the professional beauty salon channel? And I know you were talking about some lost distribution, but is there anything else you’re seeing in that channel at all? Well, in the professional business, as I mentioned, we’re coming out with our new line of professional tools at high – at very high price points – that we’re all excited about. And we’ve shown it to our customers, and we believe that we’ll have increases in that division, starting with our first quarter of fiscal 2007. Thank you. And at this time if you do have a question, and it is the star one on your touch-tone telephone. And our next question comes from Stephen O’Brien with Wellington Management. Yes. Could you give us some idea of the sales comparisons in the – in the appliance, and the grooming, and the accessory areas? Christopher Carameros Yeah, this is Chris Carameros. Just take a look at the Q this afternoon when you file it, and it’ll be all in there. Stephen O’Brien OK. You mentioned we’ll get eight to $10 million of savings next fiscal year. Is that going to come through kind of evenly throughout the quarters, or is it … Well, we anticipate it should come through the – throughout the year, but obviously we are starting to fully shift out of that distribution facility in March the first of next year. We’ll have some additional cost in the first two or three months, or first quarter, and as we begin to get more efficient the cost should come down. OK. And in inventory turns, can we see those go back to where they had been, we’ll say, in the previous fiscal year? You know, we’re focused on inventory levels, and inventory turns, and where appropriate we’ll bring the inventories down in a variety of different areas. And again, we’ve focused on that as we transition our warehouse. We had a little bit excess inventories in both warehouses at this point in time, but it should transition and be appropriate amounts at that point in time. Yes. And I think, as Tom mentioned, if you heard his last comment, the last 30 days you show a positive trend on days in receivables. Oh hi, thanks. I just had a follow-up question. Actually, just in your press release when you talk about the Tactica bankruptcy, it appears that it’s going to finally get settled. And I wondered just when I read what you put in the press release, I think at the time from some of the papers that you filed over this summer that you were actually looking to receive – you had a $3.5 million claim yourselves, and I guess if you – my understanding of reading your press release, you have a – are booking a $1.8 million liability. Does that mean now that what you’re going to receive is zero? No. We’re going to receive less out of our claim. And so when you say we’re booking a liability, we had recorded some of that claim in our net difference in the OXO – I mean, excuse me – in the Tactica transaction. We’re just receiving less of our claim. No, we’re not having to pay out. All that – all the – all the refund is in escrow right now, so it’s going to be – we’re going to receive less than we originally anticipated. And those are the net numbers we disclosed. This is Tom Benson. All of the claim that we filed we did not have – we had some reserves set up against that on our books originally. So, it was not all set up as a receivable. We’re actually not going to pay any cash out. We’re going to receive less cash out of this than we anticipated if everything gets approved. OK. So, you don’t – you’re not paying any cash out, you’re just going to receive less than what you had previously thought? OK. And finally, is there a large industry trade show that goes on sometime soon that you premier some of your new products at? Well, there’s several. There’s the “International Housewares Show,” which is in Chicago in March. For retail there’s a European show, “COSMOPROF” in Bologna, Italy, that we also show in. And there is the professional “COSMOPROF” show in the United States in July in Las Vegas. OK, great. And then you all had historically given some guidance on cap ex and cash flow from ops and EBITDA for fiscal ’06. Could you update that? Right. I mean, last time we gave out that information we had to file the – some filings after the conference call. So, we’re trying to be careful and not give out information you can’t really find in our public filings already. Justin Boisseau Could you go through the income statement? I assume you would say that there’s a three cent hit on this Tactica bankruptcy. Go through the cost of goods and SG&A and tell us what numbers are in what, so we can try to get to a pure number? And then I’m – Chris is – I know Chris is a lot smarter than me, but I’m looking at a million-eight as liability payable, but seems to me sooner or later we pay somebody something, don’t we? It’s real easy. All you got to do is a take a look at the net difference, and Tactica it’s three cents, and I can walk you through the details later if you want me to do that. But basically it’s a net hit of three cents on Tactica after you – after you do the effects. This is Tom Benson. The legal fees that we disclosed in the press release are in SG&A. The other things are down in other income, and those are – will be fully explained in the Q when it comes out. Thank you. And as a final reminder, it is star one on your touch-tone telephone. And if you do find that your question has been answered, you may release yourself from the queue with star two. Our next question comes from Ivan Sacks with Institutional Equities. Ivan Sacks Good morning. Tough quarter, but respect your answers. I’d like to please get a historical perspective just in terms of valuation on the Company right now, and if you are still doing a stock purchase buyback, if you could please speak to those points? Thanks. Well, stock purchase is something that the board considers at every board meeting. As you know, we have authorization to buy up to three million shares. I think we’ve purchased already 1.6, so we have 1.4 million. When that’s going to happen, I can’t tell you, but we do have authority to buy 1.4 million more shares. And your other question was about valuation – of what, I was going to ask you? Ivan Sacks: Yeah, just if you can just give like a historical perspective. I mean, obviously you’ve got a long range of how long the Company’s been going for relative to the way it’s been before, if you could just speak to that Jerry. Well, you know – you know – one of the things that you see that, you know, we have shareholder equity of $469 million. And with profits next year, we should be certainly well over $500 million in shareholder equity, which I believe if you look at the valuation, I think that’s – that the shareholder equity is probably equal or better than what the price of the shares are today. Just based on the shareholder equity. Ivan Sacks: Good. And then in terms of like to like, when you look at the comparative (niche) of – I mean you got 27 products, or 24 products, I think the last quarter you had 27 products coming up in the professional side. I mean, obviously that was compared to 40. Do you see yourself getting ahead again, or just, I mean how are you guys feeling about business, just going forward? Well, we’re very positive. I mean, we all believe that in almost all our divisions that every division should show increases next year, is what we’re looking forward to. Based on the new products that we have, increased distribution, more SKUs. That’s the way we’re looking at the business that every division should be positive next year. Yeah, I just wanted to get a clarification on the new distribution center. Are you currently shipping from both centers, or are you, you know, and when are you going to throw the switch, and when do you think the transition is complete? This is Tom Benson. The answer is, it’s really – there’s kind of a three-phased approach to the transition. The first phase we have completed, and just started shipping out of it last week. The second phase is going to – we’re anticipating completing in mid-February. And the third phase we’re anticipating completing in mid-March. So, it will not be fully operational until around the end of March. That’s correct. We have to dispose of our old facility that we anticipate disposing of shortly. We will probably lease it for a period of time. So, I don’t want to say at the end of March all expenses are going to be totally completed. It might take a short period of time after that. Well, it’s like we said in the press release, we should be there in May, and we should have elimination of the dual warehouse by May. OK, great. And then can you give any color on the acquisition environment right now for products? It seems like there’s a lot of talk in the market about some fairly well known brands that are coming up, and just any color on that, if you could? Christopher Carameros This is Chris Carameros. We always take a look at a lot of the, I guess, opportunities out there. Some of them are fairly well priced, but there may be select opportunities, just like when we bought the Brut brand, it was offered in a whole portfolio of assets that Unilever had for sale. But we really focused on that one asset, which was the Brut brand, and just purchased that one asset even though there was seven or eight other assets being sold. During this current review we’ll focus on that same kind of opportunity. If we see some assets being up for sale, which there are right now, that we can take a look at, we’re going to look at them, and look and see if we can acquire those assets. Jim Larkins You know, I think it’s both, because it seems like it used to be private equity money had some kind of limitation on overall multiple of EBITDA, but they almost seem to be paying more because lots of money out there, and I think sometimes the industry people, if you take a look at guys like Chatham, they’ve said that lots of brands are out there that are overvalued. The industry guys may know a little bit better than maybe the equity funds. But I don’t know – time will tell. Yeah. A big picture question on that is that if you look at – if we kind of assume maybe that over the past 15 years or more that riding Wal-Mart has been, you know, a great benefit to guys like Helen of Troy that have been able to execute and supply the fast-growing retailers like Wal- Mart or Target, and so forth. It seems like there’s a slowdown now in that trend, and, you know, is there increased competition and just rivalry among competitors, given that maybe the overall growth rate of kind of the Wal-Mart train is slowing down? Can you comment on that? Christopher Carameros You know, my opinion is there’s always lots of competition out there among a variety of retailers that we sell around the world. And it seems that over the last six months there’s been a, you know, lots of issues about this and that about Wal-Mart, but it’s a great customer, and we enjoy our relationship with the customer, and look forward to growing with Wal- Mart. You know, as we’ve reported in the past, our sales with Wal-Mart, our percentage, probably will be no different this year. Wal-Mart’s about 20 percent of our corporate business, so. And that’s been pretty steady over the last few years. You know, the question is, overall retail, you know, is it slowing down? And I really don’t – can’t comment on that. But we sell to a variety of customers around the world, like I said, and look to increase our sales for next year. Thank you. And we have next question from Mimi Sokolowski from Sidoti and Company. Mimi Sokolowski: I’m sorry. I tried to withdraw my question. It’s already have been answered. But thank you. Thank you very much. I just wanted to get back to the share repurchase question that was asked a little while ago. Correct me if I’m wrong, but originally when that three million share authorization was established, I recall a deadline of May 31, ’06, as the timeframe for repurchasing the shares. And I’m under the impression you haven’t really purchased any shares since you filed your last K in the middle of ’05. So, I’m just kind of curious, was the original intent to repurchase all these shares by May 31, ’06? If that was, when did that change, and I’m just kind of curious – I realize there’s a lot of need for cash elsewhere right now in inventory with the warehouse move, but if you were buying these 1.7 million shares in the last two years at much higher prices, given your comments about shareholders’ equity and stock price, why wouldn’t you be buying the stock more aggressively here? You know, these are certainly board decisions. Let me – let me clarify it. When we first put the program in, it was for three years, and yes, it does expire May 31st, 2006. But that’s not to say that it can be – it can certainly be extended by the board, or a new program could come up. And as far as the repurchase, I know everybody says, you know, why wouldn’t you? But we look at the opportunities. Are the opportunities better in an acquisition, or are they better to use the money for a buy back of stock, and that’s an ongoing discussion. And, you know, there are times when it’s better to buy the stock back, and there are times when it’s better to do acquisitions. So, there’s – the Company doesn’t have a set formula that – only to buy stock back and not acquisitions, or just buy acquisitions and not stock back. So, it just depends on the time, and what’s going on in the marketplace. Plus we’re working down our debt. We’d like to work our debt down, although we do have bank availability. But, there’s, as we talked in the previous question about new acquisitions, and there are opportunities out there that we’re looking at. So, either we’ll do one or the other. This is Chris Carameros. You know, our priority has been we did an acquisition, as we said, of OXO. Spent $217 million on that. Our priority has been to make that acquisition successful, which I think we’ve done so far. To get our costs down by doing the new DC, we made an investment in that. And as we digest those particular two pieces, the new DC and the acquisition, we’ll look at other acquisitions or the opportunity to buy our stock back at that point in time. And we do it judiciously and once a quarter we look at those opportunities. So, answer your question why? We’re going to look at those opportunities and see if it makes sense for us as a board and as a company. Jeff Kauffman OK. Your point is capital, it’s just better to put it elsewhere right now, despite the fact the stock is as cheap as it is? Let’s put it this way – the last year and a half, we deployed capital, as I’ve said, for an acquisition. We’ve done some new warehouse and distribution facilities to get our costs down. And we’ll generate some cash flows next year, and we’ll analyze whether we want to – what we do with our cash – pay our debt down, buy our stock back, or do some acquisitions. We always – we always analyze that at every board meeting. OK. Yes. Well, thank you everybody for being part of our third quarter conference call. And we look forward to our year-end results that’ll be in early May. Thank you all again. Thank you, ladies and gentlemen. If you do wish to access a replay for this call, you may do so by dialing 888-203-1112. Again, the number is 888-203-1112, with a replay passcode of 8142082. This does conclude our conference call for today. Thank you all for participating. And have a nice day. All parties may disconnect now.

EarningCall_233995

The latest in our selection of full conference call transcripts: the entire text of the Q&A from Monster’s (ticker: MNST) Q3 2005 conference call. This is part 2 of the 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. Ladies and gentleman if you like to register your question please press the “1” followed by “4” on your telephone. You will hear a three prompt to acknowledge your request. Your question has been answered then you would like to withdraw your registration please press “1 “followed by “3”. If you using speakerphone please lift your handset before entering your request. One moment please for the first question. Our first question comes from line of Christa Quarles from Thomas Weisel Partners, please go ahead. Hi I have couple of questions. First there has been some set of noise around some of the competitor pressure is driving Monster, I was wondering obviously it is competed with Yahoo, HotJobs for many years, and Korea built it as well as credit first. I was wondering if you could highlight, you do survey your employers the reasons why are they continue to choose you or not choose, as you have lost RSPs, and then the second I was wondering if you could highlight the growth in difference by US versus international and third I know its probably a little early for 2006 guidance but I was wondering if you could highlight this from a cost standpoint, do you feel like the sales force for example in Europe fairly well built out at this point and it is now about harvesting those people? Okay this is Steve, I would like to answer the first question, why the customers choose Monster. We believe that we are gaining market share in Monster North America against both our online and our offline competitors. We do very exhaustive surveys twice the year of over 10,000 customers, to measure customer satisfaction and loyalty. In the seven categories in which we survey our customers including our sales people, our communications customer service, our product, our technology or the website as well as financial billing and payment options, we come out number one in each and everyone of those respective areas. So customers truly have a very satisfied experience with Monster but the bottom line is why we continue to have very high renewal rates is that we simply derive results. The employers measure results based on time cost and quality and when it comes to shorting their hiring cycle, lower their cost per hire and finding quality candidates in what continues to be a skill shortage labor market economy, Monster comes in number one. Before Lanny answers the differed question let me talk to you about the European sales environment, we continue to believe that we need to invest in European sales results in strategic exercise right now, we make sure that we have the right sales people in the right segment in the right countries, we are doing a very good job in Europe, in ramping up our sales people and I think that we will make some pragmatic investments as we a large opportunity to scale in Europe and built up that sales force. On the differed revenue question, if you look at it sequentially, the sequential increase was balanced about evenly between North America and Overseas. May be a little bit more of it in the US, and when we look at it on a year-over-year basis, the faster growth rate that you see in revenue overseas are also there within differed revenue. We will leave it at that. So I guess, just solidify maybe Steve’s comments, do you expect margin improvements in Europe next year from the current level? Yes. When it comes Europe, it’s imperative in this stage as European adoption curves investing role, so in 2005 we made heavy investments in sales and marketing and going forward we think it’s finally time based portfolio approach is best in European markets or customer segments and infrastructure. And at the same time we are doing that taking a close look at the cost structure and the financial benefits of centralization and regionalisation while the 2005 investments really start to payoff. So we wont’ increase margins in Europe but we will do so without letting our abilities to grow and take advantage of the sizable opportunity that’s represented there. Lanny, you mentioned that I think referring to North America Monster that e-commerce was now high teens percent of revenue so I am just wondering if you can sort of flesh out what the other percentages are for resume, job listings, etc., and then can you just update us on sort of how you are allocating the marketing spend clearly you are getting more out of that, it’s not growing as fast as it has in the past. What can you update us on the breakdown on where the spending is going in terms of traditional media versus e-commerce? Thanks The mix of the business really hasn’t changed from what is has been from the last 6,7,8 quarters, 53% of the revenue came from postings just under 38% or so came from resumes and the rest came from other sources. The e-com business historically has been almost entirely postings revenue, but as I said as we’ve changed our product and we marketed it a little bit differently we are excited that we finally able to sell things other than just single job postings, selling bundles, and actually sell some resumes, so e-com is a kind of split between the those buckets, we are not going to quantify how much is in each bucket, but it has proponently leaned toward the postings and as you said correctly it’s percentage of the business. Your question on marketing, I think related to the efficiency and productivity and how we think about what we are spending and the returns. Yes, over the last year marketing has been an area tremendous leverage for us. We have moved beyond the ages ago portals and Super Bowl advertising, to being much more targeted and measuring much more carefully with specific goals for every dollar that spends in terms of whether it is brand awareness, on the one side and offline media or it’s attracting customers and resumes in online media. As we look forward we talked about we are spending year-over -year the increase in Europe was over 100% and we are going to spend more on marketing everywhere. I think the right way to look at it is as we lower our expenses elsewhere, become more efficient in areas like sales and productivity and fixed cost, it frees up more money to put back in the machine and drive the growth of the business. Did that give a good picture on marketing? Yes that’s fine thanks a lot. I just a followup for Steve, what of the competitors in Europe are they sort of mix of traditional print newspaper and online, It’s a very fragmented market, very tough to get scale in any particular geography, its that a route in terms of a joint venture alliance or partnership you may explore in the future or you likely to just go alone or remains to be seen. I think if you look at Germany for instance Doug, that’s a highly fragmented market and we have been able to grow the business at significant levels, so this is the conclusion we’ve reached is the best thing to do is to go is to go there alone to invest in our brands, to drive more seekers to our sites because that is ultimately what makes the difference and then leverage the scalability of the model. Now it wouldn’t ruin anything out, but in the future plans it is focused on becoming number one in every market and growing organically. A couple of questions, it seems like you hired 83 people in Q3, I was wondering if you could comment which part of business you hired them and secondly if you could talk a little about how should we think about hiring going forward, then in terms of international could you give us update like how many international sales rep you have and how the productivity in the international market compares with the U.S. Sales reps market. Sure with regard to headcount, the headcount updated in the quarter was about 4600 people, you are right, with an increase of 83 between June and September. On sequential basis worth about 2% in North America and 1% overseas, but in the Monster Division headcount grew about 5% from June to September, the U.S was up about 4% sequentially, we are adding some staff in our new center at Arizona. Head count in Europe was about 5% sequentially, so I think what you see when you see certainly look at those numbers there has been pretty consistent, steady incremental growth quarter over quarter up around the world at this point. So for the sales and productivity, today we’ve got a sales force in Europe that is not quite as big as the U.S. sales force but its pretty close it’s within 10% in parts of the U.S. sales force. You can certainly look at the revenue numbers generated by Monster North American, Monster Europe, gives us a great opportunity on sale and productivity which I’ll let Steve talk about it a little more detail. Our focus right now is on Market coverage and segmentation, as I said early getting right people in the right markets in the right channels. In terms of top line productivity, we are finding that, people in Europe, people in India, and people in China will have the same levels of talk time, standards performance, but what we are trying to do is increase sales optimization which is really what drives margin in our business. So we are pleased with the progress that we’ve had, with regard in overseas sales operations, there are comparable basis to where we were in earlier point in time in the United states when we had some room to grow that, you will see in the next year. Lanny, one last question, with regards to your e-commerce product that is growing very significantly. Could you give us some color how the margin structure is different than your traditional Monster business versus your e-commerce business, we think that e-commerce’s higher margins so can you give us some more color how better the margins are for e-commerce business? Sure. It’s a little bit difficult to untangle various sales channel but at the top level the e-commerce business is definitely, we’ve said before many times, it’s our most efficient sales channel Its doesn’t have nearly the number of sales people headcount be it on the street, behind it, but on other hand it’s a business that is very clearly driven by marketing, so may be it has relatively a little bit more marketing drive in that business than sort of the average of the rest of the businesses. From an overall standpoint its clearly more productive that its been one of the factors that has helped Monster’s incremental profitability and its overall level of profitability this year and that’s why we were continuing to push on it. I think we will leave it at that. Hi guys, just trying to get a sense for what might be left on the acquisition front from a geographic standpoint, I think on last quarter’s call you had mentioned Korea, Japan and Russia but I didn’t know if that was still the case or there are other areas that we should be looking toward in the future? Yeah it can be. As I’ve said couple of times, we unfortunately seem to be running out of countries, Japan is so fragmented that it is really not even on the even on the radar list at this point, Russia yeah, but nothing now may be something Monster like in the future, so you look, we are not in South America and not in Africa, the answer is we are not. At this point we don’t have any plans to go to either of those continents. So I only repeat myself, we kind of run out a countries, we are looking at a way to get into countries like Brazil on a very modest basis and we will talk about that probably more next year, but right now we really don’t have a sites on anything particularly other than may be something here and something there in Europe. So that’s where stand in acquisitions. So it’s the strategy at this point than its kind of build your footprints organically from what you have in place already or the other TAC on acquisition opportunities that your are assessing even within the markets that you already have a presence? Its much more the former than the later, there are an actual infact very few internet career websites that buy and eat, even if we get buy whatever we wanted to buy, so its not going to be much a TAC on and you are correct, most of the footprint would be organic. Okay, and then touching quickly on the AdComs business you talked about the lower expenses generally in the quarter but wondering if you could break that into what buckets you saw particular little lower expenses and how sustainable that is going forward? Before Lanny talks about talks about the numbers,. I believe its extremely sustainable, I think we are going improve on the results in AdComs both in North America and in Europe. We processing re-engineering, restructuring and technology, we believe we have a very had a efficient operation and the management team in North America has come up with new ways to make that even more efficient, so I think not only it is sustainable we will improve the numbers going into 2006, Lanny will talk to you about the numbers specifically. Sure there are a couple of things at play, remember there isn’t really any marketing dollars that consequence in there so the question on cost that comes down to people and state, we’ve done something over the course of last year on facility side but we also restructured the way the business is organized from personal standpoint. Moving from a geography a very desperate field officers to cut in more of a hub and spoke model as more production is done in big production centers rather an out in the field, we’ve been carrying some of the cost of that restructuring over the last 9 to12 months and I think now you’re starting to see those sort of one time cost at the rate side going down as well getting into benefit of the work that we have done. Hi Good morning congratulations on the results, two questions one for Steve and one for Lanny. Steve last quarter you mentioned a product level enquiry that you had received from Google, where did that go, and what is your view of the report yesterday regarding the potential Google base offering. And then Lanny just in light of Andy’s comments just now lack of countries to acquire into. Could you just give an update on the companies use of cash uses in the light of the building cash balance. Thanks. From a Google standpoint, first newspaper helpline, in the US is still a $5 billion market. So more players use the internet for their recruiting needs, Monster and industry we created will win. We believe that we provide a better more focused experience for jobseekers and a stronger value propositions in terms of time cost and quality and the tools we provide for employers. It is important that you understand that 75% of our traffic comes directly to Monster.com. That really to my mind reflects our brand resonance and the quality jobs that we provide and the trusted environment we have and that will prevail. If you look at our traffic just below the numbers, 55% of our traffic is looking at jobs, meaning that 45% of the traffic is looking at content, they are researching companies and they are managing the MyMonster accounts for their resumes non of which aggregators offer. Couple of other points, we focus on HR that is the only thing we do, we are 90+ brand awareness with both employers and consumers. The market is not fragment in the United States, it’s very easy for a job seeker to go to several sites and find hundreds and thousands of jobs and whereas the strength of the sales forces and the relationships we’ve built over the past ten years is over a 100s or 1000s of companies are going to be very difficult to replicate. Now you question on the balance sheet gets to very hard why we focus on free cash, these are dollars that gives Monster and increasingly strong balance sheet and then strategically flexibility and the luxury to contemplate financial questions that would range from doing like things we done Korea to other users of cash. As we think about balance sheet, we consider it not only in terms of absolutely dollars which is $300 million in net cash, we are starting to feel pretty substantial, we are also thinking in relative terms compared to some of our peers and potential competitors, our cash balances are not as big in absolutely terms, but also in relation to our annual revenues our cash flow we don’t’ get to have quite the big GAAP cash reserves but some of the other companies do. So that’s all not come in direction or another, rather it’s trying to provide some background on our thinking and when we have something new to report and update for some of the uses of cash, we will be quick to update you. We do have time for one more question, and it is from the line of Jim Juneski from Ryan Bank, please go ahead. Yes. Good morning. When you look at the front end loading or the smoothing of the expenses, that you talked about Lanny, do you expect that to continue into 2006? I think, in the past we have spent a lot of money early in the year because it’s typically when jobseekers are out, and employees are out really aggressively looking higher indeed. As we come into the finish of this year, we’ve really momentum and profitability, as Monster North America that is really exceed as I said our expectations a little bit. It’s given us an opportunity to reinvest into the business so the outcome of that is the picture looks a little bit steadier this year seasonally or start to finish than it has in the prior years. And I thought some thing we would very much like to do, in the future, thinking about it on a very continual basis, rather than a quarter to quarter or half –half kind of model. And last year, in the third quarter, the differed revenues were up sequentially somewhere around 9% to 10%, this year they were roughly flat, is there any trends as either early or late in the quarter that would help justify the difference year over year? In the differed revenue there are couple of things going on, the e-commerce doesn’t appear to be a little bit bigger portion of the sale of the company, move those sales flow immediately into revenue, that is a very small effect but it’s something that I think will be important over time. Secondly there is little bit of lumpiness from year to year, quarter to quarter perspective in terms when contracts get signed, but I don’t think there is another major difference in what you are seeing differed revenue pattern this year versus last year. We are heading into the big seasonal sales quarter in the fourth quarter with the differed revenue balance is just 26% year over year. We are focused on sales force productivity and new products and marketing to continue to drive differed revenue, and profits down the road. So we feel pretty good about those numbers. This is Bob Johns, once again thank you for joining us this morning, we appreciate your participation and support. To listen to a replay of the conference call, please visit the investor relations section of Monster Worldwide.com or dial 800-633-8282. And the reservation number 212648923. Also please feel free to call me at anytime at 212-351-7032 or Lanny at 212-351-7005 for any further questions. 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_233996

The latest in our selection of full conference call transcripts: the entire text of the prepared remarks from Monster’s (ticker: MNST) 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. Ladies and gentleman thank you for sending by welcome to the 3rd Quarter 2005 operating results conference call. During the presentation all participants will be only in listen mode. Afterwards we will back to the question and answer session. At that time if you have question please press the “1” followed by the “4” on your telephone. As a remainder this conference is being recorded, October 26 2005. I would now like to turn the conference over to Bob John Vice President Investor Relation. Please go ahead sir. [Bob John Vice President Investor Relations] Good morning and thank you for joining us on Monster Worldwide Third Quarter 2005 conference call. You will have formal remarks from Andrew McKelvey, Chairman and Chief Executive, Steve Pogorzelski Group President International and Lanny Baker Chief Financial Officer. They along with William Pastore, our Chief Operating Officer will then answer your questions following the formal remarks. Before we begin I would like to remind you that except for historical information the statements made during this conference call constitute forward-looking statements under applicable securities laws. Such forward-looking statements involve certain risks and uncertainties including statements regarding the company’s strategic direction, prospects and future results. Certain factors including factors outside of our control may cause actual results to differ materially from those contained in the forward looking statements included economic and other conditions in the markets in which we operate, risks associated with acquisitions competitions, seasonality and other risks discussed in our Form10-K and other fillings made with the Securities and Exchange Commission. With that I would like turn the call over to Andrew. Welcome to our third quarter 2005 conference call. We are pleased to report that Monster posted another outstanding quarter due to strong organic revenue growth, steady operating margin expansions and significant earnings growth. Really a strong showing all around. Results were driven by the terrific performance of our aggressive global sales force and dedicated operating team. We successfully executed our strategic plan to grow our customer base especially in the small and medium sized market while attracting quality job seekers and creating innovative online solutions and great service for our customers. The full impact of the hurricanes Katrina and Rita on the labor market may not be known for several months. However it is clear that the natural disaster had an immediate, but likely short-term effect on the employment market during the quarter. In fact the hurricane related job losses in September were somewhat less than expected, a positive indication of the underlying strength of the US labor market. These disasters are about much more than their effect on the job market, they are about our fellow citizens’ lives and livelihoods. With this in mind shortly after the hurricanes hit, Monster launched a customized hurricane relief site to bring together survivors, employers and volunteers to facilitate the rebuilding of lives. We are operating both public and private sector employers free job postings on the site. I have also asked some of our top technology and marketing experts to hold ongoing working sessions with the Department of Labor and Red Cross to determine how we can best help those affected, find employment, re-establish their lives and rebuild the communities. A tight labor market exists in the Gulf Course region particularly in rebuilding related sectors. We are not doing this alone. I am pleased to tell you that our efforts have been combined with the support and assistance of HotJobs, CareerBuilder and other career related sites. The collective goal of this coalition is to provide a one-stop online resource for hurricane survivors seeking re-employment and for businesses seeking workers to rebuild the affected region. Also we are one of the major contributors to Mississippi’s first job fair since the hurricane. It’s very encouraging that the underlying economic data in the US remains strong and the overall economy remains somewhat resilient to these occurrences. Judging by what our customers tell us, we anticipate a healthy hired environment going forward. Monster is surely getting better. Our goal, both domestic and overseas has been part driven by the strong and continuing shift to the online market from print. The hard work of targeting small and medium sized businesses in local markets and helping them move their recruitment online is paying off and the local re-growth will remain a priority for Monster. Monster Employment Index, the MEI results for the past quarter as well as the results for both Monster European index and the local index reflected the broad based increase in online recruiting demand. US online recruitment activity increased during the quarter for the US index reaching an all time high of 142 in August and registering a 4 point increase overall since the end of the second quarter. For the first nine months of the year, the index has shown a 27 point increase, this well-distributed growth is a very encouraging sign, but we anticipate will also be reflected in the Department of Labor statistics over the next few months. Since the index measures jobs posted online that are likely to be filled over the next 30 to 60 days, it’s fast becoming recognized as the leading and economic indicator to correlates strongly with official labor figures, combined with other positive economic data we anticipate a healthy employment market heading into the winter season. European index also edged higher in the third quarter continuing a mostly upward growth trend and suggesting a slow steady improvement in Europe online recruitment activities. The financial highlights for the quarter included a 26% revenue increase at Monster Worldwide and 31% revenue gain at the Monster Vision. Our ability to increase revenue and efficiently manage our expenses during the quarter allowed us to expand our operating margin by over 5 points. Certainly a meaningful achievement. As a result earnings per share from continuing operations grew at a significantly higher pace in revenue reaching $0.25 that is a 67% increase over last year’s third quarter on a comparable basis. In addition we ended the quarter with a very liquid balance sheet and over $300 million in cash. For the first nine months of the year, Monster’s earnings per share from continuing operations have already exceeded the levels we achieved in all of 2004. So financially Monster is strong and getting stronger and the fundamental are certainly sound. One of the key priorities that I’ve spoken with you about is the further development of our multiple sales channel. The quarter’s strong organic revenue increase was partly driven by higher activity by our North American and international sales team. Our Post–a-Job product had an excellent quarter growing more than 40% over last year’s third quarter. We’ve aggressively advertised and promoted its value proposition to recruiters from small and medium sized companies nationwide and most recently in Europe with terrific results. Post-a-Job is also a leading source of new business leads and combined with our productive telesales force that has enabled us deepen our coverage of the small and medium sized companies on a local level. This represents a huge market opportunity for Monster. Our tight focus on growing the Monster Division to reach it’s full potential is another priority this year. We take great pride in our leadership role in the industry and we are driven to be innovative and creative. Our objective is to grow our brand in a measured and balanced way with targeted marketing that strikes the appropriate seeker audience to serve our customers needs. We’ve become more efficient in marketing and have significantly lowered the cost of attracting visitors to Monster, while generating a strong flow of resumes, application for job posting and page views. During the quarter we introduced several enhancements to help jobseekers find and apply for more jobs is less time while providing our customers with a larger pool of quality candidates. We continue to make great strides in extending the Monster brand and online expertise to the international markets, another of our strategic priorities. In the quarter, revenue from outside of North America grew more than 1.5 times faster than domestic revenue growth. It is now on an annualized revenue run rate of approximately $180 million. We achieved strong top line growth in all four of our regions in Europe despite the continuing weak economic conditions in Germany and France, which are two of our largest markets in continental Europe. We’ve made strategic investments to raise Monster’s brand awareness in key countries in Europe and are seeing promising results and higher volumes from these initiatives. We’ve recently promoted Steve Pogorzelski to the newly created position of International Group President. Steve’s success in leading Monster’s North American growth and development make him uniquely qualified to work closely with Peter Dolphin and his team in Europe and the leaders in our Asian markets to drive Monster’s strategic overseas expansion. His North American experience is invaluable. In the month of September, Monster Worldwide attracted 75 million unique visitors to its’ global sites, a number far way larger than any of our online competitors and greater than the vast majority of designation websites. This demonstrates our leadership position, global presence and the power of the Monster brand worldwide. On our last conference call, I told you that Asia is the most dynamic human capital market in the world today. After returning from a trip to India, China and South Korea just a few weeks ago, I can make that same statement with an even higher level of confidence. These are nuance emerging markets that represent the fastest growing geographic regions of the internet economy. In the third quarter revenue from our Asian operations grew at a healthy rate and our India operations are on a pace to deliver revenue that is almost double that of last year. Last week we are very excited to announce that we expanded our footprint in Asia to the acquisition of JobKorea, the premier online recruitment website in South Korea. This acquisition marks a significant step in Monster’s global expansion strategy and establishes Monster as the number one online recruiter in one of Asia’s fastest growing markets. I’ve asked both Steve and Lanny to give you some additional information on international markets and the JobKorea acquisition and the terrific opportunity it represents to driver Monster’s global growth. Before turning the call over to Steve I would like to say that we are very pleased with the results of the third quarter and believe we are well positioned to continue to deliver continued growth as we enter the fourth quarter. The fourth quarter has historically been a strong sales quarter as companies tend to renew or reinitiates commitments in support of their hiring needs for the following year. We’ve built a solid platform for sustainable growth and strengthened our leadership position as we look into 2006. Our strategic priorities which we focus almost across the entire company to be drive the global Monster by enhancing and developing products and technology to build our international operations. Further expand our sales channels and balance our investments to reach our long-term objective of delivering strong results in the near term, as we have certainly done this quarter. With that Steve will share with you more information on JobKorea and International. I am truly excited about my new role because there is a tremendous opportunity to leverage Monster North America best practices in the international markets. Moreover there are also opportunities to transfer the innovation in these individual markets across borders. The JobKorea e-com model is an excellent example of this and I will describe the model later in my remarks. I would like to share some of the other observation that I have after six weeks in my new role. In that time I traveled to Europe, India and South Korea and China. I found substantial potential at every stop whether it’s the $4 billion European help line and advertising market or the surging labor markets and economies in Asia Online recruitment. Internet adoption trials the US at about half the rate but the adoption curves do look similar. I am impressed by the expertise, the passion and commitment to results exhibited by our international senior leadership teams. It is important to note that we are the only company playing regionally and globally and we will leverage our network but ultimately the battle would be won by leadership at the local level. We are the market leader in nearly three quarters of the markets we serve and our objective is to posses the number one position in all of our markets. Our global footprint allows us to define the online recruitment space around the world and to do this we will leverage our competitive advantages. Specifically our global brand awareness, our unmatched market insight, our deep operating experience in distinct economic cycles, various stages of adoption and in creating scalable business models. Our expertise in increasing sales, productivity and efficiency, our proven product and technology expertise especially e-com, and finally leveraging our multinational customer base. Looking ahead at 2006 and beyond I am confident about monster’s international potential in terms of both revenue growth and profitability. Longer term I believe that international can be as big if not bigger than the US. As promised I would like to share some insights about JobKorea. One thing we are learning is as we become more global is that there is great opportunity in value and building a global footprint and sharing ideas and strategies across the globe. Our recent acquisition of JobKorea is a good example. South Korea is an attractive market with a strong economy, global brands and an advanced, technologically literate, internet-connected workforce. Internet penetration in Korea is 70%, and 85% of those users are on broadband. Korea has also has a highly advanced mobile phone Internet market, all of which provide an environmental ripe for new ideas and a proving ground for a new applications of interactive technology. In this market JobKorea has emerged as the clear leader with a well-recognized brand of 50% plus online market share and healthy profitability. Driving this is a lucrative e-com model that generates 80% or more of the revenue over the internet on an in-bound basis. This is the inverse of the US. This model is highly scalable for JobKorea and its applications for other existing Monster properties and future country startups. There is an opportunity to combine the JobKorea e-com model with Monster’s sales expertise and penetrate small and medium sized business and enterprise markets. In summary the combination of Monster’s global vision set by Andrew, our commitment to locally managed market leadership, our well recognized industry experience and strong financial resources put us in this position to acquire JobKorea and thereby strengthening the company’s worldwide reach and increase our long-term growth potential. I can hardly wait for 2006, now I would like to turn the call over to Lanny Baker. [Lanny Baker, Chief Financial Officer] Monster Worldwide’s third quarter financial performance again demonstrated the attractiveness of the company’s business model and the benefit of deliberate operating and financial executions. Among the highlights of the third quarter, the Monster division achieved organic revenue growth of 30% year-to-year. Incremental profitability at Monster North America exceeded 60%, overall operating margins expanded by 580 basis points year-to-year. Earnings from continuing operations rose 67% year-to-year to $0.25 a share, and free cash flow totaled $58 million in the quarter equating to 23% of the company’s third quarter revenue and an impressive $0.46 per share in the quarter alone. Our results particularly on the bottomline and inter cash flows were slightly stronger than we anticipated. Accumulating strides in sales force productivity and the growing significance of our e-commerce channel contributed to the top line growth as well as to our profitability upside during the quarter. The good news is that we should be able to extend these recent trends into the end of the year and beyond. Based on our third quarter results and our current view of the fourth quarter we now expect to deliver slightly stronger results than we had anticipated earlier. Importantly while raising our earnings guidance, while also investing more in marketing end product And our operating discipline drives monster fixed and variable cost down and pushes margins upward, we are in better position to internally fund important strategic investments in long-term growth of our business. Notably we intend to support these internal investments, which will focus on additions such as stepped up marketing aimed at smaller employers in our e-commerce business, as well as introducing new jobseeker functionality while still delivering significant earnings and cash flow growth in the near term as our newly revised guidance implies. Second the results also visibly showcase the growing power and efficiency of Monster’s financial engine. Looking outside North Americas it is easy to see Monster’s expanding breadth and reach in the company’s international operations. With the addition of Korea Monster now operates online in 24 countries. Our global footprint in online recruitment is unmatched and international now represents 22% of Monster’s revenue. We are optimistic about the long-term opportunity overseas and we are equally encouraged by the growth we are achieving there today. In the third quarter head of Monster’s operations outside the United States achieved greater than 50% organic revenue growth over the prior year’s quarter. With our biggest overseas operation Germany, growing by more than 80% year–to-year despite a soft labor market and political distractions in that country in the quarter. Meanwhile in the big long-term opportunity that is China our partner China HR again posted revenue growth in the vicinity of 100% year-to-year. Now before getting into the third quarter results in full detail, I would like to focus on one of the business model’s most fundamental strengths, that is Monster’s ability to generate strong and growing cash flows that supports strategic flexibility and our ability to drive shareholder value. On this front, our financial engine is really revved during the quarter in the year. Year-to-date Monster Worldwide’s revenue has grown 33% from the year ago’s nine-month revenue. And with careful cost management and our inherent operating leverage, we’ve been able to convert that top line growth into a 66% increase in operating income before the depreciation and amortization. Because Monster’s business model requires neither heavy capital expenditure nor significant balance sheet investments to support growth, we’ve converted 89% of the company’s EBITDA into free cash flow over the last nine months. That cash flow conversion means we produced over a $1.40 per share in free cash flow across the last 12 months. We believe that the company’s free cash flow which has averaged about 170% of the income from continuing operations this year, is a quintessential hallmark of our internet powered business model and leadership position. Now let us turn to the P&L. Overall revenue grew to $249 million, a 26% increase from the third quarter of last year. The Monster unit grew 31% year-to-year to $207 million in revenue. While the advertising and communications division saw a 4% year-to-year growth to $42 million in revenue in the third quarter. Overall operating expenses grew 17% year-to-year in the third quarter nearly 10% points slower than revenue growth and our margins expanded accordingly. A 580 basis point increase to an operating margin of 19.1% in the third quarter of 2005 compared with a 13.3% margin a year ago. Operating income grew 80% of $48 million and operating income before depreciation and amortization increased 55% to $58 million, plus the EBITDA margins at 23% for the quarter, the best level since the final quarter 2001. Zeroing in on the Monster Division, the highlights includes stronger organic revenue growth of 30% which excludes $1.6 million from acquisitions in currencies and very favorable profitability trends with margins ending up bit higher than we anticipated for the quarter. The Monster Division achieved a 26% operating margin and a 30% EBITDA margin in the third quarter of ‘05. These levels represents a 300 to 400 basis point of improvement over the earlier period and reflect the increasing efficiency of the model. Within North America Monster’s revenue grew 28% year-to-year highlighting our secular momentum. Monsters domestic revenue growth outpaced the combined help wanted advertising revenue performance of the leading US newspapers that are online by a healthy margin again in this third quarter. Monster’s North America operating margin was 35% in the third quarter of 2005 up 740 basis points from a year ago. EBITDA margin was 38% up 650 basis points year-to-year. In both cases monster’s year-over-year incremental margins in North America were about 60% in the third quarter, improving upon the second quarter’s performance and demonstrating the scaling of our business model. The sources of the margin improvement continue to be higher revenue and balanced gains from employee related cost economies, marketing efficiency, and leveraged against fixed cost items such as technology and real estate. However increased efficiency on the employee side was the largest margin drive in the quarter. Sales force productivity was the key driver of both revenue growth and profitability in North America in the third quarter, with revenue per sale increasing 5% between the second and third quarter of ‘05. More broadly revenue per employee at Monster North America was up 15% year-to-year in the third quarter as headcount rose under 10% significantly lower than revenue growth. The smaller and medium sized businesses continued to offer great potential for Monster in the US as these businesses have typically somewhat slower to adopt online recruitment. Encouragingly the steady growth of consumer e-commerce and improvements in internet payment systems, security and advertising models are bringing more and more small business onto the internet. And those trends are benefiting our results too. Notably SMB customer growth exceeded 35% year-to-year in the quarter. The growth of SMB and local business is propelling our e-commerce channel in particular, which had a record quarter and accounted for a high teen percentage of Monster’s career related revenue in North America while also contributing to the margin performance described earlier. Thanks to effective marketing we attracted 16,000 new customers to e-commerce in the US in the third quarter. From a product standpoint, changes were made to our e-commerce side are allowing us now to set a wider variety of products in bundles and nearly half of our e-commerce orders in the quarter came from products other than single job postings. Moving Monster’s operations outside North America, international revenue increase by 46%, organic growth revenue of 40% year-to-year overseas was consistent with the 38% organic rate of the second quarter. We are encouraged by our growth in Europe and Asia particularly given the slight sluggish economic conditions throughout much of the year. With our first half branding portion in Germany winding down, we continue to market Monster aggressively throughout Europe. Our marketing and spend in Europe, which more than doubled year to year in the third quarter and is aimed primarily at jobseekers. We are seeing positive results her with significant increase in registered users’ resumes and job applications across the key regions. Meanwhile prior investments in expansion of our sales force in Europe and Asia are generating growth in our customer account and lifting Monster’s overall recruitment advertising market share overseas. For the third quarter of ‘05 Monster’s international operations were roughly breaking on EBITDA while losing about 2 million on the operating income line. These profitability levels are consistent with the first half and our strategy for the year as we prioritize investments overseas in ‘05. This is a good chance to talk about JobKorea, the market leading online recruitment company in South Korea we acquired recently. Far away JobKorea is the strongest and most attractive company in that market. With a business model that as Steve said is largely inbound and e-commerce driven. Monster Worldwide paid $94 million in net cash in short-term investment required for JobKorea. We funded the purchase with cash using a portion of the $314 million in cash equivalents you see in our September balance sheet. JobKorea is expected generate about $15 million revenue as in ‘05 up roughly 50% from 2004 levels due to higher prices and growing percentage of it’s posting being placed in revenue generating premium locations. Thanks to the efficiency of it’s business model JobKorea’s EBIDTA margins are expected to be in the mid 20% range in 2005, with margins expanding in ‘06 and beyond. We previously stated that we would expect JobKorea’s operating income before depreciation and amortization to be approximately $6 to $7 million in 2006. And with the full allocation of the purchase prices finalized we will update to you on likely EPS transactions. However we do not expect a large earnings impact into 2006 but the deal will be immediately accredited to cash flow and should make a meaningful earnings contribution beyond 2006. From a valuation standpoint at the midpoint of the operating cash flow range outlined for 2006, our purchase equates to roughly 14.5 times forward EBIDTA, which we believe compares favorably with valuations observed to cause of range of recent and comparable internet transactions. Circling back to our advertising and communications segment revenue rose about 4% year-to-year to $42.5 million in the third quarter. Within North America we grew revenue by 12% year-to-year but softer economic conditions in the UK and Australia panelized AdComs and their revenue by 3% year-to-year. Given the steady decline of helpline which still accounts for more than half of AdComs’ global billing, we’ve been reengineering and resizing our AdComs operations, as a result segment operating expenses declined by 3% year-to-year and over $2 million sequentially allowing the unit to post double digit operating margin for the quarter. While the dollar value of AdComs profit remains small within the quarters expense sand profit performance speaks loudly about the management team and our company’s operating discipline. Turning to balance sheet, we built our net cash balances by $74 million in the quarter to $269 million at the end of the third quarter. The net change in cash could be summarized as we had $58 million in free cash flow and another $23 million in net proceeds from stock option exercises. Of late we had a net $3 million in cash equivalents for acquisition payments and selling for balances related to the sale of discontinued operations. After the quarter closed we applied $94 million of our cash balances to the purchase of JobKorea which leaves the company with well in access of $150 million in net cash. At end of the third quarter the Monster Division had $247 million in differed revenue on the balance sheet, a slight increase from the second quarter reflecting some seasonality. On the year-by-year basis Monsters differed revenue was up 26% at the end of the third quarter. Providing encouragement as we enter the seasonally stronger fourth quarter. Let us now move to the business outlook, which we are revising due to strong third quarter results and prove this ability into the final quarter. In addition the updated outlook now includes the anticipated contribution of JobKorea which we expect to be about $2 to $3 million in revenue and a small increment to operating income before depreciation and amortization for the period from mid-October through the end of the year. Taking this into account we now anticipate total company revenue of $260 to $267 million in the fourth quarter of 2005, up 23 % from year ago at the midpoint of the range. For the Monster Division we expect fourth quarter revenue of $218 to $223 an increase of 28% at the midpoint of the range. At AdComs we anticipated a flat year-to-year revenue comparison for the fourth quarter with progress in North America mitigated overseas. At the anticipated revenue levels we expect to achieve substantial year-to-year increases in overall margins in the fourth quarter. At Monster healthy demand for candidates in the US the globally e-com opportunity and our long-term objectives overseas support continued investments in marketing and promotion and we expect to invest slightly more during the fourth quarter then we did in the third quarter. Measured as a percentage of Monster Division revenue our overall marketing and promotion expenses will be slightly greater in the fourth quarter of 2005 than they were in the final quarter of last year. We will capitalize on our growing scale and improving expenses sufficiency’s elsewhere to fund these investments while producing profitability at Monster on par with the high level seen in the fourth quarter ‘04. We expect these investments to return added revenue growth and profit heading into next year. Last year we saw a 600 basis points sequentially increase in margins at Monster segment in the fourth quarter versus the third quarter, which in part reflected seasonal strength of revenue and our historical pattern of front loading our year long marketing activity. This year in keeping with recent discipline and our branding investments in Europe and our objective of balancing near term earnings results would be appropriate investments for future growth. We expect the monster divisions margins to be roughly flat from the third quarter to the fourth quarter of 2005. Below the operating income line we’ve interest income on our cash balances in the fourth quarter although at a slightly reduced level conducted compared to the third quarter given the cash outflow to fund the JobKorea acquisition. We expect a 35% cash rate in the fourth quarter and we will report a share of China HR net losses on our equity interest line. Expecting less than the $2 million equity loss for the year. Pulling the pieces together, we now expect fourth quarter earnings per share from continued operations to be in the range of $0.27 to$0.28 per share. More than a 50% increase year-over-year at the midpoint. On a full year basis we now expect Monster Worldwide to generate $0.91 to $0.92 in earnings per share from continued operation, up from our pervious earnings expectation of $0.88 to $0.91 per share for the full year. The revised guidance represents a near 70% improvement from the $0.54 per share Monster earning in 2004 on a comparable basis. Our full year revenue expectations are now $980 to $987 million for the company overall and $812 to $818 million for the Monster Division on its own. At the midpoint of those ranges the Monster unit will achieve 37% revenue growth this year with organic growth better than 30% underlying that figure. For the company as a whole the full year outlook suggests 30% revenue growth in 2005. In summary our third quarter financial performance was strong as we head into the seasonally strongest quarter of the year encouraged by Monster’s momentum. The breadth and depth of the business continues to grow both in the US and abroad and our financial model is increasingly efficient and strong. For continuing reducing cost and driving revenue up and prudently balancing near-term profitability and earnings objectives with essential strategic investments for the future growth. With our strong top line large global opportunity, improving margins and healthy free cash flow we believe Monster Worldwide business model shows convincing current performance and compelling long-term appeal. With that we will turn it back to the operator 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_233997

I would like to welcome everyone to Overstock.com's thirdquarter 2005 financial results conference call. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. A Web-based slide presentation will be used during this call, and is available for your download or viewing over the Internet on the company website, www.shareholder.com/overstock. If you're listening via the telephone and want to see the presentation via the Internet, please ensure that you select the no audio, slides only option. If you select the regular webcast, you will experience up to a 25 second delay. (OPERATOR INSTRUCTIONS). This call is being recorded, and will be available for replay beginning today at 3:00 PM Eastern time through 11:59 PM Eastern time Friday, November 4th. The replay can be accessed by dialing 888-203-1112 or 719-457-0820 and entering the access code of 441-6025. At this time, I would like to turn the call over to Mr. David Chidester, Overstock.com's Senior Vice President of Finance. Mr. Chidester, you may begin, sir. Good morning, and welcome to Overstock.com's third-quarter 2005 conference call. Participating with me on the call today is Dr. Patrick Byrne, President of Overstock.com. Before I turn to the financial results, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, October 28, 2005 only. As you listen to the call, I encourage you to have our press release in front of you, since our financial results, detailed commentary and the President's letter to shareholders are included and will correspond to much of the discussion that follows. As we share information today to help you better understand our business, it is important to keep in mind that we will make statements in the course of this conference call that state our intentions, hopes, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve certain risks and uncertainties that could cause Overstock.com's actual results to differ materially from those projected in these forward-looking statements. Overstock.com disclaims any intention or obligation to revise any forward-looking statements. Additional information concerning important factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents that the Company files with the SEC, including but not limited to its most recent reports on Forms 10-K, 10- Q, 8-K and S-1. With all that said, I will now review our financial results for this past quarter. Please note that all comparisons will be against our results from the third quarter of 2004, unless otherwise stated. Total revenue in the quarter was 169 million, up 64%. Gross margins were essentially flat sequentially at 14.6%. A slight decrease in margins from inefficiencies in operations was offset by 50 a basis point increase in margins from the addition of Ski West to our travel business. Gross profit dollars increased 80% to 24.7 million. Operating expenses grew 115% to 36 million. That was driven by a 91% increase in sales and marketing, a 250% increase in technology costs and a 96% increase in G&A. Our travel business, now including Ski West, added an additional 1.6 million of operating expenses this quarter, and we also incurred 700,000 of amortization expense related to the allocation of the Ski West purchase price to intangible assets, and this will be a quarterly charge going forward. Our operating loss was 11.2 million or 6.6% of sales versus a 2.9% loss last year. Our net loss was 14.2 million or $0.75 per share, compared to a $3 million loss or $0.16 per share loss last year. And one important thing to note about our net loss -- we incurred a $2.1 million non-operating expense from the mark-to-market adjustment of our foreign bonds. And the coupon on these bonds is tied to the movement in Asian currencies against the US dollar. Because it's structured as a bond, there is no downside risk at maturity. They will mature at par and we will receive 100% of our cash back. However, derivative accounting requires that we run the change in the value of the derivative through the income statement each quarter. We have recorded cumulatively 2.4 million of nonoperating expense to date. The bonds will mature in the next 10 to 12 months. If we hold them to maturity as we plan, the expense will reverse itself and we will record a non-operating gain of 2.4 million, equal to any losses we have incurred to date. We ended the quarter with 77 million in cash and marketable securities and 97 million of working capital. We also ended the quarter with 95 million in inventory, in preparation for Q4 sales. Operating cash flows were -12 million for the quarter and -20 million on a trailing 12-month basis. Free cash flows were -24 million and -60 million for the same periods. However, we do expect to generate positive operating cash flow for the full year 2005. Depreciation and amortization was 5 million for the quarter and 9.5 million year to date. Total capital expenditures increased by 12 million to 52 million year to date and we'll end the year with 55 to 60 million of total capital expenditures. Two more points of interest -- the average invoice remained at $97, flat from last quarter, and BMV was 10% of total gross bookings, up 50 basis points over last year. Thank you, David. Well, as I said in my letter, gomen nasai. It's a Japanese expression that means more than I'm sorry in English. It means I'm sorry and I know I failed in a duty; I failed in a mission or an obligation. I lost $14 million of our money, and I'm sorry about that. Gomen nasai. Let's see. We have a Safe Harbor; I don't have to read this again. It repeats basically what Dave Chidester said. Slide three -- this is a graph of this quarter. And whether you want to know about conversion or customer retention or repeat rates or marketing efficiency or sales growth versus previous year, it's incredible, but they basically all looked just like this, remarkably. The quarter got off to quite a nice start. So I've left off scale and label, because I'm just letting this stand as a symbol for just about everything that folks would want to know about. This happens to be sales, sales by week. And the ordinate is a little bit truncated, more than I would have liked. But anyway, this stands for what happened this quarter. We got off to a nice start, and then things started deteriorating. On slide four, you can see this. I am speaking slowly because I understand there is this 20-second lag. On slide 4, point A, you see where -- that's about where we cut over to a new system. And then there's the area shaded baby-mess yellow or green -- that's basically the next five or six weeks in the quarter. I think you can draw a line, a straight line between A and B, and that's really what I think the underlying secular results were in sales and all these other things you care about. Dollar shipping started on July 15th, and it was supposed to run to August 15th. Now, what we did once we realized we had a problem was we extended it through September 1st. In that green-shaded area, the last spike is basically the last day of dollar shipping, and then you see that it very -- the end of August, it was. And then it very quickly deteriorated to what its natural level was. And then B is where products started being posted on our site. As I said in my letter, the real problem was, once we realize that some of these processes were not working as expected, we had to focus on everything that was facing the customer. And everything that's facing the customer means processing orders quickly, getting ship confirms loaded right, processing returns, giving credits on credit cards; everything like that had to take priority. And some background processes related to financial, related to posting new products, things like that, updating the site, all were secondary. And we didn't really expect it to take this long, to take that five weeks to get fixed, but it did. I'd say, just going forward, you can see how on the right side of slide four, we did come out pretty robustly, once we got the products back up on the site. It seems to me that a 20% -- we sold through about 20% of our products in that time. And it seems to me that that's -- you can almost say that sales gradually decayed 20% or maybe even more, because many of them were our best-selling products that we sold through. And even when we got replenishment, if we could, we could not load them up again on the site. Well, not much more needs to be said about that, other than I ended up holding up as much as they did, even given dollar shipping for half the quarter. I would have thought that they would have declined more. How I really think of this is effectively we lost about 30 or $35 million of sales, although how that showed up to -- some of that we made up by dollar shipping. But we really lost the gross profit, then, on 30 or $35 million of sales while this was going on. Next slide. Oh, one more thing on that -- on the right side of slide four, that -- you see, we did end the quarter fairly robustly, and things have continued rather nicely since then. Slide five -- this is just a graph I show every time, 169 million, 64% year-over-year growth. Next slide -- I said at the beginning of the year that I would cap margins at 15%, excluding effects of travel and auctions and things like that. Well, they are not really having that much of an effect yet. And it has stayed at 15%. The first thing I would say is I'm ready to take this 15% cap off, given our expense structure. I want to take it off without changing our value proposition to the consumer, and we can do that through, again, the savings in logistics and customer service and better buying. I think that for most of our history, our improvements have come in terms of buildup, buildup, buildup and then belch, a belch-through. I expected this year to be different. I expected this year to be more stair-step, sort of a 20 or 30 basis point improvement each quarter. It hasn't happened, obviously, looking at what is in front of you. But I do think that we have a buildup that's ready to break loose, and I would be surprised if you do not see substantially higher margin for this quarter and Q1. The savings we can talk about, rather than just drone on here - - if people want to go into it in the Q&A, I will -- but it has to do with logistics and customer service that our new systems do make possible. The next slide is gross profit per transaction, nothing out of the ordinary; it's basically stayed flat with the previous quarter. Slide eight -- this is our CPA and marketing efficiency. I'll tell you, I look more at the marketing efficiency, which is how much we're spending on marketing as a percentage of revenue. You see that has basically hovered around the 10% level this year. I think that is too high. I view it as it's the difference between using muscle and using brains. Having to spend 10% of revenue to keep up this growth is muscle. We want to maintain this growth or higher growth on brains, and I'll get to what I mean by that, but not just with heavy dollar spend. And I think the right number here is probably 8.5% for next year. Slide nine, G&A expense, non-tech -- you see that's going up; it went up from 7.5 to 10 million this quarter. As David said, 1 million 1 of that is we have moved from a tiny building that we were all sitting in each other's laps to, this July, about three times the space. And it was a lot of space. We have to let the building -- or 60, maybe 70% fill up the building, but it should last us for a long, long time. The other piece is the Ski West acquisition of $25 million. The auditors have come through and said 10 million of that is goodwill, but the other 15 million is the assets of the business that we want you to depreciate roughly over five years. There will be a $3 million amortization per year for the next five years, and that comes to 750,000 per quarter. Slide ten, technology expense -- what you see here is the big stair-step. I talked last quarter or two about what we call around here O-Town (ph), the ability to be a large mainstream competitive player on the Internet, maybe not quite the size of Amazon in North America, but on the same order of magnitude. We've been laying the curbs and the gutters for it, and that's showing up here. It's actually not overwhelmingly, in terms of -- showing up in terms of headcount. What is happening is that depreciation, I think you'll see, at least 22 to $25 million of depreciation next year from -- David, what is it going to end this year? Patrick Byrne, Overstock.com – PresidentYes, and a lot of that is kicking in in the third and in the fourth quarter. A few things on the customer base, slide 11 -- 76% more customers have bought from us than had at this point last year. More interesting in the next few slides, where the unique customers who purchased in the quarter that supported that 50% growth -- and I think, David, the GMS growth was quite a bit higher than 64, was it not? Patrick Byrne, Overstock.com – PresidentOkay, I had that backwards. So 50% year-over-year growth supporting the 64% GAAP revenue growth. I think that we ought to start publishing. Our problem with GMS at this point is comparables are difficult, because in the past, we didn't have auctions and travel. I think we ought to use a number like GMV, gross merchandise value, or something, that eBay does, and just combine everything together. But we'll see if the auditors let us talk that way. Yes, we actually split the three numbers out in our earnings release, in the tables, for everybody so you can see the three different GMS numbers. But we don't report them all together; you are right. Believe it or not, the auditors have -- more power to them, but they have an opinion on that. I think that we ought to come up with some unified number that captures it all. New customers, I guess, 37% year-over-year growth, again. So we are getting more -- and 52% more orders supporting that 64% growth. So we are getting more out of our customers and out of each order. Slide 15, auctions -- you see, on the one hand, auction -- the gross merchandise value has basically held flat at 7.3 million. The listings fell. That was by design. Holly went through and cleaned out a bunch of unproductive listings and sellers that were cluttering things up, and she cut online marketing expense, and things held their own. As far as the future goes, this seems to have stabilized. We have now ended our first year with auctions; it lost $5 million. The loss did decline a bit in the third quarter, and it's looking better in the fourth quarter. My goal is for '06 to have this be at breakeven. I would consider that a nice accomplishment and just a free option for the future. And the CPA for auctions is slowly getting -- they are getting more efficient, and they have some other ideas about that that will come into play in the first quarter. Okay, I've been wanting to talk for a year about what I'm going to show you for the next few slides. I feel when people come through that there seem to be two camps of people -- those who share the vision that we have here and understand what we're trying to build, and those who want to talk more about, well, other things. And I feel almost -- not duplicitous, but I feel less than forthcoming because I keep trying to talk in the language of one group to the other group, and it doesn't go over. So I would feel better if, to calibrate everybody, I could put everybody -- I can throw out there a very clear explanation of what we're trying to do. It may matter to some people, it may not matter to some people. But it's a little difficult to talk to the two different camps in the two different vocabularies. This is Overstock as a percentage of e-commerce, US ecommerce, since we went public. We went public on Q1 2002 numbers. You'll notice that each fourth quarter, it spikes. So we've gone from 0.2% to 0.9% in Q3, and you see that each Q4 is when it tends to spike. Now, it's no secret that I'm chasing the guys at Amazon. This is a picture of Amazon's revenue, in North America versus -- as a multiple of Overstock's revenue -- again, since we went public. This is a little bit -- that's all on a GAAP basis, but because we had an accounting change, I've made slide 19, with the green line that's inserted here to make it an apples-to-apples comparison. So we started off with them about 31 times our size; now they are about 6 times our size. Why that is important is shown in the next slide. I think, if we have a good Q4, by the end of this Q4, we should only see them being about 4 times our size. Now, that's Amazon North America, and we don't have an international business. This is the vision that has excited us because, if we get too -- that starts being, in my mind, when we are a quarter the size of them in North America, which I think can happen this quarter -- I think, if we have a good quarter, that should happen this quarter, plus or minus, I hope minus -- we start being a meaningful competitor to Amazon at that point. That also puts us in the place to do -- if you were to ask me at the beginning of the year -- now that I don't think it will happen, I'm going to come out and say what I was really thinking at the beginning of the year. These numbers are our Q4 numbers over the last several years and the growth rates implied, and this was an ambitious perspective. But my goal at the beginning of the year was to get us to a $400 million fourth quarter, which would have been 81% growth over Q4 of '04; that's where it switches from blue to red. So this is just looking at the past several Q4's and where we could be in the next several. So my goal was a $400 million fourth quarter; that's what everybody here was trying to do. That would have been 81% growth, and then if we could maintain 80% growth for two more years, it got us to 1.3 billion. Now, why did I pick that as a number? Because 1.3 billion is what Amazon did last year in Q4 in North America. So I sort of set that as a goal, 80%. I know it's a high growth rate, and I know that it starts getting harder to grow as you get bigger. But, given the growth rates that we had achieved over the last several years, this did not look outlandish to me. Again, those are just Q4's. Well, that was an extremely ambitious perspective, I acknowledge. Here's a more modest perspective. I think that the world has us -- I should mention I don't spend -- just for my own sanity, I don't spend a lot of time reading analysts' reports. I know there are some very good analysts who get us -- Scott Devitt and Doug and guys at Hambrecht and Piper, of course, get us. And I'm sure other people do. But I don't spend a lot of time -- I generally can't even tell you what our numbers are; I've got my internal goals, but not -- but this is one case where I look at -- I understand that the world thinks we're going to do about $350 million this fourth quarter. And that seems like a reasonable number to me. And then the goal is 69% growth for two more years, and that puts us at a $1 billion fourth quarter two years from now. Again, why is that important? Well, Amazon by then will have grown to, I'm sure, 1.6 billion, 1.7 billion, maybe better, more power to them. But at least that puts us -- at that point, it puts us on the same -- it puts us in the ring with them. We've been punching above our weight for a long time. This would put us rightfully in the ring with them. And I don't think that's a crazy ambition. It's not something we can do henceforth, using marketing muscle. We've got to use more brains to get there, but that's the perspective on what it is we're trying to do here. And if we can do that on an operating cash flow positive basis, then I think that's a worthwhile goal. Now, that may seem outlandish, but I'm really saying the 350 million I wouldn't say is in the bag for this year; it's going to take a good quarter. But that's not outlandish. And so we are in that quarter already, so I'm really saying 69%. Can we keep that up for two years? Well, why is that important? Here's just a graph showing the tall bars are Amazon's G&A and tech expense over the fourth quarters for the last several years versus ours; we are a tiny fraction of theirs. Our margins are about the same, as I said. We are falling a little bit behind, on an apples-to-apples basis. But if we had a -- we would have to spend more marketing to get there than them. But if we can show up on the same order of magnitude as they are, and have all the other expenses other than marketing be this tiny fraction, then we should have a very valuable business. If folks want to get inside my head, that's the ambition that we have. To get there, we need to get -- it's really two things -- conversion, which comes down to personal vision, this Propeller, Project Propeller, site design and brand equity; and then, the second is gross margins. I think that the $55 million that we have put into things this year -- our systems, more or less -- $50 million of that are systems that support this first and second goal. But again, I'll end on the note that I know I botched the end of this. I've set a goal for this year of growing 60 to 100% and being breakeven, plus or minus 1%, in net income. It's now gotten $14 million harder to do that than it was a few months ago, but we've pulled rabbits out of our hat before, and I think that we are searching for the rabbit now. I meant to include you, if I didn't, on the list of analysts who I know get what we're trying to do. Well, thank you. During the quarter, you are having IT travails; your conversion is down. And so, I would think you would back off your marketing spending at that point, until you got your hands around things. It looks like you accelerated, so why would that be? Your marketing spend came in higher as a percentage of revs, and it came in much higher on an absolute basis. I would think you would be backing off marketing, if your conversion is down. Well, we did, for a period of several weeks, forego deals that came our way. Most of the deals -- the vast majority of what we spend is still online and, say, 75% or so. And they are typically not deals that -- the large parts of that online spending are not things that we can change week to week. But where we had a chance to, we did pull back. I think we can, yes. I wouldn't expect it to go up. I would expect it to come down a little bit. But I think the 10% -- if it ends this year at 10%, that's probably going to be right. And I acknowledge that's a point or two higher than I would have liked. And then, looking at the graph you had for sales -- and then I'll let someone else take a question. But it looked like if I extended the graph upward, that October sales would still be running below where you were in July, before you turned down, if that's fair? Conversion is back to normal. Conversion is back to normal, but still, to me, that's our biggest opportunity. Our conversion is 2.5 to 3%. Our competitors are much higher. Now, our competitors like Amazon are 10%, and our book category converts at around 10%. If you weighted our average, it might not be that dramatically worse, but it's still worse. JCPenney and other guys do 12 to 15%. I view the conversion as the biggest thing we can do to get growth now. When I say, let's get there with brains rather than muscle, that's what I'm talking about. They are not all finished. Even the ERP system is itself not finished. The last, what we think of, issues that put the patient in the critical part of the hospital, the last one is done. But there's still some intensive care ones and some normal ones. Propeller is -- Propeller is very promising. I guess, now that (technical difficulty) I understand more about what (technical difficulty) salvation can do of about 35 to 40% lift. Now, at the risk of just walking people through some sixth-grade math, if something is growing 60% and you give it 25% lift, it takes you to 100% lift. It's not -- so if you have something that is 100, and it's growing 60% (ph) (technical difficulty) brings it back to 200, which is 100% lift. So what I hear all over the industry as the numbers, 35 to 40% is what the scientists say. We have gotten Propeller, in short bursts -- well, we've gotten Propeller to run 12 to 21% lift. And even in short bursts -- we've had short bursts over 50%. It's unstable, and even when we had, say, 21% for four or five days, some of that was caused by -- a strange phenomenon that happens when we run Propeller on part of our traffic is we start occasionally getting people placing $100,000 orders. And that never happens without Propeller, so I don't what the reason is. The problem is it decays. We haven't -- and it's really a huge math problem, I guess. But the mathematical model that has been built decays quicker than it should if you were just selling, I guess, apparel or CDs or something. And that's the problem we are wrestling with. Unfortunately, wrestling with it requires some very fine, finely-tuned A/B testing. And that has been -- we really finished, in a sense, the guts of Propeller a year ago. But this year, it's just taken all this time to keep -- actually, a lot of it has been building both the architecture and the site that could use the input from Propeller but then, also, building the very refined testing that can let you tune in Propeller. So you now know everything I do about Propeller, but I'm very encouraged by it. It sounds like, if I cut through that, though, if you are still testing, Propeller is not going to have an impact on the Q4; it's more of a '06? No, it's live now. It's live now. It's live only on parts of the site. It has been live for about a week. No, it has actually been live on and off for three weeks. It should have an effect on Q4. It should help us get to that 350 million or above. Two questions for you. You had IT issues, obviously, in 3Q and then warehouse issues two years ago, during the fourth quarter. So, as we head into this holiday season, are you comfortable with how the Company is positioned in both IT and warehouse, if you look to get a much bigger order number during the quarter? Then, secondly, in terms of the macroenvironment, you said October sales are above July. Are you seeing anything in terms of macro headwinds here? And what are you seeing from the perspective of other retailers who may be discounting more and earlier during the quarter, and how do you think that will affect you? On IT and logistics, I'm very comfortable with logistics. I won't be comfortable with IT until we have gone through a season. Two years ago, we did have a real problem with logistics. When the wave hit, the dock almost splintered. This year, I'm very comfortable. We've got Steve Tryon who is now running it. He's gotten some terrific help, and I'm very comfortable there. On IT, I go down every day, and I say just tell me when the wave hits that things are not going to have a problem. And more and more in the last three, four weeks, people are now, for the first time, saying they are comfortable. We are comfortable; we've gotten so we can process 10,000 orders an hour. And we have some benchmarks that are set with a lot of conservativism about what we need to be able to process. And we are now -- we are sort of 99.8% of orders flow through promptly and everything, without any intervention. But, Dave Chidester, you may have a better feel for that. Do you have a comment? No, I would say you are exactly right. It's something that we are going to watch real closely, obviously. It's our first year into the new architecture, so it's something we are taking very seriously. But I think we are feeling better and better every day. I've checked that every day, and people tell me -- people are now breathing easy and are not staying late nights and things like that. We over-spec'd it. The system, when it's all completely burned in, is far more capable and powerful than what we got off. So I'm comfortable, but we are on it. We're looking at the CPU processing and running and if it’s, let's say, over 15 or 20%, we get worried -- things like that. And I'm sorry, what was your other question? I was just curious if you're seeing anything thus far in terms of macro headwinds, and what you expect the discounting environment to be like in the fourth quarter? Well, every time I talk about macro -- I said once in early April that hey, the last couple days of March were soft. And people come out and say, oh, Byrne is blaming the first quarter on the last couple of days. And that was the Pope thing (ph). And so I don't like to talk too much about the macroenvironment. Put it this way -- I have not at all been surprised that -- I think that retail is quite sluggish, and what I am hearing is things are sluggish. I've been hearing this both brick and mortar and online. There's reports that show what happened in September was Internet usage was up, but shopping in the first couple weeks of September -- shopping dropped rather dramatically. I forget if the number was 6 or 8%, although people were spending, I think, 6 or 8% more time online than they had been a couple weeks earlier. So people are going online, but they are doing other -- they were doing other things than shopping. What I hear, especially in electronics, is that there is overstock, that there's some very interesting new products being introduced. And of course, as electronics have a curve, and they reach a certain point on the curve, and then they suddenly lose 50% of their value in 90 days. That's, I think, going to happen this Christmas season. There's a couple of big electronic products like the new Microsoft system. So my sense of things is that in electronics, in particular, people are going to see heavy discounting. And do you view that as positive or negative for you guys? I mean, negative from the standpoint that competitors and the traditional retailers would be discounting more, but you could have much greater access to inventory, potentially, if things were overstocked? I think both those statements are true. And if we are smart, it works in our favor, and if we are not smart we get stuck with mistakes. I could say that this year, for the first time -- I mean, I know for the last couple of years we have gone into the quarter with a bunch Franck Muller's or some other experimental thing. We don't, this quarter. We are deep as heck in inventory, and more time went in this year to plotting what that -- doing a lot of analysis and figuring out what do we really want to get deep in and not run out of, and they have gone out and they have bought it. So we are deep, but it's all inventory that we want. There's no safe load of Franck Muller's in the warehouse. We have never been in such a good position with good inventory going into the Christmas season. A couple of questions. First, around the inventory that you just mentioned, I think on the last call, you guys said something like 65 to 70 million peak inventory, and you are at 95. So I'm wondering if you are higher than you expected, due to what happened in the third quarter, or if there is some opportunity that arose leading into the fourth quarter that caused you to build higher than you thought. And then, second, I think Dave mentioned that you still thought you could be operating cash flow positive for the full year. So I'm assuming that means something north of 62 million in OCF this quarter? And then I had one follow-up. That was the end, and I think it possibly could have been slightly higher than that after the September 30th number. A couple of things have happened. In previous years, a lot of our buying for the Christmas season got done in October and even right up -- usually, there's not much in early November, and then people start panicking around mid-November and we are taking stuff in December 1st that we sell. This year is different. People started calling us over the summer. And I certainly don't think it's going up from here, but I'd say that that bulge, the zenith probably moved from what is normally November 5th -- probably that moved back - - I know exactly what our inventory is as of this morning. What did we show us ending, David? It's not going up from there. And so part of it was something going on out in the world, that people -- we were getting calls, and we were buying in August and September for the holiday season, rather than the last-minute stuff. Well, operating cash flow, I still think probably positive 25 million is about right for the year. Dave, do you have a different --? Yes, it will be positive. We'll drop, assuming inventory drops 15 to 20 million by the end of the year, and we generate a whole bunch of December sales through our fulfillment partners that add up in payables. So, yes, we should see, like you say, Scott, 60 to 70 million of positive operating cash flow we anticipate in Q4. And then, just separately, but related to the inventory build, you have mentioned in the past that you expense your inbound freight, which I think is a little bit different from other online retailers, and your direct gross margin was 11% this quarter. So that was down, I think, 220 basis points sequentially. Could you possibly just break down the decline in the direct gross number as to, maybe, the inbound piece, outbound shipping and anything else that may have happened there? Sure. I know a huge piece of it is inbound. All that expense associated with trucking in the $95 million of inventory was expensed in the third quarter. I actually don't like that, and I think that going into the new year, I might ask to -- I think it understates three quarters of margin and then overstates margin in the fourth quarter. So I may talk to Dave about changing that. The majority of that is inbound freight. We had made mention to it in Q2. It was actually a couple hundred basis points higher, just as a percent of the direct business, than it was in Q2. I mean, inventory increased 35 million from quarter to quarter. So it was primarily inbound freight is the difference between this quarter and last. How many total basis points do you think were involved? I know it on a core basis, but can you say overall, Dave? And that's basically -- we have very little inbound freight at this point, so you get that big swing in the other direction. So I think you can probably see why I think that might be something that we want to start treating differently. Yes, and one of the reasons we are optimistic about margins in Q4, is that we know that's going to come down significantly. We put 400 basis points in margins last year, and I still think this year, for year on year, we've put 300 in so far this year, and I think that we'll finish the year at least -- last year was 13.3, and I would expect to finish this year at least 15.3 for the year. A couple of quick questions. I was wondering if you could give us a sense of the split you're planning on advertising between TV and online for Q4 and into next year? Well, Q4, it's -- I've said in the past that it's about 25% offline -- TV, radio and print. And we won't be departing much from that. We won't be departing much. We don't have any distinct new number. I know that it's been slightly different, but it's within 5 percentage points, plus or minus, there. And then, your comment regarding the breakeven operating profit -- I was just wondering if you could perhaps describe what some of those rabbits might be that you could pull out of the hat? Well, was gotten some -- Propeller is one of them. Propeller is -- and what we are doing is we are freeing up resources off ERP. We've sort of formed a S.W.A.T. team to just focus on the things that can make a difference this fourth quarter. And there are some really -- I mean, if I tell you some of the things we've learned -- one thing that has happened is we've gotten a very nice -- we now have two different systems that we use for site analytics, and that's systems that track the clicking behavior through the site. And this is where you do different testing, you change your color, you put up a 2.95 shipping banner, things like that. And we have found, just in the last two weeks, something that makes me want to stick a fork in my head. It's giving us a very measurable lift, and it's something we could have been doing for five years. That's an example. It's actually just a certain banner we've started putting up around our site, and it changes lift. It changes revenue per visitor significantly -- well, not significantly but measurably. I think that there's dozens of things like that. We are redesigning our checkout. We've got the assistance of a company called Optimos to do that; they are doing a whole bunch of testing for us. Propeller is the big one. Propeller -- right now, it's running a minicart as you check out, and it's powering different pieces of the site. But we are finally -- I've been banging (ph) for several years that we have to -- I don't think our site has been beautifully designed in the past. I think it's been designed by guys, for guys; it's not designed for female customers. It's not designed even very well for guys. There's a lot of experimentation and new mockups going on and being tested now. And since we have over 1 million people a day, we can get very incredible data quickly. And what we find is you change the look and feel, and you use colors to organize data and information, and it has immediate effects. We've only had the real system that could measure that since late September. And that was just another one of these projects, and I'm thrilled with what's coming out of it already. It's really going to take, I think, 6 to 12 months to squeeze all the juice out of that lemon. But we are looking for things that -- some big wins that we could have in this quarter, because I do think that -- I do want to hit that $350 million mark. I'm familiar with the Club O. On the Holiday O, I don't know the data offhand. Dave, do you have that at your fingertips? It's early, but similar to Club O, people who are joining -- and you really need to get through a Christmas to measure what their behavior was before and after they joined. But we've had quite a large response of people joining. It will be hard to know until Christmas is over on how it actually plays out. I can say that Club O -- we now have plenty of data where you take somebody who was a customer for a full year without being a Club O member and then joined the Club O and then was a customer for a full year -- and we've got many, many thousands or tens of thousands who now fit that description. And I would say that it has exceeded even my wildest expectations, in terms of how it affects behavior, once you get people to join. And I have pretty wild expectations. It's not 100% improvement in their value as a customer, but it's not a whole heck of a long way off from that. And just one last one. On the balance sheet, I noticed you drew down a little bit on the credit line. If you would just clarify the reasoning behind that? That's just, once again, for working capital. Because we have money tied up in the foreign bonds, we have a 30 million line of credit in place that we can draw down on. It's just -- this is the cash nadir for the year right now as we build inventory. Really, the cash starts flooding back in on or around November 4th, is where we start getting swamped. And also, something to understand -- I know Dave mentioned this, but sort of went over it lightly. Those two bonds that we have, one -- it's $50 million in cash. One matures next September, one next November. If I had it to do it again, I would probably have them both in September, because we don't need cash in November. That's just something you should know when thinking about our cash needs. A couple questions for you. First, can you give us an insight into the travel revenues in the quarter, as well as the gross margins? I believe you did break out the gross bookings for travel. The gross bookings were just short of 10 million. And I'll let Dave -- I know that your GAAP revenue, Dave, is quite a bit less than that. What do you call it? And then, as we think about the G&A and tech costs going into next year, can you give us a sense for where those are going to be, either as a percent of revenues or maybe on an absolute basis? Sure, I can give you one and one. I think that, if you model this at 8.5% of revenue gets spent on marketing and our G&A is $95 million plus or minus 5, you have a good basic model for the Company. You have got to figure out how much top line you think we are going to do and what our -- if we added 400 basis points in margin last year and, I think, 200 this year is a good assumption, you might figure that we -- I think that, and I can even walk you through where I think the margin improvements are. I think that there's another number like that to spit out. And so really, all we have to do is figure out, if we spent 8.5% on marketing, what does the top line look like? I can almost give you those two other numbers -- 95 million in G&A, including tech, and 8.5% on marketing. (Indiscernible) follow-up question, clarification. On the second page in the press release, you said 196.4 million in gross bookings, and I believe on the income statement table it said about 180 million (multiple speakers) bookings. I'll clarify that for you. The 180 is the shopping business. The 196 includes auctions and travel. So the breakdown that you see at the bottom of the table is the correct breakdown of all gross bookings. So that number is wrong; that number should say 179.5 million. My questions relate to the cost side of the equation. I think, as you know, Patrick, since April, we've been talking about the spending on infrastructure marketing. We were afraid you would probably end up spending more than you think to meet the targets that you put at the start of the year. So if you break that down, on the sales efficiency side, you mentioned that in some areas you've been efficient, using your brains, as you say; in other areas, you are not, using muscle. So what do you expect to reduce the spending in the fourth quarter, and '06 on the marketing? And then, to follow that corollary, if you were to -- you're spending more on free shipping this quarter. So why not just go straight to $1 shipping? And does that work for your model, from an economic perspective, going forward? Patrick Byrne, Overstock.com - President Well, on the brains versus muscle, I didn't mean to claim that we had been using any brains this year. We have been trying to get in position to use our brains. We have been firing up our brains. But this year, it's still been muscle. I think, especially in online, we figure out how to spend online dollars. But we haven't been using our brains, and it shows up in not seeing a lift in conversion. Other things have happened that have suppressed -- we actually do have a listing conversion, but by segment. One thing that has happened is this year, we've gotten very big in keywords, and keywords convert quite marginally, so the weighted average has -- that retards the weighted average. I mean, going forward, that if we can -- that 10% should drop to 8 or 8.5%, if we can just get conversion to move up 20%, which I think we should be able to do with things. Or not even conversion, revenue per visitor gets moved up 20%, which could happen either by increasing conversion or increasing the average order size, which Propeller personalization should do both of those as well as site design. So I don't mean to say we have been using our brains in how you spend a dollar online. But where the real money is is to get those other -- to get much better in those two areas. But Patrick, we are a month into the quarter. So I'm just trying to figure is there any way -- you are not really cutting spending, so obviously (ph) you're going to keep this thing to where it is. What do you think the sales will be there because the conversion rates are improving and should improve? Is that the point of that comment? Well, the fourth quarter, the conversion rates soar, anyway. I'm talking more to secular level. Yes, over the next six weeks, conversion rates basically go to 5%, 6%, something like that (ph). Right. And then on the free shipping? Does it work at $1 shipping, just to do it year-round? Does it work for you, or you are just not there yet in terms of costs and scale? Well, one way, if we do get 2 or 3% more, if the logistics in customer service -- let me back up a second. We are now spending about 2.3% of revenue on customer service. Where we should be is about 0.5%, maybe 1%. So just by getting customer service, getting some better systems and automation -- I think where other people are, are below 1%, say, 0.8%. There's over 1.5% we should be able to gain there. And on logistics, there's some huge savings we can do in shipping, now that we have an ERP system and we can be much smarter about how we give warehouses orders. And you can do a lot of intelligent things, build intelligence into your system and save a lot. So I don't think it's out of the question to expect to get another 200 or 300 basis points. What do we do with that? Well, I think that more and more, I'm leaning towards keeping it and not cutting to $1 shipping. I was one of the bigger fans of $1 shipping, and $1 shipping does seem to pay for itself. I don't know, there's pros and cons. Dave, do you want to make the con? I'm sure you are on the con side of $1 shipping. Why don't you make the con side? Well, the con side is that if hits gross margins. And in the face of the expense structure rising, the focus is trying to increase margins. And it does hide a little bit how efficient is your marketing, because you are shooting your marketing some steroids that they are not getting charged for. So that's kind of the con side of $1 shipping. On the other hand, you do get higher sales, and the higher sales, even at the lower gross margin, make up about 75% of what you give up in margin by the $1 shipping. On the other hand, back on the con side, it seems to shift sales just up a bit. If you tell people we're going to have $1 shipping for this week, you get a lot of revenue this week. But people seem to just shift their spending from next week back to this week. So you put all that together, and we've grown -- what we've really realized is, we must be doing something wrong, because we normally have 2.95 shipping. And yet, when we have $1 shipping, people come in and buy beds and bookcases and all this stuff. Well, the saving of $1.95 stimulating that behavior tells me we are not messaging well enough that our shipping is only 2.95. And so you see more of those banners. So I think that that's probably the direction we're going to go, is more towards showing people that a 2.95 everyday flat rate is a great deal, rather than just shooting marketing some steroids with $1 shipping. I think it's kind of a lazy way, for now. But on the other hand, it's not out of the question that, if we really get a lot of savings in our supply chain, you could see us pass some of that on to the consumer. And switching to $1 shipping might be a good way to do that. Just one more small question, if I may. On the gross margins, how much of that decline -- and I know you expect it to be better -- is a function of merchandise mix versus just shipping and the pricing stuff, to the extent --? The reason why I ask that -- I'm concerned that you're saying you're trying to drive your gross margin. Is there going to be a shift in merchandising that can also reduce sort of your sales targets? No. Our merchandising margin is holding its own or improving. It's certainly not deteriorating. Our merchandising margin is right where our goal was for it to be. In some weeks it's even, I think, too high. So that drop to 11% on the core stuff that we buy is not a function of -- the mix is not against us. It's a function more of the supply chain and factors like the inbound shipping suddenly going up. Let me see. We have a whole list of people. We're not going to be able to get through everybody. Why don't we go -- okay, well, we've got five more people, I see. So go ahead to Justin Post. You like to compare your model a lot to Amazon's. And I'm just wondering; your marketing is higher than theirs. And you've mentioned earlier conversion is lower. When you go to Amazon, you really kind of know what you're going to get, and the inventory really is sustainable. Can you talk about how you're going to convince people that they can come to Overstock and find what they need, as opposed to just come on a special promotion basis? Well, it is a different model. It is a different model, and I forget what Amazon -- in North America, what percentage of their revenue is still book, music, video? Do you know? Is it 60, 70, still? So, that's a challenge for us, because we are not going to have -- we can, first of all, have a much better BMVG department. Right now, you can't -- it's hard to find descriptions of books and CDs and stuff; that's one of the things we are working on this month. But it is going to be hard. We are never going to get the furniture department to convert like Amazon's books do. On the other hand, there are good apparel sites like JCPenney, who do very well on conversion. So our shtick is not that we have everything, but that we have something good in each place you want to look. We're getting there on apparel. The short answer is we'll never get Amazon conversions, but if we go from 2.5% conversion to 3.5% conversion, that's 40% less. And it seems to me that that's a much cheaper way to get 40% growth than trying to buy $400 million new revenue through marketing deals. So that's really where our focus is going to be. And then, two quick follow-ups. Partners, plus or minus any in the quarter -- did you lose or gain any? And second question -- I think T.J. Maxx shut down their operations. Do you think that's a positive, or does it indicate that it's a tougher business, your business model? On partners, I'm not aware of losing any big ones. And Dave, I'll cut to you in a second. I've been impressed -- other times when we've had problems -- and the same time last year, we switched to a different software package to manage our partners. And we had problems, and there was a lot of teeth, toes and fingernails about what was going on. And they beat us up, and they were right to. I mean, we are providing them a service, and we stopped providing it very well. That was a year ago. This time, I loved -- I mean, they get it. We are all part of the same team, and the partners that I talked to showed a lot of forbearance and understanding. I'm not aware of losing any big ones, and most of our partners are up -- the whole company is up, I think, 79% or something year to date. So most of our partners are quite happy with that. Dave, do you know of any big partners --? No. I think we've built a very loyal partner group. And right ahead of Christmas, they are just excited for Christmas. We've busted a gut, and they know it. They really did put up with a lot. For five weeks, we couldn't load their products. And some of these guys are small guys who went out and brought inventory, and I felt terrible, because they are sitting on this cash that we couldn't -- but we did -- we had people working nights and weekends, once the system could take it, to get their products up. I think they understand that. They view themselves almost, from what I can tell, as part of Overstock. And our own buyers were mad at the IT department, too. And that may have been an attitude that was shared by the partners, but it's not really an us/them situation. And I'm sorry, I've lost -- I didn't make a note on your second point. Oh, T.J. Maxx? Well, I'm surprised. A few years ago, somebody told me that T.J. Maxx had tried cataloguing back in the early '90s, and they had gotten killed. And they got killed on the returns cost. Now, I may be -- I was talking to somebody in the logistics field who knew their business well, and said that they had gotten out of it because the returns killed them, and they just decided never to get into it again. So then, the message was you don't have to worry about them coming in, Byrne. Well, they did come in, but they came in -- and it's a monkey business (ph). They got out of it. I think that's definitely good for us. I think that we are getting -- it's going to take a while for folks on the outside to see this, but we have become -- you know, apparel was nothing two years ago. It's going to do over $100 million this year. On 7th Avenue, New York, we have become a player, and people respect us -- not, obviously, the same stature as T.J. Maxx. But we are on everybody's radar. And I think it's good for us that they pulled out of this, because those people want -- they see the new economy coming to them, finally. They see this coming, and they want a place in it. And I think that we are evolving into -- I just know, even yesterday, I was dealing with some folks who were telling me this, that the name that we have now gotten, especially in the apparel industry. Okay. I'll try to be briefer, so we can -- next is Rebecca Kujiwa (ph). Two quick questions -- or actually, just really one. Your inventory has almost tripled year over year. And actually, you've talked a little bit about what that build is and how you have been buying earlier. One, your inventory, your distribution center, must be stuffed to the gills. Will you have to change your planning at all for next year, as far as capacity goes, assuming that you expect the same/similar build earlier in the year (ph) than you were expecting before? Great question. It is stuffed to the gills, and we've actually rented a little warehouse down the street for $20,000 for bulk storage. But actually, one of the great virtues of this new Oracle ERP system I am pleased with -- and by the way, I know, when I'm talking about Oracle, it should be absolutely clear they are not the ones who tripped up. In fact, they and IBM saved our bacon. And so, by me talking about this ERP problem, I hope people don't hold it against Oracle. It was completely our fault. It was completely my fault. I made the decision that I shouldn't have. But one of the virtues of it is we can have a lot of intelligence. So, for example -- now, I don't think we have to keep this secret anymore; we used to keep this secret because other people hadn't figured it out. You have to divide products into ship alone's or ship together's. And you normally don't want to split ship together's, because you don't want them to come from two separate warehouses. Well, it turns out that a very high percentage of the time that somebody orders one of our core ship together's, it comes from -- it ends up shipping alone from a warehouse, just because either they order nothing else or they order something else that's a core ship alone, or they order a partner product, and say over three quarters of the time. What that means is that we can start -- under our old system, we were not able to split inventory. We had to keep all of one SKU in one warehouse. Now, with the new system, we can split it between warehouses, so we can put -- if we get 1,000 of something, we can put 500 of them or 400 of them in Salt Lake and 600 of them in our Indiana facility, which means that we will be able to not only get it to the customer faster but, if we are shipping to New York, you are saving 30% or something on the freight. There's actually the partner we have, OHL, who runs our Indiana facility, actually has 90 facilities around the country. We are not going to split inventory among 90 places, but you might see us start splitting it into three or four big places. And that can -- probably no more than three, actually. That can create real savings on logistics. It also gives you more capacity. I have basically had -- one thing has worked out better this year then planned, and one thing worse. I thought that next year, we were going to have to do some sort of dramatic warehouse overhaul, either completely redoing this warehouse here or going out to some million square foot facility in Salt Lake, or something like that. It now looks to us like, using the brains side of the equation, we can get through next year and the year after without any big, significant redesign of the logistics system. On the other hand, I thought our computers were going to last us this year and maybe next year, maybe not, and our computer system would be strong enough. And actually, when we looked at it this year, we realized, no, we had to replace it. So one system got replaced a year earlier, and one system is going to last a year longer. If I take from your explanation, if you do want to do another site, either Indiana -- either an expansion of Indiana or add an additional site, you will likely look at OHL, or at least a thirdparty logistics manager? I think so. In fact, we've already -- we are moving into a bigger facility in OHL in the first quarter. Two questions. The first is in terms of your sort of '06 Q4 timeline or projection, hypothetical, that you laid out -- Ambition. The question is, why would you feel confident that year-over-year growth could accelerate next year, given that that isn't something that has happened for maybe the last two or three or four years? And then, somewhat related to that is sales and marketing, as a percentage of revenue, you talked about it perhaps dropping to the 8.5 level next year. And that's a pretty meaningful decline, which would clearly reverse the trend that we've seen over the last few quarters. And it seemed like a lot of that is hinged on Propeller. And until Propeller fully launches and you sort of get the type of feedback you want from it, why would you feel confident that those types of hypotheticals could be achieved? I'll take the first one. First of all, my degree of confidence on meeting my ambitions, even the less grand ambitions -- I'm not saying I'm confident we can meet them. I think it's a slightly scaled-back ambition; it's still a good ambition. How I think of it now is that we can probably get -- I think that the reason we are able to grow so much, so much more cheaply than other people, is -- and just for comparison, and I know people hate to use comparisons, but Amazon at our size was losing 1 billion 1 a year, an operating loss of 400 million. I think that -- corny as it sounds, I think that the reason we grow like this is we are just that much a better deal. We're just getting better and better at all kinds of things. But I don't think that that takes you past about 50%. The market is growing 15 to maybe 25% in the fourth quarter. I think that we can grow 50% reasonably, just because we are good, but it takes people -- there is a limit on how much people are going to change their habits in a given year. But if we can grow 50% -- so if you take 100 and you grow it 50%, there is 150. If we can get even a 20% lift from the combination of site design and personalization, Propeller -- well, that 20% on 150 is 30; it brings you to 180. It takes you back to 80% growth. So that's kind of the way I look at it. And I meant to mention, we are -- I think I did mention -- we are seeing definite results from Propeller, I mean double-digit lift. And I don't think it's out of the question we get -- nobody here does think it's out of the question that we can get to conceivably the 35 or 40% lift that other people experience that seems to be, when you go to these conferences, what people say is the upper end on what you get. My guess is our business model doesn't allow for that. Our business model means maybe it is capped at half of that. Maybe just 20% is the most we're really going to get on a stable basis. But we are already seeing, like I say, spurts of four or five days at a time, we get a 21% lift, and then it decays. What we're trying to do is figure out how to stop it from decaying. As far as CapEx, it's obviously greatly reduced from this year. Dave Chidester, do you want to --? Yes, I think greatly reduced, but we're in the middle of planning for '06. I think we'll have a much better number next quarter, but it will be considerably less than it was this year. Why don't -- let me go back to that first point. That's all just for color. Then there's site design, and site design -- when the book is written, and I explain what we found out in the last two or three weeks, you're just going to want to stick another fork in my head. The site design issues -- I can't believe how, when you can really refine your measurement, how you can find little things that make 5% differences. So I think you put all that together and you say, if we can get even 20% out of combined Propeller and site design, that kicks us back up into sort of a 70 or 80% growth rate. But we may not; I mean, our history has been five or six years that may look like smooth growth. But it's really been we figure something out, and it pops us 30%. And then we work a few months, we figure something out, and it pops us 20 or 30%. Those things that are able to be figured out are getting fewer and farther between. I think that there's really -- the last two big ones are personalization and site design. Then there is conceivably one other, third one; I won't tell you the project name, because everyone will laugh at it and give me -- bring it up to me. But there's one third one. But then, the things that we can figure out that have made us grow so much faster than other people will most -- will, I think, be used up. And then you'll see us regress towards what's an industry rate. Yes, we have two more people who have been waiting -- three more people. Dan Thorne (ph), Aruva Shaw (ph) and Jim Krueger (ph). Okay, Ms. Shaw or Mr. Shaw? This is Don Best (ph) for Dan; he had to step out. First, do you expect your current level of spending on IT and G&A to remain at the current level in the next quarter, or will there be a big drop? Well, a lot of it is becoming depreciation, so it's not going to drop. Dave -- I think 21 million, is that still your number for this quarter? Yes. I think, overall, G&A and tech -- we had talked at the beginning of the year about it being 60 million plus or minus 3 million. And I think for the year, we are going to end up at the high end of that range, which means we're going to see -- by the end of the year, we should have all of the spend that we've put in this year will be depreciating, so it will be a much more -- the Q4 number will go up again from Q3, but it will be much more similar to the number that we will see going forward. But yes, we do have one more stair-step in the next quarter. My second question is, we burned some cash this latest quarter, because we were building up inventory for the Christmas season. You've also been buying stock. I'm a little concerned about us buying more stock than we can actually afford, given our declining cash balance, your requirement for the foreign bonds. What is your plan on stock purchases, and do you feel that's a risk to your business strategy by continuing to buy stock? I think we're in the same boat there. I think we're in the same boat. We are in a place where, in seven more days, cash stops being an issue. It starts flooding through the door, and it's just not going to be an issue. Where we see it as conceivably being an issue is if we're trying to build inventory next year, in August, and the bond does not mature until -- half the bond matures in September, and half of it in November. Do we get into a cash squeeze? But there's small things that can be done to -- you know, we will be able to get around that. But I see your point. I don't want to go out and use a chunk of cash that is presently on the books to go and buy -- I mean, I would love to go and buy more stock. But I'm also reaching the point where, although I would insist that my father and I count as separate persons, from an SEC sense, people might argue that we're the same person, and we are reaching the point that I think we're about 1.3 million shares, I'm told, from being over 50%, which we don't want to do. So there's not much more stock we can buy in, anyway, without tripping that. And Jim Krueger? And I think this is the last one. Yes, dramatic improvements. Jason Lindsey (ph) is sitting right here with me. Well, first of all, there's my father. My father was the Chairman for the first three or four years of the Company. He stepped down because of some Sarbanes-Oxley stuff, and then he slowly came back and was Vice Chairman. I've been asking him to be Chairman for almost a year. I think I announced three or six months ago that you would see this before the end of the year, didn't I? I put that in the press release, and people wondered why I put it in. Well, I put it in partially to pressure him into taking it. He has been retired, and he's been sort of coming out of retirement to take care of some other things in his business life. But we have a great working relationship. We bang heads a little bit, but we've worked together on and off, on different projects, for 20 years. He's been a great Board member. And I did try to give people warning. I was afraid people were going to say that it's a sign of destabilization; that's why I gave people warning, but also to try to present them with a bit of a fait accompli. And he took it. He has flunked retirement for the fourth time, and he's going to be Chairman. And I strongly believe that the Chairman and the CEO position should be split. In my mind, I work for 10,000 strangers, most of whom I never going to meet. And I can't meet them each quarter, but what I can do is meet a group of five people that represent them. And I think it's a mistake for someone to be the CEO and to be the Chairman, because he is straddling two hearts in one breast. Ray Groves is a former managing partner of Ernst & Young -- Ernst & Whinney, then Ernst & Young. I worked with him in the mid '90s on a number of acquisitions, and sat on a couple of boards with him, and in fact, he made me the money that was the origin of Overstock. We did about four deals together, and two of them worked out just spectacularly. And we had a great relationship. We haven't done anything for five or six years together, but literally, the funding from Overstock, when I think of it, when we were still private -- my piece of it all came from deals that I did with Ray. We were in a printing company and a fixed base operator company and a mulch company that we just sold. He has a tremendous business mind as well as, of course, a great financial mind. I think he's going to sit on the audit committee, but Gordon is going to stay chairing the audit committee. And then Jason Lindsey is -- Jason is my best friend out here in Utah, my best buddy. He's a CPA, MBA, real entrepreneur himself, made a lot of money before we ever met. We really started -- Overstock was our first real project together. He, I'd say, built the Company at least as much or more than I did, is super well-respected around here. I've always told people, if I get hit by the proverbial bus or somebody drives over me on purpose, to call Jason; he's very well-respected within the Company. He retired a couple of years ago. I actually wrote something about this on Motley Fool a few weeks ago. He had a health issue with his family. Well, he was the CFO, and I was the President. He became President, and about three weeks later, he had a health situation with his family which I won't go into here. And he came to me, and it was a serious health issue, and he told me that I could say this, because there's been so much scuttlebutt about this crap. He had a real health problem in his family, and it was unfortunately, I don't know, just weeks or a couple months after becoming President. So he stepped down, and of course some people said, well, the CFO/President is stepping down after being President for two months. What does that mean? Well, it meant that he had a serious health problem in his family. We said that. And he's back. He's actually sort of kept a toe in the water with us for the last couple of years, and he knows everything going on in the business. He's much more conservative than I am. I think he'd like to see us throttle back to 20% growth and start spitting out 40 or $50 million. And I'm not sure he's wrong about that, but -- so it's a very healthy relationship of equals. He will be on the Board, and he's a great, great financial guy, too. Anything else, Mr. Krueger? Well, 10:26, hour and a half. I see a lot of folks have stayed on; that's always nice. Again, gomen nasai. I guess I'll add one more thing. Jason just passed me a note. I'll tell you what I think. I guess I'm doing two things. I've just reminding newcomers of the story. I'm doing things differently in two ways. One is, I don't understand this. There are guys who say, Byrne is always making excuses. I'm not. I'm saying, hey, I stepped in it, and I made a mistake. And I've said that -- we've been public about 13 quarters, I think, and in four or five of them, I've come out and said, I made a mistake. This went badly, and here's what went wrong. Here's my mistakes. And when I do, people say, oh, Byrne is making all these excuses. I don't know what they are listening to. These are my mistakes. I made these mistakes. They want to bayonet the wounded or something. But all I can say is what I can do with the last quarter is learn from it, making no excuses. I take full responsibility, and it wasn't the fault of my CIO and it wasn't the fall of any of my colleagues here. It was purely my fault. Gomen nasai. The other is, it seems to me the normal game is played with -- people throw out numbers with a lot of windage in then, trying to be 95% sure they are going to beat them. I warn you that all the numbers I throw out, I'm really putting out the kind of numbers I talk with the executives about, without windage in them. I think it's 50/50 whether we go over them or under them. People always love to -- I think that I'm more open about what's going on in this company than any CEO in America. I give folks pretty much the letters and operational reports I give the Board of Directors. I know I work for shareholders. That means, though, that if I say here's these ten things we are working on, and these three things went great and these four things are mediocre and these three things went badly, it's very easy for people to jump on the things that went badly and say, oh, more blown missions. Well, if folks want just corporate pap, I can write corporate pap. I'm really trying to let people know the details of what's going on. You decide for yourself, but there's not windage in my numbers. When I tell you that we are shooting for 350, it's not, hey, we've got a secret plan, I know we are going to make 380, or any of those games. I'm telling it to you straight.

EarningCall_233998

Here’s the entire text of the Q&A from InfoSpace's (ticker: INSP) 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] Hi, thanks a lot. Thanks for taking my questions. I would like to ask two at this point. As we are going through this, what we are calling cleanup process in the search and directory business, can you just give us a sense of what the baseline revenues for that business may be in 2006 and how long will that process last? And then secondly, in the mobile business, I think it is still relatively small, but can you give us a sense of how much of your revenues are coming from applications other than ring tone downloads? Thanks. Sure, Mark. Thanks for the question. On the cleanup traffic side, which is your first question. We've focused and have been as proactive as possible in really addressing kind of what has become, what I would say a changing and evolving landscape both in terms of the advertising online market as well as, the relationships with partners. And so, it is a process that we talked about a quarter ago and it's something that we have embarked on and have been as proactive as we can be in that area. And so it is just hard for me to speculate on kind of the exact extent of that and when and what happens in that field other than to say that we're out there being very proactive about the quality of traffic and we will continue to be proactive there and I think, you should see our guidance for fourth quarter reflecting as we had indicated earlier, reflecting in part the impact of kind of this improvement on the traffic side. Switching to your second question on the mobile revenue applications, really I guess maybe I could sort of briefly explain kind of the key areas of revenue for us. One is the ring tones area, which has been kind of our biggest area of revenue and revenue growth. The other area is kind of graphics, or what some people call wallpaper. A third area, and not necessarily in any order other than top of mind here, is the games and the products sets we have in games. There is a whole other set of content hype that we introduced over the course of the last year plus, that are like voice ringers and other genres within those categories. And then obviously, another important area for us as a company is around the services and infrastructure we provide for key carriers such as, the Portal for Verizon as an example and portals or some people call those the WAP decks for other carriers as well like Cingular, and Key Mobile, etc., We haven't, It is not something that we have broken out separately. In part because, a lot of our work in that latter area that I just mentioned is reflective of our broader relationships and deeper relationships with carriers, so in many cases the importance to us of doing that revolves not just around a separate business opportunity, but more importantly a way to drive business for us as well as for the carriers. Indeed. Could you please tell us about on your for your ringtone sales, what would be the percentage of those that would be labeled tones or polyphonics and how that has evolved since the last quarter? Hi, Sasha. On the ringtone side, we haven't broken out specifically for competitive reasons. And because each of our carriers have slightly different breakdowns in that area. What I can tell you and what we have talked about over the last few quarters is the label tone product that well I guess maybe taking a step back, the whole ringtone business is very, very new. For us at InfoSpace started in late 2003 through an acquisition. But really the whole industry started in the United States anyway, started in the 2003 time frame, late 2003. And in early 2004 label tones were launched by a few carriers. And some people call that label tones and some people call it true tones or something like that. And really that has been a much higher quality product, a much higher quality service. And not surprising we have seen significant growth on the label tone side fueled by new handset sales and fueled by the fact that it is a superior product. We continue to think the bulk of the growth, as we have seen and the bulk of the growth going forward, will come from the higher end products like label tones. And with that in mind that is one of the reasons we embarked on a much broader content strategy, which includes adding games, adding other kinds of content. I mentioned some of it earlier, things like comedy, things like movie type content, also graphics and wall paper, and other types of content that you will see over the course of the next few quarters and hopefully years. Great. Now a question really specifically relating to the gains. I understand that you're on a break sort of specifically what the revenue is coming from those, but now that you have had, coming up just about a year, three acquisitions that you have made basically, what has been sort of your learning from having those and what do you think your string star with the games and what is your strategy particularly focusing for games going forward? Sure. Well, I think kind of, the main thing we did just to remind everyone, is we purchased three relatively small and young companies over the course really of late 2004 and into really early part of 2005. So it has been a pretty recent entry for us into the games business. Also our acquisitions were relatively small and young companies, and what we focused on is primarily, to date, really getting the different groups better integrated with each other. So we are doing some sales here in the U.S. from games that were developed in Europe and then taking games that were developed here over to Europe, and so we have embarked on that. And really kind of the other major area of initiative for us and kind of it's consistent with some of the hiring that we just recently announced, in particular around the kind of content and media expertise is really around the licensing for games and so we are actively working as we speak on unique and interesting licenses that will add, I guess greater richness to our games catalog. And between that and kind of a continuing to enhance on the product set, that has been our main focus. And as we talked about one or two quarters ago that business has been in kind of been in the 5% to 10% range of our mobile revenues and continues to be the case. And we will continue to use the games and the games development as one of many content strategies that we have as we continue to grow the mobile business, and as we continue to work with carriers on a broader set of broader set of products to sell them. And to your question about what is our strength in that area, I think our biggest strength, or two biggest strengths, I would say are around really the ability to have strong and deeper relationships with multiple carriers across the world. We find that when we meet with content owners or games producers or others, our ability to potentially get them onto other carriers decks is very interesting to them. And then the second area is around core expertise on developing a product for a mobile environment. Those are pretty complex tasks and that is what we spend most of our time working on that. Hey, David, congratulations. Can you explain why or elaborate a little bit on why paid volume of paid searches was down sequentially from 214 to 182. And then also why you saw an increase in revenue per search from $0.18 to $0.20? Sure. On your first question, about the paid volume decrease, remember our metric is a combination of both our search and our directory paid searches, but includes both search and directory. The loss of Verizon in Q3, which happened late in the Q2 time frame and we talked about last quarter, had a significant impact in that sequential comparison that you are look at relative to paid volumes. Obviously we are working hard to try and find other sources of traffic to replace that, but it happened late in the quarter and it takes time and we made some progress there with the addition of Yellow book, but more work to do that. And then similarly, the increase in the revenue per paid search is primarily driven by the fact that the mix of business on the search and directory is more heavily weighted now towards search than directory relative to second quarter. And that had an impact on the ratio or that number that you asked about. And just one follow-up. You had mentioned the second quarter that you expected to spend $5 million on sales and marketing behind your wholly owned websites. It looks like you increased spending there $1.5 million. I guess what did you see in your sales and marketing efforts, and are you concerned that not spending there might hurt the long-term sort of awareness or demand for those sites? I think a couple of things on that, Stewart. In terms of the spending, not all of that 1.5 was an increase in the search and directory site, but a big chunk of it was. And kind of, as we talked about last quarter, we had been experimenting and continued to experiment with marketing spend on our own sites trying to see kind of what works and how to most cost-effectively drive users to our site. And so in Q3 we did increase our spending as you noted and as we had planned. What we found was we had pretty good success at getting users or visitors to our web sites. We didn't have as good of success as we had hoped in terms of driving revenues from those searches and from those searchers. And so as a result, in Q4 we will go back to levels of spending that were closer related or more like what you had seen in past periods, past meaning, before Q3. In terms of the long term, we are working on plans for 2006. I think it would be probably too early to really comment on that and beyond. Obviously, we continue to work on different initiatives to improve on the products side and to continue to look for ways to enhance the value of those assets. Hi, good afternoon. A couple of questions. I think you mentioned a percentage of clicks that came from affiliates at 60%, but if I misheard, please correct me there. I didn't know what that 60% number as you mentioned. Also, curious if there had been any change in the TAC rate paid to your affiliates, any trend there that you can speak to? And then on the mobile side could you comment on the local search offering, have you launched it with any carriers yet? And then also, if you could talk about the pay-per-call deal that you have announced and the timing of how that might be integrated into your mobile offering? And then lastly, whether you have plans to launch a direct consumer site for games and mobile content? On your first question the 60% is actually 60% of our search revenues that are from our distribution partners. The portion of our search and directory revenue, the search portion of that portion of revenue over 60% came from our affiliate. Which is consistent with past periods. Kind of following on that, if I remembered most of these questions right. On the tack rate, I would say no real change in terms of that. We haven't seen that yet. So no change there. On the mobile side, we just launched it. Actually at CTI, we featured our mobile local search product. I would say it is early and we’ve been pleased with the response we have gotten both from the industry and from potential customers. We are interactively working as we speak on trying to, to make some successful sales in that area and that is probably all I could say that the point. But again, It is early and you got to create the product before you can sell it in this part of the industry and that is what we are doing and we are working hard on selling it. We think it as great product. Pay-per-call is again very early in the world of pay-per-call. It is an interesting model. We have talked about it before in the context of search. I know in the search world there is a number of companies out there working on pay per call and it is something we will continue to pursue as one of many potential vehicles for sales and growth. And then finally, direct to consumer, obviously it's I guess with regard to direct to consumer you are probably referring to the mobile side. Mobile or and or games, I think it is fair to say that, as a company we need to continue to explore all possible avenues of the opportunity for our business, but other than that I can't really speculate any more on kind of which initiatives, we may pursue in the near term or over the course of '06 and beyond. On the mobile side first. Can you talk about the growth in mobile downloads whether you saw it from organic growth, from existing customers, or was it from some new carrier launches? And also, if you could talk about where you saw some stronger growth by content? With ringtones, games or graphics or can you give at least, where you saw bigger growth? Sure, on your first question in terms of organic or new. Most if not all our growth came from our existing partners and our existing partner relationships. And as, Scott, we have relationships with most of the major carriers certainly in North America and then many outside North America and in particular in Europe. So, no real change there. And, it was a nice change for us from I guess a sequential standpoint to see the pickup in third quarter. On the second question about which type of content really, in the third quarter we saw a favorable pickup in a variety of our content sets but I would say to date the main demand for content is still around the music categories, so the ringtones being the main driver of customer usage. Okay. Have games increased as a percentage of the content revenue? I think you said about 5% last quarter, mobile? I said last quarter and I think even the prior quarter games has been about in the 5% to 10% percent range of our revenues and that continues to be the case this quarter as well. Okay. Remind us what the loss of Verizon impacted you this quarter maybe on a net basis? I know you got this other customer to monetize some of the traffic, kind of what you got back from that customer if that was anything this quarter so far? We had said at end of second quarter that the lose of Verizon in second half of the year would have about a $9 million impact on the company in terms of that was quantifying the loss specifically there. I prefer not to disclose for obvious reasons the benefits we have gotten from other potential partners and so I kind of leave it at that. You can see that our decline in revenues quarter-over-quarter wasn't it was less than $4.5 million, so I think that will help you a little bit on that front. I think that's right. I guess I say that is always the case with all of our traffic, but yeah, absolutely. Okay. And just a couple last financial questions. Any ideas on the use of your cash balances and any 10% customers? I guess as you could see in the last quarter we were very active on the repurchase front and obviously, we continue to look at and explore potential ways to best use our balance sheet to enhance shareholder value. The main one being, possible acquisitions in our industry. Can you briefly comment on your relationship with Cingular? And also, on the balance sheet, can you comment on the increase in receivables sequentially? Sure. I mean I'm not totally sure I know how to answer your question on Cingular if you have a specific question? Just some color in terms of when we were at CTIA we saw a lot of companies trying to get placement in the Cingular stack and just relative are things going better or worse? Just a little bit color of what is your relationship with them? Cingular continues to be a very important customer to InfoSpace and we work very hard [indiscernible] at all levels of the organization to meet or exceed their needs as a company. I would like to say I think we made great progress and we continue to make good progress, but really that might be a question best posed to Cingular. We certainly would, that's why we're here. To do a great job for our customers, and I would say that any of our customers whether it is Cingular or any other ones it is, it is an important part of the company's sort of focus is around keeping the customers happy and meeting their needs. On the balance sheet front. On the receivables question. Really, you have to remember that as a company our top ten customers make up a significant amount of our revenues, so sometimes if those customers were to pay slightly faster or slightly slower that can have an effect on our receivables. Again it's really more a reflection of timing rather than anything more than that. And also, keep in mind that the types of customers we deal with, our top ten customers are all really most if not all of them are very bluechip companies. So it's not something that concerns us if we get paid a few days earlier or later. And again the receivables were up only slightly, relative to prior period. Good afternoon, David. Couple of questions. The first is, I was wondering if you would go through the kind of contracts from key customers that are up for renewal in 2006. And then also, any kind of guidance you could give on the individual expense lines for the fourth quarter? Sure, why don't I start with the first one. Contract renewals and specific dates isn't something that I'm prepared to break out obviously for competitive reasons and for confidentiality reasons. From time to time we've disclosed what kind of customers and when the ending dates of those contracts are, but it is not something that I like to break out in detail here. Other than to say, as I said on the Cingular one as well, that our customers are very important to us and we work hard to try to meet or exceed their needs. When you only have a few major customers as we do, you try to get feedback from them day in and day whether than waiting for some arbitrary date when a contract ends, in terms of feedback. On the expense line, I think the main comment I would make, which is consistent with the comments I made on the call was we expect the margins to be similar to the range of guidance that we provided last quarter. That being 15% to 20% on the mobile side and 35% to 40% on the search and directory side. And I think that, that's probably the most helpful thing given the revenue guidance we gave and the other guidance for you to kind of work on your models. Yeah, I think it would be premature to do that. We are actually, as we speak, we're working on our 2006 plan and kind of consistent with what we have done in past years I would expect that that plan and kind of our outlook for '06 or more detail in '06 will provide that at the next earnings call. Hi. This is Derek Newman calling in for Imran Khan. Two quick questions. The first. Can you give us an idea on how the traffic trends have done on your owned and operated sites? And then secondly, can you give us a sense of how much of your traffic distribution deals are coming up in '06? Hi, Derek. That level of specificity isn't something we typically break out. The traffic trend our own sites have been, they performed I guess sort of in line with kind of what we had seen for the last few quarters. Obviously, as Q3 tends to be, and Q2 as well, tend to be some what seasonally weaker than other parts of the year. In terms of traffic and or partners, again for competitive reasons we don't break out specifics and when those deals are up for renewal. With that I think we would like to thank everybody for joining us on the call today and please don't hesitate to call any of us with follow-up questions.

EarningCall_233999

Here’s the entire text of the prepared remarks from Yahoo's (ticker: YHOO) 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, ladies and gentlemen. And welcome to the Yahoo Third Quarter 2005 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Paul Hollerbach, Vice President, finance and investor relations. Mr. Paul You may begin. Thank you and good afternoon and welcome to Yahoo's third quarter earnings conference call. On the call today are members of our executive team Terry Semel, Sue Decker and Dan Rosensweig, and Jerry Yang. Before I begin I'd like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning Yahoo's expected financial performance as well as Yahoo’s strategic and operational plans. Actual results may differ materially from the predicted results and reported results should not be considered in indication of future performance. The potential risk and uncertainness include among others the company's ability to compete with new or existing competitors, a reduction in marketing services spending, adoption of our premium services and risks related to the integration of recent acquisitions. All information discussed in this call is as of October 18, and Yahoo undertakes no duty to update this information. Other potential factors that could affect the company’s business and financial results are included in the company's annual and quarterly reports, which are on file with the SEC. On the call today we'll be discussing some non-GAAP financial measures in characterizing the company's performance. Reconciliation’s of those measures to GAAP measures can be found on our investor relations website. Terry and Sue will spend the next 30 minutes on prepared remarks, which will then be followed by a Q&A session that will lastly until 3 p.m. Pacific Time. Now I'd like the call over to Terry. Thank you, Paul and good afternoon, ladies and gentlemen. Yahoo has continued its run of exceptional growth. Our relentless focus on our consumers and continued investments in people and infrastructure has led to increased product quality and a powerful rate of innovation, which are really paying off. As Yahoo's relationship with its users grows stronger, the costs we have chosen to build the world's largest global online network of integrated services is being further validated. This is a very exciting time. For the third quarter we reported revenue of $1.3 billion, up 47% from the third quarter of last year and our 10th quarter of record results. We achieved balanced growth with contributions across the board from our multiple lines of business and geographies. Operation income before depreciation and amortization in the third quarter was Yahoo's highest ever at $385 million, up 48% year-over-year. We were able to deliver these results even while investing in and pursuing emerging opportunities and launching some of our most exciting and innovative products to date. These results clearly highlight the power of our brand, products and business model. Yahoo reaches 73% of all Internet users in the U.S. in any given month, which speaks of the importance of the extraordinary breadth of our product suite. In fact, there is no doubt that Yahoo reaches more people in more ways than any other company on the web. Most importantly, Yahoo has deeper relationships with its users, which is essential to success in the next growth phase of the Internet. This helps provide our users and advertisers with richer and more relevant experiences. The broadband and mobile Internet is always on, always fast, and always with you. As users depend on the Internet for more things in more places and on more devices, we believe Yahoo with its integration of search, content, community and personalization has the best product suite to provide the greatest value to users around the world. By building both breadth and depth of usage globally, our consumer relationships also enable us to take advantage of multiple moneterization opportunities, which includes offerings all forms of advertising as well as premium services and commerce. As a global network among the biggest future growth opportunities of course is China. That is why we signed an agreement with Alibaba in China during the quarter in which we combine our assets and have approximately a 40% economic stake in the new entity. This transaction is expected to close in this fourth quarter. We believe the combination of Alibaba and Yahoo is the best approach for Yahoo to win in China. Together the two companies can combine to deliver the best search, commerce and communications under the management of a very strong local team. This arrangement will further strengthen Yahoo's position as a pre-eminent destination in Asia, where we are a leader in many of the most important markets in that region. We have been on a mission globally and it is really coming to fruition. Let's look at some of the specific highlights for the quarter. We ended the quarter with approximately 411 million unique users up 26% from 325 million for the same period last year. Our active registered users now stand at approximately 191 million, up 22% from 157 million in last year's third quarter. The fastest growing subset of users continue to be our paid subscribers as people find more value in Yahoo's suite of premium services. In the third quarter we ended with 11.4 million unique paying relationships up approximately 1.3 million subscribers from the last quarter and up 50% from last year. When we look further into our numbers, we are extremely pleased that we have achieved important share gains across many, many key verticals. Additionally, the average number of Yahoo services used by consumers and frequency of usage in many of our key verticals are also up. As an Internet network, we look at these trends and we know that we're moving in the right direction. We have always said great products lead to a great business and this quarter you have seen us launch some of our best products to date. I'll now give you a quick overview of some of them. In communications, Yahoo messenger and mail made significant advances. We announced the industry's first major IM inter- operability agreement together with Microsoft to form the world's largest consumer IM community with more than 275 million users. We also made significant upgrades to Yahoo messenger with high quality PC-to-PC voice and interactive photo sharing, which we launched in 18 countries. This was the next step in our voice strategy which you'll see unfold further over the coming months. Yahoo mail hit a significant milestone becoming the largest global web-based e-mail provider according to ComScore Media Metrix. We recently launched a new beta featuring a completely redesigned intuitive user interface with the speed and responsiveness of a desktop application. Industry experts called it “Far superior to competitors, sleeker, faster and smarter than its predecessor and stunning in its simplicity.” Our media group began its first phase of expanding its content initiatives and its integration with world-class community features. We introduced well-known and respected columnist within the personal finance area and launched Kevin sites in the hot zone. The user feedback on Kevin sites has been absolutely great. You can read thousands of comments from our users around the world on the site. Additionally, the integration of both professional new sources with citizen journalism with further advance through with the integration of blocks, flicker photos and my web links with Yahoo news search. Yahoo music continues to grow at a strong pace. Increasing our leadership position as the number one music destination on the web. The integration of community through Yahoo messenger enables people to find, use, rate, discover and share songs. To date, there have been more than 6 billion ratings from our community of users. And that is billions. Yahoo music unlimited was launched to highly favorable reviews and user acceptance, validating the strategy of giving the choice to listen, to subscribe or download music. We're very pleased with the growth rate of our subscription service and believe that as more devices come into the market place we are well-positioned to take advantage of the increasing consumption of digital music. Audio consumption overall is growing rapidly and users expand beyond just music. With that in mind, last week we also launched Yahoo's innovative new podcasting service that will serve as a platform for all kinds of media casts in the future. Through the integration of community into all of these services Yahoo is at the forefront of the marriage of great professionals and user generated content. The success of our products in our relationships with our users has allowed us to once again forge and extend important partnership. Four years ago, we talked about the possibility of creating truly unique broadband partnerships, combining the great assets of Yahoo's brand, its Internet audience and expertise with the leading telecommunications companies brands, audience and communication infrastructure. Yesterday, we reinforced our position as a pre-eminent broadband partner of choice by announcing the new alliance with Bell South who offer their DSL subscribers co-branded services Internet services. The Bell South Yahoo alliance also brings us to closer to a full national reach in the U.S. with access to approximately 92% of the U.S. population living in the footprint of our broadband partners. This relationship is also a very important inclusion in our global broadband distribution strategy, which includes some big broadband wins in the last 12 months including the extension and expansion of the SPC Yahoo DSL alliance, the signing and subsequent launch of Verizon Yahoo for DSL. The continued and ongoing success with Rogers Yahoo high speed in Canada and the extension of BT Yahoo broadband in the UK, which was announced just last week. These relationships open up additional channels through which we share premium services today and provide an avenue for possible future moneterization opportunities tomorrow. All of our accomplishments are possible because Yahoo attracts the best and most accomplished scientists, engineers, design specialists, marketers and product visionaries. Talent is our most important asset and during the quarter, we had tremendous success attracting, hiring and retaining highly qualified and accomplished people across multiple disciplines and geographies. They thrive on the opportunity Yahoo provides to solve some of the most technically challenging problems benefiting hundreds of millions of users across a range of areas such as search, communications, media, mobility, community, data and advertising. Our innovation and leadership extends beyond our consumer products to our business model. So let's turn now to the moneterization side of the equation. We are making significant investments in our diverse moneterization capabilities and we continue to see excellent results. Our marketing services business delivered almost $1.2 billion in revenue for the quarter representing 46% year-over-year growth as a result of strong contributions by all forms of advertising. In brand advertising, we're clearly the number one player and we continue to outperform the segment and grow our share. The largest brand advertisers continue to come back and spend more. In fact, the top 200 U.S. brand advertisers on Yahoo from the prior year had more than a 90% renewal rate. As it grew, the top 200 brand marketers are growing faster than all our marketing services on a revenue extax basis. This shows that the Internet and Yahoo are firmly established as must buys for brand advertising. This is due to our unique and powerful brand advertising solutions such as advance targeting, innovative rich media formats and network wide marketing packages that are helping the world's largest and most important marketers derive great results. Targeting in particular is gaining in popularity amongst our clients. This provides a more relevant experience for our users, more effective results for our advertisers and allows Yahoo to maximize revenues and efficiently utilize our inventory. We also saw the volume of video streaming ads across the Yahoo network almost double year-over-year with much of this driven by consumer packaged goods companies. Search advertising continues to be a very, very exciting opportunity for us and of course, as one of our most important priorities. We're right on plan improving and growing our moneterization capabilities and see this area as providing real upside for Yahoo in the near future. In August, we launched an invite only beta of our new self-serve publisher network. While we've been very successful in attracting large publishers like Viacom and iVillage and USA Today we haven't yet tapped the small publisher market. We believe this service will ultimately position Yahoo as the preferred advertising partner for small and medium sized publishers and enable us to garner new revenue sources by participating in this fast-growing segment. This month also completes two years of planned integration between Overture and Yahoo. I want to thank Ted Meisel for staying with us during this period and overseeing this important process. Moving forward, the search marketing sales team will be operating under the same management as the brand sales team and we believe the future is about even closer alignment of these two groups. This is important, because we are seeing trends that indicate an increasing percentage of our advertisers are spending in both brands and search marketing. Already 50 of the top 200 U.S. brand advertisers are also in the top 200 U.S. search advertisers. What advertisers are finding and as our research demonstrates is that the more they utilize both forms of advertising on the Yahoo network, the better they do with each. Our industry leading advertising tools, the best environment for brand and performance dollars and a sales culture that will help marketers learn and take advantage of what the web can really offer who serve us well as the market rapidly expands. So in conclusion, we're very proud of what we've accomplished so far, but fully embrace the belief that we are still at the beginning of significant long-term opportunities. And as the web evolves into the next exciting phase, we believe Yahoo is in the best position to lead, and our business model gives us the competitive edge to take advantage of the growth opportunities on the Internet. So now I will turn it over to Sue who will review more of our key financial highlights. Very pleased with our third quarter results because they clearly underscore two fundamental business model strengths. Excellent growth and great balance and it is not an accident. We've been careful, deliberate and persistent about committing the appropriate investment to both internal operations and external acquisitions. At the same time we are aware that our mission is not simply to deliver strong returns for a few years, but to make the appropriate investments and capital allocation decisions to build value over the long-term. This would not be possible if our source of strength were a single product or if we were reliant on a narrow customer base. We still have a lot of work to do, but we feel very good about our progress on delivering this combination of value to shareholders. Before we review Q3 results let me start with a couple of housekeeping items. First, our earnings in Q3 contained a non-operating pretax gain of $27 million from the disposal of two non-strategic investments, which we recorded in other income. In addition, our effective tax rate for the quarter was unusually low. Earlier in the year we had estimated a full year effective tax rate of 41% to 42%. We now believe that rate will be about 100 basis points lower, owing to greater use of tax credits than originally planned. As a result in order to adjust our nine-months tax rate to this level that we expect for the full year our Q3 effective rate was 34%. Excluding these items and assuming an effective tax rate of approximately 40% in Q3 consistent with our revised expected effective tax rate for the year, our earnings for the quarter would have been $221 million or $0.15 per diluted share in the quarter up 77% from a year ago and up 15% from the $0.13 we earned in Q2. Let's talk now about some of the highlights from the quarter starting with free cash flow, which we consider to be our most important financial metric. As a remainder we define free cash flow as cash generated from operations, which includes cash costs related to taxes and changes in working capital plus capital spending and dividends received. Free cash flow came in at $335 million in the quarter, a new record, up 71% and advancing our trailing 12 months free cash flow to over $1.2 billion. This quarterly free cash flow represented 37% of revenue extax and a conversion rate of 89% of operating cash flow. A testament to the exceptionally high cash productivity of our business model. One very interesting relationship is to compare our earnings to our free cash flow. Q3 free cash flow was 45% larger than our normalized earnings whereas for most companies free cash flow is less than earnings. As compared with most companies we continue to benefit economically from large tax loss carry forwards even though our earnings are fully taxed for GAAP purposes, and from relatively limited requirements to invest in our balance sheet to grow. Let's look now at what we did with that cash and what happened to our balance sheet. Our ending cash and marketable securities balance was $4.8 billion up almost $1.7 billion since the same time last quarter and down about $160 million since last quarter. Our primary sources of cash in addition to our free cash flow collectively amounted to close to $220 million. These cash sources were comprised of proceeds from the exercise of employee stock options, the sale of the two non-strategic equity investments and the receipt of cash back from previously initiated structured share repurchases on which we earned an annualized rate of approximately 16%. We invested these cash proceeds in various transactions that we believe will yield substantial returns to investors. In Q3 we invested over $700 million. First we repurchased $208 million of Yahoo stock at an average price of $32.89 per share. Second, we entered into $500 million in structured stock repurchased transactions, which mature in two troches through April of 2006. At the final maturity depending on the price of our stock we will have either repurchased up to 16.3 million shares of these funds or will have received up to our initial $500 million investment plus an annualized premium of 18.5%. It's important to note that our ending cash balance of $4.8 billion is net of both the $500 million in structured share repurchase transactions referenced before and also of $350 million in similar transactions that were previously entered into, all of which mature over the next three quarters. Looking forward, we plan to continue to use our strong balance sheets and free cash flow to enhance value for shareholders through acquisitions, investments and share repurchase activity as appropriate. Moving now to the P and L. The overall summary is that consistent with our financial strategy, we are successfully supporting a massive and growing base of more revenue productive users, which has allowed us to exceed both our longer-term revenue and operating cash flow growth objectives. Specifically third quarter revenue ex-TAC came in $932 million advancing 42% over a year ago figures and up 7% from Q2 '05 despite normal adverse seasonality in the brand side of marketing services. The 42% growth broke down into 40% growth in underlying organic revenue particularly strong considering tough comparisons against strong year ago gains and 2% related to acquired companies owned for less than a year. Global marketing, our largest service generated $762 million of revenue extax for the quarter up 40% year over year roughly consistent with both the very strong gains we saw in the first half of 2005 and also with the growth rates we experienced in '03 and '04. This strength was nicely balanced across our various offerings to advertisers from paper performance to branding. In short we believe Yahoo is sitting in the catbird’s eat relative to competitors as we have both strong brand and strong search offerings and this strong positioning is showing up in the numbers. We believe we are on track to gain market share of the global online ad business for the fourth consecutive year. Let me give you a little more color on what we see happening across our two forms of marketing. Terry mentioned that we're seeing an increasing overlap in the client that sponsor search and brand marketing. Historically sponsored search within driven by more direct marketers that experience transactions from their web sites rather than from the OEM type of companies that typically define the brand business and sell offline and generally through distributors. However, more and more research on the buying cycle is demonstrating that the consumer conducts their primary research on the web, often conducting multiple searches to find what they're looking for. Once they make a decision based on that research the majority of that actual purchases generally occur offline. This has led an increasing number of OEM type companies such as automobile manufacturers, brick and mortar retailers and traditional financial services companies to begin to spend directly in search marketing and to value search beyond immediate online conversions to the search's overall influence in the buying process. We see this in our numbers. Growth in spending from these types of advertising is outpacing our overall marketing service growth rates as advertisers are using the different media to complement each other rather than one medium replacing the others. Considering the size of many of these companies direct marketing budgets you can imagine how much potential there could be if this becomes more pervasive. Turning to fees, we produced $170 million of revenue, up 55% from a year ago excluding acquisitions principally music match fees grew a very healthy 41%. The primary driver of that business line is our premium offerings in which consumers and businesses pay us for our services. We ended the quarter with approximately 11.4 million paid relationships, up 50% from 7.6 million a year ago and up 1.3 million from Q2. This strong performance was driven by content bundled with access, fantasy sports, which is typically strongest in Q3 for the football season, music and small business. Last quarter we raised our expected paid ending relationships forecast to indicate that we could exceed 12 million by the end of 2005. Based on our third quarter experience and taking into account Q4 is typically seasonally challenged versus Q3 in fantasy sports, we saw meaningful incremental subscriber growth from new season. We now believe we're likely to approach 12.5 million as the Verizon deal gains momentum and other services continue to grow. We continue to expect these relationships to produce an average ARPU of $3 to $4 per month in 2005. Turning to revenue by geographic segment, top line growth remained very robust internationally up 50% extax over the last year quarter to $228 million and boosted in particular by strong growth in sponsored search as more and more inventory becomes monetized. On an organic basis and holding currencies constant, our international revenue extax increased 48% in the quarter even faster than the strong 37% increase domestically. As a result, international revenue extax represented 25% of total revenue extax in the quarter advancing from 23% a year ago and consistent with expectations. Let's turn now to some of the details behind our strong and growing profitability. Specifically operating cash flow came in at $385 million, up 48% year-over-year and above the high-end of our business outlook. Consequently global OCF margins were 41% somewhat above what we had planned despite the timing of spend relating to the new Yahoo Music Unlimited service and seasonal challenges for the brand business in Q3. As you know, the major driver of margin leverages is compensation costs our largest expense, which continues to yield productivity improvements. Head count ended the quarter at around 9660 and up about 880 from Q2 05’ levels and of 38% from a year ago. Most of this was attributable to planned organic investments and key talents in various products and infrastructure collectively designed to improve our user experience, strengthen our market position, extend new verticals and support our growing businesses. We are very pleased that we've been able to make these investments in talent while still delivering improvements in productivity and margins. We see this as a testament of the network effective our model and our relentless focus on key priority areas. Let's turn now to the business outlook, which we are upwardly revising due to better expected results and better visibility into Q4. In addition, the updated outlook that follows includes the impact of four other factors. First, the expected impact of the pending transaction with Alibaba in Q4 and 2006. Upon on closing of this dealing in Q4 Yahoo China will no longer be consolidated in our results. In the first quarter of 2006, we will begin recording our more than 40% economic share of the new Alibaba entity through our equity interest line. For the full year 2006 we expect the transaction to be neutral to free cash flow and modestly diluted earnings due to the amortization of intangibles. In addition, at the time we close this transaction, we expect to record a non-cash gain based on the difference between Yahoo China's fair value and its cost basis. Adjusted for our continued ownership interest in the newly combined entity. We are anticipating a non-cash pretax gain of approximately $300 to $350 million in Q4 or somewhere between $0.20 and $0.23 per share. Second, the impact of MSN comprising less and less of our overall search network traffic and economics. Over the course of 2005, MSN has declined in significance to our overall network and we expect that this trend will continue as MSN sells an increasing number of links on their own. That relationship is now expected to generate approximately $70 to $75 million of revenue extax in 2005. We expect this erosion to continue in Q4 and through the anticipated termination of the relationship in June of 2006. For the first half of 2006 we are estimating $20 to $25 million in revenue extax from MSN. Third, the impact of the dollar modestly strengthening from the last time we provided our outlook in July relative to other currencies in which we operate and fourth, the impact of the pending acquisition of Whereonearth, which we signed today is still in investment mode from the perspective of the PNL and does not generate revenue. We see this asset contributing to our ability to offer more relevant and monetizable listings in 2006 and beyond. Taking into account all of those factors, we expect fourth quarter revenue ex-TAC to come in a range of $1,032 million to $1,082 million up about 35% from a year ago at the mid point. At these revenue levels we expect to operate within an operating cash flow range of $452 to $482 million representing a 50% margin on incremental revenues and yielding a 44% margin at the midpoint. This Q4 outlook is expected to drive a full year range for 2005 of $3,660 million to $3,710 million in revenue extax, up 42% from year ago levels to the midpoint. Excluding the impact of acquisitions in the past year, our organic growth rate is expected to be about 40% for the year. On the operating cash flow side, combining our positive third quarter results with the outlook for the balance of the year. The full year operating cash flow is now expected to be $1,550 million to$1,580 million up 52% from year ago levels and approaching our 50% flow through goal for incremental revenue conversion. We expect our full year OCF margins to be 42% in 2005, up from the 39% in 2004 with most of this margin expansion coming from our international operations. As we said previously, our domestic operations are now approaching an operating level that seems to strike close to the right balance between appropriate levels of current profitability and ongoing investments in future growth. Moving to free cash flow, we are upwardly revising our 2005 free cash flow range by $88 million to $1.2 to $1.250 billion up 45% from year ago levels and representing an OCF conversion of approximately 78%. The high end of our longer-term target range of 60 to 80%. This outlook contemplates capital spending for 2005 of approximately $390 to $405 million. Our capital spending shifted in a similar way as our overall bunnies mix with search and mail becoming proportionately more important to both our operating cash flow and our CapEx levels. To sum up, as we take stock of our financial vital signs for the third quarter we are very pleased to have 2005 is performing. First, at the middle of our ranges, our full-year 2005 outlook suggest a financial model that is extremely attractive relative to most businesses. The calls for a third consecutive year of growing more than 30% in organic revenue extax. It's suggesting delivering cost of 50% of that to the OCF line and it anticipates yielding more than 70% of that to free cash flow. Second, we're delivering balanced growth across all of our contributors to revenue, whether measured by business line or geographic region. And third, we're very pleased with the underlying consumer and advertiser metrics that drive these results. Users, usage and moneterization. And this is really the best part of the story while Yahoo is continuing to extend its reach to new users we're also becoming better at serving the needs of existing users by listening to them and investing in better and more relevant products and services. This deepening engagement is really the magic that attracting advertisers to our global platform and users to our premium offerings. We expect this dynamic to continue to occur creating sustainable growth for the foreseeable future. With that I'd like to turn it back to Terry. Thank you. So some of our recent offerings are just a glimpse of the potential of Yahoo and the value we can create for users and marketers. Our intention is to continue capitalizing on our industry leading assets in order to deliver consistent and powerful growth over the long-term. We really are blessed with amazing talent throughout the organization that will help ensure that we stay at the forefront of change and innovation for the years to come. Now I'd like to open it up 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.