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Kulicke & Soffa Industries Inc  (NASDAQ:KLIC)
Q4 2018 Earnings Conference Call
Nov. 19, 2018, 6:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Kulicke & Soffa 2018 Fourth Fiscal Quarter Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joseph Elgindy, Director of Investor Relations and Strategic Initiatives for Kulicke & Soffa. Joseph, you may begin.

Joseph Elgindy -- Director of Investor Relations and Strategic Initiatives

Thank you. Welcome everyone to Kulicke & Soffa's fourth quarter fiscal 2018 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer; and Lester Wong, General Counsel and Interim Chief Financial Officer.

For those of you who have not received a copy of today's results, the release, as well as the latest investor presentation are both available in the Investor Relations section of our website at investor.kns.com.

In addition to historical statements, today's remarks will contain statements relating to future events and our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K/A for the year ended September 30th, 2017.

I would now like to turn the call over to Fusen Chen, for the business overview. Please go ahead, Fusen.

Fusen Ernie Chen -- President and Chief Executive Officer

Thank you, Joe.

We were again able to achieve our quarterly revenue targets, despite macro and the industry concerns. While broader macro force are out of our control, we believe the near-term industry stubbornness is somewhat limited and does not impact our long-term fundamental targets or plans.

Some specific concerns such as ongoing challenge of two dimensional node shrink and also pricing reductions in the NAND market, have little near-term impact to all business and they actually improve our long-term prospects.

Our confidence in our long-term strength, demonstrated by our aggressive repurchase activity is supported by the following key points. First, our business is highly diversified. It is not overly dependent on any one package type application or customer. We broadly support the majority of semiconductor applications in productions. This includes, major markets such as consumer, mobility, memory, LED and automotive.

Second, as mentioned on our prior conference call, two dimensional node shrink continued to have challenge and that is failing to drive the significant cost improvement it has historically provided. This is driving demand for mature (inaudible) equipment and also otherwise packaging.

Our advanced packaging solution provide new alternative to drive form factor, performance or efficiency and the cost, depending on the applications. We anticipate this shift in value proposition from node shrink to advance packaging for years, and are now beginning to see real traction. Looking ahead, we are excited to participate and are well positioned to benefit from this fundamental technology transition.

Finally, we continue to expand our sub-market opportunities. Over the prior years, we have maintained our dominant position in general semiconductor, connectivity and automotive, and we have further strength in market shares in key area like LED. We continue to aggressively seek out new opportunities (inaudible) increase our end market diversity, and will further expand our sub-market. For example, our recent partnership and the solution for micro and the mini LED opportunities is virtually taking increased assets through the sizable display market, the market we historically did not participate in.

Turning back to our September quarter's performance, we achieved the midpoint of our revenue guidance of $184.8 million. Although this represents a sequential decline from the strong June quarters, September quarter revenue was 15% above our prior three-year September quarter average. We also generated strong gross margin of 46.4% and have delivered $0.43 of EPS.

Our full fiscal year's net revenue of $889.1 million represents sequential growth of 9.9% and a 75% (ph) increase relative to our average of prior three years period. Non-GAAP income for the year was $171.1 million, which generated a strong $2.43 of non-GAAP EPS. The expected sequential quarterly revenue decline was largely driven by our short-term softness in our capital equipment offering, primarily within our high-volume ball bonder business. Wedge bonding business decreased slightly, while our electronic assembly, APAMA thermo-compression and iStack die attach business line have sequentially improved.

Also of note, we continue to make progress toward our long-term aftermarket product and service strategy and have realized a sequential APS revenue improvement of approximately 11%, even in the September quarters. We strongly believe these improvements are driven by our fundamental effort over the prior two years to optimize our current market positions, expand our product portfolio, and to further enhance cash flow generation.

I would now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater detail. Lester?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

Thank you, Fusen.

My remarks today will refer to GAAP results, unless noted. Net revenue for the quarter was $184.8 million. Strong gross margins of 46.4%, generated $85.8 million of gross profit. Gross margins exceeded our prior expectations, largely due to product mix and favorable pricing. We continue to target margins of roughly 45% over the near term. Our operating expense came in lower than expected due to ForEx gains and cost control, which drove meaningful operating income of $24.6 million. Going forward, we are maintaining our existing operating expense target of $53 million of fixed quarterly expense, plus 5% to 7% of variable quarterly expense tied to revenue. We booked a net tax benefit of $1.75 million, and continue to maintain our 15% long-term effective tax rate target going forward.

Turning to the balance sheet, we ended the September quarter with a total cash and investment position of $614.1 million or $8.94 on a per share basis. During the quarter, we have continued to return capital to investors. We deployed $23.7 million in open market repurchases during the September quarter, and also paid out our first $0.12 dividend.

Throughout fiscal 2018, we have returned $91.1 million in cumulative repurchases, more than any prior year. At the end of the fiscal year, we had approximately $98 million remaining under the current Board authorization for share repurchases. We will continue to opportunistically execute the existing repurchase authorization in the most tax efficient way. On the book value per share basis, we closed the September quarter with $12.82, an increase of approximately $0.27 from the June quarter.

Working capital, defined as accounts receivable plus inventory less accounts payable, increased by $8.3 million to $309.5 million. From a DSO perspective, our day sales outstanding increased from 86 days to 118 days. Our days sales of inventory increased from 78 days to 105 days and days of accounts payable decreased from 50 days to 44 days.

This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the December quarter business outlook.

Fusen Ernie Chen -- President and Chief Executive Officer

Thanks, Lester. As evident in peer guidance and also analyst industry expectations, there is clearly some softening in the December quarters, particularly along the Chinese market. For our business we believe the outlook is important due to near-term uncertainty around additional incremental capacity need, after several very capital-intensive quarters. We also believe a near-term hesitation to add capacity is also partially due to increased uncertainty around the impact and the potential escalation of tariffs.

While 2017 and 2018 were very strong years for the space, we anticipate momentum to ramp in the second fiscal half of 2019. As discussed on today's earning release, we are guiding revenue for the December quarter to be between $150 million to $160 million. This new point represents a decrease of approximately 16% sequentially although is higher than four of the five past December quarters.

Our software demand, especially, within our ball bonding business is largely driven by our customer base in China. Looking forward, we are increasingly focused on further strength in our fundamentals, driving our ongoing development, gain traction on the new business, and to keeping costs under control.

In addition to those mentioned earlier, I wanted to clarify a few additional points that highlights our unique position and the strength in our outlook. For there -- first, there continue to be a lot of focus on the memory market, especially price decline in the NAND. Overall, we view the NAND market to be price elastic and expect ongoing demand for our memory-related equipment into the long-term. The capital intensity of the memory and our dominant position within the memory assembly process make this one of our largest specific end market, accounting for about 11% of our revenue over the past 12 months. Again we anticipate near-term price reduction to drive long-term unit growth and to further increase longer-term demand for our memory solution. Secondarily, we continue to enjoy strong exposure to several positive and long-term trend in automotive space. Our automotive exposure further increase our end market diversification and the long-term growth potential. Automotive and the industrial customer represent approximately 17% of fiscal-year 2018 revenue, slightly up from last year. Over the coming years as semiconductor become more critical to traditional electric and autonomous vehicles, we anticipate our automotive-centric products to outpace overall semiconductor growth.

Finally, we continue to gain traction on our various growth initiative; win Advanced Packaging and also from our micro and mini LED initiative. During September quarters we recognized the revenue on multiple similar competition fuel and I expect (inaudible). We have also recently introduced our latest high accuracy, high productivity Flip Chip tool Katalyst in the September quarters which is a promising architecture and is driving strong customer interest. We are also pleased to announce that during the current December quarters, we anticipate shipping the first Katalyst tool to a major customer for evaluation in high volume production environment.

Finally, we officially launch our micro and mini LED solution PIXALUX during the September quarters providing us as truly emerging LED display market. PIXALUX continued to be a very interesting unit and the opportunity as we look ahead. Overall, we remain very positive on our outlook. Our (inaudible) are increasingly aligned with several major long-term trend, supporting global consumer, mobility, memory, LED and the automotive applications. In parallel, we continue to execute on our development goal and the market expansion strategy. Although our December quarter outlook is tougher than expected, we believe this is only a short term consensus. Considering our balance sheet log and the diversified portfolio ongoing development trend, organizational efficiency, software capital allocation and our renewed focus on profitability enhancements, we are very confident on our fundamental position and that we'll further enhance as we exit this near-term soft period.

This concludes our prepared remarks. Operator, you will now -- we will now be happy to take the questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Tom Diffely with DA Davidson. Please proceed with your question.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yes, good afternoon. So when you look at the guidance for the fourth or for the December quarter versus the strong December quarter, you had a year ago which of the segments are the softer compare on a year-over-year basis?

Fusen Ernie Chen -- President and Chief Executive Officer

So Tom, you're asking the segment difference -- the lumber comparison this year compared to last year?

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yeah, just comparing the different segments, it sounds like obviously NAND is a little bit weaker, but just in general, I'm curious what are the biggest impacts on a year-over-year basis for the December quarter?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

So, Tom, this is Lester, I think, general semi particular, our Ball Bonder business unit as Fusen said, particularly in China. I think there is obviously a lot of a uncertainty around that. That and memory I would say those are the two main ones.

Fusen Ernie Chen -- President and Chief Executive Officer

So, Tom maybe if I can add, actually there is still a lot of plan in China. Well, I think this probably, trade tension and cause of delay of investment and that's all we have seen and Ball Bonder is still the biggest revenue source for us, so it impact particularly, I think is in Ball Bonder business.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay.

Fusen Ernie Chen -- President and Chief Executive Officer

So, we believe after a certain periods that demand will continue to pick up.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Do you think the biggest impact comes from just kind of the trade uncertainty or is it just the weaker than expected, iPhone supply chain?

Fusen Ernie Chen -- President and Chief Executive Officer

Yeah, I think it's a little bit of everything. You know, I think supply chain add a a little bit, but we are really diversified right, not only Ball Bonder products, we have a vert wide product portfolio. So we see actually I would say, probably majority is delay of investment and we already know the mobile space is not as strong as of 3 years ago.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yeah, OK. And then what's happened with your utilization rate in the field over the last quarter. Where is it today versus where it was a quarter ago?

Fusen Ernie Chen -- President and Chief Executive Officer

Well, I think I maybe a quarter ago, probably close to 70%, 80% and right now, probably we believe is probably. High end, I think product our customers very high, while low end probably is already lower, probably below 70%.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. So --

Fusen Ernie Chen -- President and Chief Executive Officer

We believe that it is a shortened phenomenon.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. So you have to see a little bit of absorption of the excess capacity for a couple quarters before you saw orders picking up again?

Fusen Ernie Chen -- President and Chief Executive Officer

Yeah. We believe this will pick up in a probably next one quarter or so.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. And then finally, what is your view for this unit growth for the broad semi for the year for 2019?

Fusen Ernie Chen -- President and Chief Executive Officer

Yeah. So Tom, overall 2018 is a very good year for us even we see a slowdown down in the second half. And with that we still grow 10%. So this is our view, we believe the current business label is quite low, and hopefully, we will stabilize our business through next March quarter followed by a ramp then 2019 can be as good as 2018. So unit growth, I think we still expect next year can still grow couple percent, maybe like a 5% and that's our view.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay, great. Well, thank you. I'll get back in the queue.

Fusen Ernie Chen -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Krish Sankar with Cowen and Company. Please proceed with your question.

Krish Sankar -- Cowen and Company -- Analyst

Hi, thanks for taking my question. I just have couple of ones. Number 1 is given that you guys are reporting probably half way into your December quarter, what's your line of sight into the March quarter and historically when December has been down this much, March has had a decent snap back, given what is going on in industry today or how do you think March is going to look directionally from December.

Fusen Ernie Chen -- President and Chief Executive Officer

Okay. So Krish, I think we assume that trade tension will not get worse, it won't get worse. And obviously in the label actually is low at this moment. So even trade tension won't get worse, we expect March quarter to stabilize and hopefully a lot delayed investment ramp and that's our current expectations. The second fiscal -- the second half of fiscal year we expect a ramp maybe start beyond March quarters.

Krish Sankar -- Cowen and Company -- Analyst

Got it. And then, I remember looking from my old notes that it looks like across all your products, your exposure to China is roughly 50%. Is there a way to parse it down into how much of it is from your core, wire bonder, how much of it is from auto/wedge bonders and how much from LED?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

Krish, it is companywide, it's about 50%. I think LED is higher than that, while I think automotive is probably lower than that. I think that's probably a good way of gauging it.

Krish Sankar -- Cowen and Company -- Analyst

Got it. And then -- all right, fair enough. And then the last question I had was, I think, Lester you kind of alluded to the OpEx to think about 53 million in fixed cost, is that the right number because I thought that with all the employee headcount reduction and everything that you've done, I thought the fixed cost must be lower?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

No. We're still guiding around 53 fixed cost and then 5% to 7% variable type revenue. As you know, it can't move in and out or quarter-by-quarter depending on performance. So, but I think that's still the target we're looking at.

Krish Sankar -- Cowen and Company -- Analyst

Got it. All right. Thank you, folks.

Operator

Our next question comes from the line of Craig Ellis with B Riley, FBR. Please proceed with your question.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question. The first is really just a clarification. Lester in the fiscal fourth quarter, we had strong gross margin performance, strong operating expense performance. So the clarification is, is that just good execution on the variable cost model or were there any one-time items in either of those line items?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

On the gross margin, I think as we said, I think, Craig, is a little bit of a mix; we sold a little less LED bonders, because I think as you know, the markets are softer there right now. So, we sold higher performance machines, so therefore our gross margin is better. As far as the OpEx is concerned, there are some one-timers but nothing really significant.

Craig Ellis -- B. Riley FBR -- Analyst

Great. Thank you. The second question Fusen, I wanted to follow up on your comments around the potential for revenues to ramp off of March which may show some stability in the fiscal second half. So are you in your conversations with customers uncovering strong customer interest for either technology or capacity needs at that time frame and it's the issue just getting beyond Lunar New Year or having some visibility beyond the potential imposition of tariffs or what are you hearing from customers that lends confidence in a stronger fiscal second half?

Fusen Ernie Chen -- President and Chief Executive Officer

So I think Number 1, the memory softness has been a few quarters already, so that's Number 1. And we expect the memory long-term outlook, we are strong believer, so hopefully, we'll continue to improve and every time -- for example, every time when NAND price are reduced, is always take additional market share against hard disk drive, so memory fundamental is positive. And also semiconductor demand is always layered and they are short term, people have hesitation to put investment at this moment and we don't believe this will continue for several quarters and also March quarter, beyond June quarter is a strong quarter for us and also a little bit indication from customers, hopefully this trade tension will not be forever, it's not everybody's interest. So we feel positive about second half of our fiscal quarters.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. And then two longer term questions. The first one is for you Fusen. Can you just talk about how you feel about your objectives to drive the significant improvement in services toward 30% of mix in the fiscal '21 target model timeframe. What are some of the things that you can chalk up as accomplishments as we look back at fiscal 2018 and what are some of the things that you feel like the team needs to execute in 2019 to have you on track for that target?

Fusen Ernie Chen -- President and Chief Executive Officer

Okay. So our APS including a lot -- is including in the consumer space, so it's refurbished, there is many things and we pulled them together. So we actually have a more portfolio in working with our customers. Actually, we started to see a result. And as I mentioned I think, September quarter, just this quarter alone, compared to last quarter, actually we grow about 11%. So we also put a lot of effort in our category production and actually this quarter probably is a historical quarter revenue for us. So, I think the team has done -- doing a very good job. The Company will focus on the APS growth, because in the downturn, I think APS actually is a high margin business and pay for everybody's paycheck. So we feel comfortable and hopefully, probably another 4 years we will be able to achieve a 30% of total revenue for us.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. And then just the last question, both for you and Lester. Just looking at the fiscal '21 target financial model. Can you express areas where you're more confident in the target financial model, whether it be revenues or gross margins or other parameters like operating margin or earnings and any that maybe more of a challenge given the macro environment that we have right now and the impact that may have on any of the programs that were embedded in that target model? Thank you, guys.

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

Sure, Craig. Let me take that. I think, we actually still relatively confident in all the targets that we shared on the Analyst Day. I think, as far as revenue is concerned, I think as Fusen indicated, I think we believe we aligned very well with some of the fastest moving trends in the industry. Yes, there is a little bit of softness. But, as we've been saying throughout the call, we think it is a short-term. Long-term, semiconductor growth is going to continue. Automotive -- semi and automotive is also going to continue, and we are very well aligned there. We have, as we indicated now also entered into the Flip Chip market, which we have now been over the Katalyst and is being received very, very well. So we believe that will also drive revenue going forward. Also again with the micro mini LED with PIXALUX, so I think on the revenue line again, we still believe we can outgrow semiconductor unit growth, which is about 5% to 7%.

As far as the margins are concerned, I think, again, we believe that we're entering some higher margin products such as automotive, such as micro LED, such as Flip Chip. So, while I think the margin expansion probably linger on over the next year, year and a half, but we do believe by our target date, we would reach those targets. And finally, OpEx, we are always very conscious of cost. This is something Fusen drives us every day and I think we are looking at cost reduction and also very, very cautious on discretionary spending, particularly in the softer period. So we're still confident, unless something significant happens in the macro market of meeting our targets for 2021.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for that color, Lester. Thanks guys.

Operator

(Operator Instructions) Our next question comes from the line of David Duley with Steelhead Securities. Please proceed with your question.

David Duley -- Steelhead Securities -- Analyst

Thanks, for taking my question. Just as a clarification, I think you mentioned that your advanced packaging revenue was up during the quarter and your bonder revenue was down during the quarter, could you give us some sequential changes or year-over-year changes in those categories or however you can frame it for us?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

So yeah, David. I think, for the quarter Ball Bonder was down, core was down and AP business was up, but again our AP business at this point is still at a lower base than our core business. So therefore, the fluctuation obviously is much higher, quarter-to-quarter.

Fusen Ernie Chen -- President and Chief Executive Officer

I think, percentage wise we expect actually year-to-year same quarter, actually, I think this quarter will probably significantly less in terms of percentage.

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

Yes.

David Duley -- Steelhead Securities -- Analyst

What percentage, could you clarify that last comment, I didn't hear you?

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

No, I think, Fusen said that for the quarter, Advanced Packaging business actually grew significantly during this quarter.

David Duley -- Steelhead Securities -- Analyst

Okay. Yes, then that led me to one of my other questions is, you talked about thermal compression bonding recognizing revenue there in die attach. Could you just talk about the applications that each one of those tools is -- that you're seeing interest in or which areas might be growing or ramping for you?

Fusen Ernie Chen -- President and Chief Executive Officer

So I think the TCB -- the market we participate, right now is in the apps processor. And of course, I've been with our memory, we are working with the customer and hopefully, we'll see a more results next years and Q3, I think is also very important for high performance logic, 2.53 integration, like a ASCII plus memory on the (inaudible) of Katalyst, I think -- we expect it's going to be very important for the (inaudible) and the high-performance microcontroller and memory, right now DRAM, particularly DRAM shift a lot of capacity to actually rechip. So our newly introduced Katalyst (inaudible), is going to be very beneficial to us. The iStack, actually, we are in CMOS imaging sensor and also 3D sensing, but the area we published and, of course, also in the memory.

David Duley -- Steelhead Securities -- Analyst

And could you talk a little bit about the trends? We hear a lot about how customers are migrating some of these memory stacks, these high performance memory stacks to, as you mentioned, I guess at an advanced packaging type connection versus a wire bonder or a wire bonding connection. How that impacted (ph) you guys?

Fusen Ernie Chen -- President and Chief Executive Officer

Okay. So, I am sorry, David, still -- so talk about DRAM, I think DRAM -- there was, of course, a lot of a ball bonder, but we see a shift in our DRAM capacity -- DRAM actually from the ball bonder to the flip chip and we do (inaudible), we have very unique architectures and a lot of interest from customer. So that's really good for us. And the Spec DRAM, the high bandwidth memory, I think is going to be TCB and we are engaging with customers. So that's it for the DRAM.

And for the NAND, it's both two dimensional and also 3D DRAM it was specing (ph) and we believe the next five years also foreseeable futures ball bonder are still prominent (ph) and we have a heavy intention I believe. We will continue to have very high market share in this market. It's very advanced 3D booking. So we call it a really base -- a higher 3D packaging for the NAND flash and we have a proud -- a very good tool to sell in this market. Hopefully, I answered your questions.

Analyst -- -- Analyst

Yes, that's it, very much so, thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the floor back to Joseph Elgindy for closing comments.

Joseph Elgindy -- Director of Investor Relations and Strategic Initiatives

Thank you, Hector. Before closing, we wanted to inform investors that we will be participating in several virtues (ph) as well as two upcoming New York conferences. The Midtown CAP Summit on December 11th, and again at the 21st Annual Needham Growth Conference on January 16th. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Operator, this includes our call. Good day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 34 minutes

Call participants:

Joseph Elgindy -- Director of Investor Relations and Strategic Initiatives

Fusen Ernie Chen -- President and Chief Executive Officer

Lester Wong -- Senior Vice President of Legal Affairs, General Counsel, Interim Chief Financial Officer

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

David Duley -- Steelhead Securities -- Analyst

Analyst -- -- Analyst

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