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Wonder if you could talk a little bit -- give some more color about Q2 and how Q3 has started? I believe last quarter you mentioned that April was down more than -- a little bit more than 20%, May was down 20%. How did June finish up? And how is that trending into July?
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Sure. So sequentially through Q2, as we thought, May was the valley, April was down in the sort of 20-ish, May was down in the upper-20s and June was down in the lower 20s, averaging out to give or take down 23% for the Q. Sequentially, July is is better than June. And as we progressed through Q3 and into Q4, every month is getting a little better. So we're feeling like in spite of the second surge, we are experiencing a recovery. When I talked to July in my opening comments, I wasn't really referring to July itself in terms of where it came out, but rather our ability to write contracts for the rest of the month -- for the rest of the year in July for the rest of 2020, and that's where we saw just a little bit of softening from the pace we set in June.
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I wonder if you could talk a little bit about as you've seen economies reopen, I know last quarter you were hopeful that casinos would have some big improvements as some get the approval to open. I wonder if you could talk about casinos, but as well -- but also, what verticals did you start seeing some nice recovery in throughout Q2?
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Sure. On the good news verticals, and I mentioned a few, but I'll throw in a couple of others. Services recovered nicely, that's mostly attorneys. I didn't mention those earlier. Education has been a real star work for us as it appears that there's just a lot of confusion around what's going to happen in the next few weeks. And a lot of educational entities are touting their virtual learning capabilities and their distant learning capabilities. And either that or they're saying they're going to be open, and they're trying to hold on to their students. So that's been a nice recovery in terms of a vertical for us. Casinos, it's a tale of two markets. As we all now know, Vegas had a difficult reopening and has had to throttle back. That's been painful for our folks in Vegas and our operations in Vegas. However, when we look at regional casinos, places like the Mississippi Gulf Coast, their reopenings seem to be going better and they are sticking with us and using us to announce to the world that they're opening. Most people would go into those places not via flight, but via car, and that's our strong suit. So again, it's sort of -- on the casino front, it's a tale of two markets. The regional markets seem to be handling the opening better. And unfortunately, it's been a tougher road to hope for what's going on in Vegas.
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Good morning, everyone. Nice to see the progress and the continuing progress on Soma. As you think about the marketing that you've put in place to elevate the styling and product at Chico's and White House black market, how do you see the path of top line and margin evolving there? And can you just give us any further update in expanding on inventory given the freight and port congestion disruptions? Thank you.
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Yes. Good morning, Dana. First of all, let's address the apparel. You know, our turnaround strategies are on track and we're not simply bouncing back from COVID. We are retooling a company that had six years of declines in -- specifically, the apparel brands and we are being methodical and strategic about that. So, the inventory discipline and the sales accordingly because of what we're doing in marketing we feel confident of what's happening from the customer response. You, in particular, can see as the business opened up and vaccines were aggressively being put out into the marketplace that our sales were improving and starting particularly in the March period, and we've seen that grow from March through May. So, we are pleased with the results that we are seeing in apparel and keeping our inventories disciplined as we continue to put our turnaround strategies in place and taking the discipline that we've learned from Soma to put into the apparel brands. That will drive top-line sales and margin because we are keeping our inventories tight so that we can continue to drive -- maintain margins, which right now are back to historical highs. And in terms of supply chain, you know, yes, we are experiencing headwinds. We are not fully out of COVID. There are problems to overcome and cost pressures in the supply chain, sourcing, production, logistics, fulfillment, and also the tightening in the labor market. So, we've done several things to mitigate these pressures. We are expanding our third-party footprint. We've identified alternative port strategies. We've adjusted our product lifecycle calendar, actually, up for weeks to adjust to some of these headwinds. We are also shifting to air when it's critical. We are partnering with suppliers for alternative countries of production, and we are continuing to keep our inventories lean so that the regular price can continue to drive solid gross margin to absorb these escalating operating costs.
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Hi. Good morning. Nice to see the improvement in the business. I was curious if you could talk about the margins and how you view them longer term. It looks like the gross margin guidance put you a little bit below 2019 gross margin levels. So, I'm curious if you think you can get back to those '19 levels, or would you need sales to get back to the '19 level to get there? And then what other levers on margins can you pull to get closer to the historical levels?
|
Thank you, Susan. The biggest factor for margin as you look back in the many years has been our over-purchasing and having too much inventory and having to be too promotional. So, we are very disciplined in how we are managing, in particular, our apparel margins. As, you know, when we look at this that we are in the middle of our turnaround, and this really is our second quarter of positive improvement on top of the Q4 improvement that we had in '19 before the COVID pause. So, we are learning from what the customer is responding to in our assortments. And keeping our inventories lean allows us to have a dramatic reduction in promotions and ability to be able to build very thoughtful promotions inside the business that our category and item-specific versus being entire inventories, just as there was just too much inventory flooded in the market. So, we feel that we're very disciplined. So, we've been conservative in terms of how we're projecting the outlook because as many of you have pointed out, we don't really know if part of the euphoria in Q1 is how sustainable that is going to be. So, we feel that being disciplined is the right approach as we move forward. But the expectation and what we're seeing in the business, in particular, as we closed April and May that the margin should continue to be very healthy as it relates back to historical highs.
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Great. And then just on the inventory levels, it looks pretty lean across the brands. It sounds like maybe there was even some more demand than you have supply. Can you maybe talk about those areas where you wish you had more inventory and then also, are there still some areas that remain high maybe in the more fashionable apparel or workwear? And then also if you could -- if you could talk about maybe your ability to chase to try and fulfill that demand or is the supply chain situation with the backup at the ports kind of hindering that? Thanks.
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Sure. The apparel product that's selling indicates optimism and excitement. Actually, our customers are emotionally responding to color print and novelty. They're very -- had a very high level and we see strong categories are in woven and dresses, also with strong business across bottoms, in the denim pants, and short categories in both apparel brands. And we see where we've integrated new fabrics that have a touch of cool or that anti-microbial hand, or we've included technology into our bottoms so that they are more comfortable. All of those are working across the apparel brands. The beauty right now, Susan, is that we don't have a category that we are -- that we're overstocked in. So, we are lean and tight across each one of our categories and classifications, and see positivity in the business and very, very lean clearance inventories as a comparison to '19. So, that all bodes well. In Soma where we've made investments because of the size intensity of that business and also the launch of new bras, we are very pleased with the performance that we are seeing and the growth that we're continuing to get. And our sales continue in all three brands to outperform the investment in our inventory. And as it relates to being able to chase inventory, you know, we've said at the -- at Q4 that we felt that we would be having our inventories at Q1, we're going to be down 30% in apparel and down more than 30% in Soma. So, you can see based upon where on-hand inventories have ended that we have been chasing goods because the sales have been better than we had forecasted. So, so far, by changing the PLC calendar four weeks and really keeping a very close eye on vessel versus air, and also being able to manipulate the ports, we've been able to stay on top of a really challenging situation. But we know that there are additional headwinds in front of us in terms of -- as the year unfolds, so we're staying very close to it and moving up as many of our buys as we can to stay on top of the inventory to flow it to sales.
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Great. That sounds good. And then if I could just add one last one. I assume you saw the sales accelerate throughout first -- as what you went throughout the first quarter. I'm curious if that momentum continued into second quarter or if you've even seen it accelerate as more and more people get vaccinated and people are starting to get out particularly as the weather is bright now. Thanks.
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Yes, Susan, that's exactly what we are seeing. In particular, you know, the -- our -- the two apparel brands, in particular, are for women. You know, we don't have a teen business, so in comparison to other retailers, you have to look at how the woman is spending her time and how she was vaccinated. And you saw it both in NPD data and in NRF data that this apparel business really started to open up the second week in March. Once their -- once more people had their second shots and has started to continue to excel -- escalate after that time, we definitely saw that in the business. If you isolate the March through May period, we saw a difference in our Q1 results being down 17% as compared to being down 22%. So, it was really that first five, six weeks of the quarter that we're still pretty depressed and where we saw the business opening up overall in the apparel brand, and the summer momentum continued. So, we are expecting that to -- that to continue as we get into the summer months and into the back half of the year. So, we are very encouraged.
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Hey, guys. Congrats. Great improvement. I guess a couple of follow-ups in some of the questions. Could you talk a little bit about some of the delivery delays? I know White House was having some issues, and so -- I think it was in the fourth quarter. Could you talk a little bit about the impact it had to the brands in the stores during the first quarter and is it pretty much cleaned up for the second quarter and going forward? And then if you could also just touch on Soma's business continues to be outstanding, obsessed, they look amazing. Could you talk about what percentage of those shoppers are sticky like coming back, repeat shoppers coming back time and -- time after time?
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Yes. Deliveries, yeah. I think every single one of us has been tried to a supply chain challenge and unfortunately, we are not out of that yet. It's been a whole host of different challenges that we have -- we've experienced whether -- and none of it actually has been factory-related. Our factories and our deliveries have been on time. It's all been on vessel capacity, vessel sailing time, port delays, the lack of chassis in the U.S. to be able to get trucks to our DC. So, you know, every single leg of the supply chain post our suppliers has had some kind of issue along the way. So, the short answer is that for the moment, yes, we have cleaned up and done and mitigated everything that we've experienced so far so that we feel that we've got a very strong hold on the supply chain moving forward. However, I say that with caution as there are still a lot of -- a lot of headwinds that are in front of every single, you know, function of stuff that's coming into the port. So, we are staying very closely aligned to it. I would say that probably everybody in the organization says they know more about supply chain today than they've ever known. And -- but it's a critical piece in terms of keeping the flow moving and keeping good -- fresh goods to our customers to keep them engaged. So, today, we feel confident that we've made all the right decisions, but we're staying very close to it, Marni. As it relates to -- and as it relates to Soma, actually yes, we are staying within Soma that our customer is also fiercely loyal. You know, we know that -- and she goes, the customer stays with us 13 years and White House, nine. But in Soma, she stays with us six years, and we're finding that some of the typical buying patterns for intimate apparel being less frequent are a little more frequent as we expand our bra menu and we really offer a lot of different options for her, because we feel that the bra, in particular, is a very sticky category. And you need a wardrobe of them, you don't need just one for all the different wearing occasions. So, we are encouraged by what we're seeing on the frequency of the shopper within Soma.
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Sherry, obviously the situation in Trinidad is very fluid. And I was wondering if there's been any change in Trinidad from the end of the quarter to where we are currently? Any difference, any, any change in that situation?
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There has been a slight easing of the restrictions on the sale of goods in our clubs because the government released an amendment to their order that is now allowing us to include things like construction products and hardware and paper and school supplies and essential things for business to be able to continue functioning. We still have significant items that we're not allowed to sell at this point. But what we're seeing currently is the pace of the spread of the virus is reducing. And the government is looking for ways to start opening things up on a gradual and measured basis. So, we're hoping to see more, more flexibility pretty soon but until we hear from them directly, we don't know.
So, we got very short notice and we're at the ready when they tell us something is issued that says you can now sell this or that. And we make sure that we make the adjustments necessary to make them available for our members. Also, we are taking into consideration that in Trinidad whenever you see these kinds of restrictions there builds a pent-up demand. And so we're focusing on that to make sure that even though we may not be able to sell certain key items at the moment, we want to be really prepared to provide those items at the most compelling value as soon as the opportunity is given to us. So we're standing by. And we're doing everything we can to recapture what we may have lost as a result of the restrictions.
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Okay. Okay. To the extent that maybe things open up again and with oil prices up and Trinidad being a energy-sensitive country, do you -- would you see maybe some improvement in the illiquidity situation, the conversion situation, would you see that improving a little bit?
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Well, generally speaking whenever there's improvements to an economy, one would expect that that would lead to some improvement in terms of liquidity. But I -- Michael, I think you might be able to provide a better answer to that.
Yeah, we're seeing very positive signs in this calendar year, especially versus the end of the last calendar year. Historically, in Trinidad, there has tended to be a falloff in liquidity in the second half of the year. So we don't want to get ahead of ourselves. But as you saw during the quarter, we did reduce substantially our dollar balance partly because of the additional restrictions despite our intention to start shipping in more merchandise. So we're keeping an eye on it. We're hopeful. I think certainly -- although a big part of the Trinidad economy is based on natural gas and others, oil prices are certainly a bellwether, if you will. And I think that that's a good sign. And we're hopeful that when things start to open up the economy will improve and we can continue to improve our liquidity situation there and continue to ship in more merchandise.
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Okay. Sherry, one last question. This year you've spent heavily on technology, on people and to improve that piece of your business. And certainly I expect you to continue to invest in that area. But will the pace of spending ease a little bit? Could we possibly see some leveraging of those costs next year compared to this year or will the spending still be at a pretty significant pace?
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Well, the approach we're taking to our spending is to make sure that we are investing appropriately to build the capacities we need. We've already seen the benefits of for example certain technology tools that have been developed for us and how that has really protected us especially in this very volatile environment and have captured sales that we might have otherwise not been able to get. And although we're watching the spending with each of these tools come significant benefits for us to be able to drive sales. So we're going to look at it in a measured way. But we really feel that by making these appropriate investments we are building the foundation for growth in the long term and we don't want to be penny wise and pound foolish.
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I had two, one on sports betting, and then one on cost. But on sports betting, you talked about that to start the year, Mary. As you look at the size of the category today, how much runway do you have as more states legalize betting? Is that going to be a top five category over time, and has the growth of the category changed, how you think about the value of sports rights with programming and radio? And then separately, just quickly on cost, given the early budgets for the year and your comments, are you looking at more permanent fixed cost reductions or you think you're in a good place?
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With regard to the category it's still -- it still remains to be seen. There are handful of states that are legal at this point, not even half the states. And we have a terrific footprint in many of those Pennsylvania, Tennessee, Michigan. And as I said, we think there is upside as it relates to how big, I think it does have the potential at some point to be a pretty big channel, a pretty big category if you will for radio. But there is complexity in navigating the legal and regulatory framework. But we do have momentum. And again, I think we have strong properties both locally, both with our station footprint, but also with our network vehicles. So we're focused on that. As it relates to how it makes us think about our sports content and positioning, there is lots of synergies there. And so it's encouraging, that's one bright spot in the category picture. I think you asked about -- I think the second question is about cost reductions, as we said in the prepared remarks, we are continuing to be focused on that. We've always said we don't operate with a lot of facts, but dealing with the new normal of mostly remote work has shown us over the last year, new ways of performing some of our operations that are more efficient than the status quo. So the short answer is yes. We're focused on three buckets, the obvious is T&E and the second would be real estate, how we work, where we work and then the third is business process improvement and efficiencies enabled by technology. And so those are the areas we're focusing on.
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You indicated that you plan to take out additional costs. I'm just following up on John's question, can you give us a sense of where those costs are being cut at this point?
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Hi, Michael, it's Frank. Well Mary talked about some of the areas in her answer and what we're focusing. I'll first start by saying that this is a continual process for us. In our third quarter earnings call, we went through a very specific cost exercise. In the middle of the summary, she indicated that our run rate expense for cost cuts for 2021 was going to be $36 million and we increased that by almost a third to $46 million, and that was through the normal process of budgeting for the year. As we go through 2021, it's a continual process. Remote from -- workforce gives us opportunities, real estate gives us opportunity, but there are a lot of things that are behind the scene in terms of business process improvements that will make a difference. So at this point we're not going to highlight numbers, we will update throughout the year, but rest assured, this is part of our ethos in terms of running our business to try to be as lean as possible without affecting our revenue and our growth.
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And in terms of political last year, what -- I know that a lot have got -- a lot of radio station capped Bloomberg money and so forth. Can you give us a sense of what political was on a pro forma basis for Q1 last year?
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Last year, Q1 was a little bit over $4 million.
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And then in terms of the -- you indicated that pacing so far is down 20%. Can you give us a sense of what that is versus network, local, national?
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We won't give you the specifics and breakdown, but I would say that the network is -- the network and national are doing better than local at this point. And that's a pattern that we saw toward the second half of last year.
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In terms of just the general economies of your markets, I mean -- can you -- this a sense of what -- are there specific areas of the country that is performing better than others. I mean to kind of give us a sense of the geography of what's happening?
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Well it's interesting. Last year, we saw a fairly consistent but narrowing gap between our PPM markets and our dairy markets, as we're going into the first quarter that gap has narrowed, which is nice. I think part of that could be the fact that our PPM markets are not -- and exclusively but not generated -- they're not in the states where you're seeing the biggest impact of shutdowns like New York or California, but that's a trend that we're seeing. And we're pleased with that at this point.
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Got you. And I know that advertising appears to be booking later and later. Is there any indication at this point, people booking into the second quarter at this time? Do you have any thoughts on how that's shaping up?
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No, no, it's -- listen, I mean obviously we did get some monies from the upfront for our network, which we always get. But in terms of flows at this point to make any representation in the second quarter, it's still way too early and as Mary talked about, March is going to be interesting because we had a very robust first two months of the year. And then as we move to the second half of March things just stopped and so we're expecting a more normal environment, which is one of the reasons why Mary indicated we expect our results for the first quarter to be better than our pacing indicated at this point.
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Got you. And then just on the sports betting, on the relative size of the sports betting category for you last year, would it -- where would it rank like -- would it rank in the top 25 at this point or is it just really very small at this point?
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It was -- it's an emerging space for us and it certainly was not in the top 10.
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The first one is just around some of the categories that were more heavily impacted by COVID-19 last year, travel, entertainment, hospitality, what percentage of revenue was that for you guys in 2019? And what are your expectations for that to recover this year?
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Look, we don't give a breakdown in terms of what each of our individual categories are, not surprising when we looked in the first quarter, some of the categories most impacted, which are large categories for us are still under pressure and that includes entertainment, restaurants and automotive, but having said that, they are all pacing below the trend that we talked about for the entire company. So that's offset by some of the stronger -- relatively stronger areas that brings us to a total pacing at this point down to 20%. For the entire year, it's hard to tell where the entire year is going to be, a lot of it depends on the success in the vaccines stimulus, the environment of the small business and our transition out of what has been a very difficult period of time for the country, our business and our employees.
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Got it. And then just around podcasting, I don't know if you can give us a sense of how big -- you mentioned us in the prepared remarks, but how big that is in terms of the overall digital bucket and we've seen a lot of podcasting assets exchange hands for multiples that are well in excess of where the market values you guys? And I don't know if there is any plans you have to kind of maybe disclose more metrics around podcasting or other mechanisms you have at your disposal to maybe get some more credit from those assets that you own?
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So our podcasting as you know, as reported in our digital segment for reporting purposes, and historically we've said that there is three lines of businesses which are streaming, C-Suite and podcasting roughly a third, a third, a third. And not surprisingly, with the strong growth in broadcast -- podcasting that is now the largest component of our digital line for reaching 40% and may get larger than that depending on the growth. With regard to the strategy on podcasting as you know, and we've been consistent, Mary has talked about in the past, the business that we've grown organically and profitably, we are in the flows of transactions that occur in the market and we see virtually all assets, whether it's podcasting or other. And at this point, we're focused on our organic growth, doesn't mean we won't look at smart acquisitions but we've generally at this point made our bet on partnership arrangements with our talent as opposed to going out and spending a lot of money on IT or infrastructure. And so that's our strategy now, and that's our key focus.
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All right, thanks for taking my question. Just two quick ones. One, I didn't catch the details on the pending use of proceeds. So I think you said term loan was going to be paid down in the spring. And then there would be a split between the bonds and the term loan in the fall. Did I catch that correctly?
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Yes, let me repeat that. So we do have the reinvestment bucket of $133 million. Allen, we remind you that reinvestment back is pretty broad. We can use that for capex and turn with investment acquisitions. So, absent any reinvestment by virtue and this was negotiated in the term loan when we put that in place. The DC land proceeds go directly to the term loan pay down, which is why I've mentioned roughly half of the $133 million goes to that if we don't use as reinvestment. But it -- and then the other balance is done -- is spent ratably between the term loan and the bonds and that will be at the end of the third quarter and the first -- beginning of the fourth quarter, which it was a timing, which we closed -- the first closing of the sale-leaseback transaction.
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Got it, got it. And then second question on the disclosure around political revenue and political EBITDA, when I look at it, it seems like in the fourth quarter, looks like a $14 million revenue contributor but then close to a $13 million EBITDA contributor. So what's the cause between -- for the margin being so high there?
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It's just a high -- it's a high margin revenue product and that's what you see for the entire industry. And so our cost is basically just a cost-of-sale and obviously marginal cost to put it on the year. So it's very high margin for us, but frankly, when you look at our book, the unit economics of our local radio, that's very high margin as well. It just came out very lumpy, lumpy in a very identifiable way.
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I just wanted to focus a bit on the recreational business. So I just wanted to understand, it looks like, from my math, and correct me if I'm wrong, but it seems like the Rec 2.0 sales as a percentage kind of declined a bit sequentially. So it seems like more of the strength was in the flower side. So just was hoping for a bit more color there? In addition to the expanded distribution that you mentioned, was there some form of significant load in of new flower products in the quarter? And how should we think about the trajectory as we look into January, February with the impact of the Ontario lockdown?
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Sure. Thanks, Tamy. So on the growth in terms of the product set or the distribution of the products within the category, we actually saw good growth in quarter-over-quarter Q3 among all of our products, but it was led by flower. So we saw solid growth in vapes, edibles and oils across the board. So I would say that we didn't necessarily see decline, just that the flower grew faster. So that was the first part of your question. In terms of the added distribution, what we've seen is that and this is -- I guess, it's a little bit hard because it's somewhat self reported. But on a self-reported basis, what we're seeing is that we probably have increased our reach in the marketplace listings by about 100 plus, 120 listings or so. And in terms of points of distribution, we're probably talking about something in excess of 1,000 to 1,250. So I think that, that's a combination of a bunch of things. It's new products in new markets, it's existing products and -- or new products in existing markets. So it's a combination. And we think that a good portion of that is both our own team working internally and maintaining the relationships that we've got with the provincial boards as well as the relationship that we've got with Kindred, where they've got more breadth and depth in terms of the reach they've got compared to the number of people that we had out in the marketplace. And then I think for us, relative to where things are in the first quarter here is that it's kind of real time, and I don't know that we've got true visibility quite yet. What we're seeing is that the provincial boards are getting more, I guess, sophisticated in their approach to carrying our products and what they have on the shelf. And we're actively working with them to try and figure out for products that they want to consider discontinuing is how we replace it with something else that might be more attractive to consumers. So I don't know that we've got specific visibility quite yet in terms of what it overall means to the business, but we're actively managing it and doing what we can to go ahead and replace products that are being considered for discontinuation.
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So for me, I want to just ask this question on Manitoba harvest. So just I can get some more color in terms of kind of the reason for some of the management changes. So I realize that down pretty good amount sequentially. You talked about a shift to private label for a large customer, which seemed to avoid not only on sales but also on margins. So I just want to kind of talk about maybe the overall trend that you think you're seeing there on the hemp side do you think that's a trend that other customers might do going forward in terms of switching to private label that further kind of impacts the margin profile? Or kind of what are the changes you're hoping the new management team will bring to hopefully turn around that segment for you guys?
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Looking at Manitoba harvest historically. The company and its products have been extremely successful historically in Costco. We've seen a lot of success in Amazon and Whole Foods as well. Those are clearly our three largest customers. Looking at the move to private label at Costco, the company has always had a small private label business, where for a few other customers we produce private label products. But the shift at Costco is something that certainly, we've been aware of over the last two years. And really, the long-term objective at Manitoba harvest is to make the other points of distribution in the United States as successful as Costco has been historically for the company and for the products. And so that's the real opportunity. So to rephrase that, customers at Costco historically have purchased a lot of Manitoba harvest hemp food products and the objective and the opportunity that's out there is to get consumers, customers at other U.S. retailers, whether it's Walmart or Target, Kroger to get those customers to purchase Manitoba harvest products, just likely to purchase them at Costco. Michael, anything to add there?
I would just say that our goal is with that additional distribution is to recapture the margin. I don't believe that we think a significant portion of our customers will be looking to switch to the private label based upon the visibility that we've got right now. So we would certainly hope that, that's a branded product play. And the other piece of it is that I do believe that we are going to focus on building out the CBD portion of our business in a more aggressive fashion than we have. We've got a brand that we acquired with a business that we owned previously by the name of Pollen. And we plan to leverage the Pollen brand in the CBD space as a go-forward product for us.
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So I guess just going toward the current quarter, Q1, are you guys providing any forward commentary in terms how you think about sales or EBITDA for the current quarter?
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Rupesh, I think if this were if this were not -- I mean -- but let me start out. So I think we're really pleased with the results that we delivered for 2020 in its entirety and specifically Q4 on the commercial side of the business, the cost side of the business and obviously, down through the EBITDA line. There are obviously a lot of moving parts due to COVID and absent a COVID environment, I think that we would probably be in a place to provide a bit more guidance. But just given all the moving parts that we've got and the unusual circumstances that we're facing. I just don't know that we can give real solid guidance at this point to say that here's how we feel things are going to turn out over the coming quarter or quarters. We're relatively bullish on where the business sits right now, and we feel good about the progress that we've made. We feel good about the progress that we continue to make and the opportunities that are in front of us. But I just -- I don't know that we're in a position to be giving specific guidance.
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On the adult-use side of the business, which you indicated was primarily driven by flower as well as the other product. But within flower, at what price point did you see the most market traction given the reset that you guys did in the third quarter?
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Yeah. Well, I mean, I'd say, Steve, and let me just pull up some information here. So we continue to see our sales predominantly in the mid and high potency, as we indicated. And our sales continue to be in the premium -- the mainstream and premium segments. So as we indicated, we had 60%. We did have some additional value segment sales compared to Q3, and so we did see -- and that was primarily driven by some products on the Dubon side, just the way that we kind of characterize it. And I think that's partially driven by the fact that we rolled out the hash product in Q4, which was very well received in Québec. In fact, I think it's considered the No. 1 hash product in the marketplace right now. So I'd say that, that -- those are some of the driving forces behind that. But we continue to stay focused on the mainstream and premium and the higher potency products, and that's been consistent, I think, now from the last quarter.
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Brendan, if I can ask two questions here. The first one, maybe it comes across as a stupid question, but given the great quarter you had and the very good news you had in the export markets in the last month. The big gap in the valuation within Aphria and Tilray, is there room to renegotiate the exchange ratio? It would seem that that would be part to renegotiate here or that just doesn't make sense at all. And then the second question related to your export markets. And by the way, congratulations on the products you're making can you talk about stickiness in those markets. I get that you have Portugal shipments and Canada, but a lot of other companies are trying to enter those markets also, right? So talk about stickiness in terms of our repeat business why do they go back to the brand or the salesperson or the service you're providing?
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Great. Thanks, Pablo. I can't speak to short-term individual shareholder sentiment. Obviously, I can now speak to my perspective. And when I look across every metric, financial, operational, product, geographic reach, the new Tilray, the combined Tilray, I think, offers shareholders the greatest return. I've been in this industry for 11 years. And when I look out over the next decade, I can't identify another industry that's going to see continual growth on a year-over-year basis. So we're working to close the transaction on the terms proposed and announced on December 16 and that's our focus, and I can't really speculate beyond that.
In terms of the second question, we're finding that extremely sticking. We're seeing despite sort of new entrants into the market, we're seeing our market share grow in Germany. And we've seen it grow on a quarter-over-quarter basis, really throughout the last two years. And it grows because the purchase process is just different, right? The patient goes to a doctor, the doctor prescribes the product, the patient then goes into the into the pharmacy and the pharmacist distributes the product. And so we're seeing I would say we're seeing more stickiness and more brand loyalty in international pharmaceutical markets than we see, certainly on the adult-use side in Canada. And we see that stickiness, not only in Germany, but we see it in Australia and New Zealand. And I think that's part of the rationale behind some of the announcements that we've made over the last six to eight weeks in terms of Hormosan in Germany and product registration, market optimization in Portugal, the export to Spain, the agreement in the U.K. and the announcements regarding France. It's important to establish a relationship with regulators in each country. It's important to establish and educate positions in each country as well as pharmacists and patients. And so I guess the short answer would have been yes, we are seeing stickiness. But we expect to continue to take market share in countries such as Germany.
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I just wanted to come back to the U.S. You certainly I believe you're well positioned for that. And I think referred to yourselves as a clear favorite for succeeding. And I think you touched on some of the reasons why, but I'd love to understand maybe a little bit of your thinking on timing, in part, maybe what you expect from regulatory reform? And then a little bit related to just in terms of the timing piece of it, as far as some of the advantages you point to are things like Aphria brands. Do you have any ability to be working with them at all now to do any planning? How actively are you trying to prepare for U.S. entry?
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So on the medical side, we're very active. We have -- we're one of the few companies that has performed multiple imports into the U.S. with DEA and FDA approval. And I'd say multiple, I think it's around half a dozen so far for clinical trials. And when I look at the agreements we have around the world, we have I think we've announced 18 countries. I think we shipped to 17 countries around the world. And when I look at the U.S., I think that there's going to be an opportunity to import medical cannabis, just like we import medical cannabis in 17 other countries around the world. I think there's going to be an opportunity to import a pharmaceutical-grade a GMP-certified medical cannabis product for distribution in the U.S. through a more pharmaceutical supply chain. So really outside of the MSO model. And so I think that's a huge opportunity. And I think it's something that relatively few international companies are prepared to do. And there's almost no GMP product available inside the U.S. And so that's -- I think that's a huge opportunity. It's something we are aggressively pursuing. When it comes to the adult-use market in the U.S., we continue to pay very close attention to regulatory changes, new states legalizing for adult-use. I think this year is going to be unique in that you will see more states legalized through the legislative branch rather than through ballot measures and ballot initiatives. Although I think that -- I think in November, it's a possibility that you'll see a state like Ohio legalize through a ballot measure. And then two years out, a year from this November, I think it'll be another four or five really Republican states legalize adult-use cannabis and medical cannabis. The key thing we're paying a close attention to in the U.S. is really the distribution model. We're seeing a battle take place right now between the existing MSOs and the tobacco companies. There's been lots of press recently about some of the lobbying that Altria has been doing in the U.S. And then thirdly, the U.S. alcohol companies. And so the big question we have is which model is it going to be in. I have a pretty strong opinion that the existing MSO adult-use model is not going to be the model of the future. I think it looks more like tobacco. I think it's more like alcohol. And I also think that adult-use cannabis products will cross state lines, you will see interstate commerce. And I think that's going to be extremely disruptive to entrenched players, extremely costly to entrenched players. And so that's what we look at. And that's what I imagine the combined company will look at when it comes time to deploy capital in the U.S.
I mean, you're asking the right question. I still think sort of that next 12 to 18 month time line. And I think it's incremental. I think you'll see a couple of steps along the way rather than one giant shift, although, it's completely unpredictable right now. Looking at -- 95% of Americans believe medical cannabis should be legal, 68% believe adult-use should be. And so there's -- it's one of the few issues that have bipartisan support, certainly, among the voters but also in Congress. And so it could be two months from now, but I'm sort of still looking at that 12-month time line, 12 to 18 months from now.
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I have couple of questions, is regarding the reasons behind the fourth-quarter guidance range. So if you could elaborate a little bit, will be better. So which apps that you have seen most of the app coming from in 3Q and how should we think about the apps that contribute with the 4Q guidance rate? And also when we look at your 4Q guidance is also suggest that -- that's a early sign of recovery from the negative impact that you experienced from Google, last few months. So are these negative impact now largely behind us and how should we think about the next year growth outlook?
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So yes, our performance this quarter was better than we expected. And our business started to bounce back in this quarter, based on the latest operation data. We're very optimistic about the coming quarter and our long-term growth. And that is why we have raised our revenue projections by 28% for Q4 from implied $37 million to $48 million. And actually both of our daily revenue and the number of daily active users regained the growth momentum. And this is testament to our strong execution capability, core competency and unique value proposition. And the major driver behind this strong recovery, is the Google ad platform. Not any individual app actually. So CooTek had platform successfully replaced Google Admob and rate the overall monetization for all of our portfolio apps. And I have to admit that we underestimated our potential to build up in-house ad network in Q1 and Q2. We knew that building up in-house ads network is that strategic choice for us to sustain our core business and reduce external dependency. But we underestimated our traffic value and the possibility in how at network could possibly and both our monetization.
So we concentrate our results to focus on developing our own ad ecosystem, we found great potential and opportunities. So, as you know that most of our portfolio apps are content rich apps, purely the traffic from content app, especially newsfeed apps have higher conversion for advertisers. So when we sell our traffic directly to ad partners such as Admob, they don't optimize their ad networks specifically for our traffic. But when we build up our ad network, we can optimize for our traffic. So we have can find the specific types of advertisers, based on conversion efficiency for our traffic.
For example, we've found that, e-commerce advertisers, especially those small and the medium advertisers have higher conversion on our fitness apps. Then we provide our wholesale sales network to focus on that category and introduce specific advertisers for our fitness apps. This resulted in better ECTM [Phonetic] and even better advertisers kind satisfaction. There are actually a lot of optimizations, we can do to further boost our monetization. And we will continue to strongly invest in both advertising technologies and our ad ecosystem. In terms of next year, since we have regained the growth momentum and what's more -- our monetization is even more stable now. But believe we will be on the fast lane next year, not only on revenue side, but also on product side. And we are confident to invest more and user acquisition could drive our user growth. I think, I will be able to provide more color, when we finish the fourth quarter.
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First one is, we understand that CooTek's in-house ad system is growing really fast. And then mitigate some of the impact from the Google incident. So, can management give some color in terms of the key metrics for this ad system such as ROI and the ECPM? And how the revenue growth trend will be like for next year for in-house ads? And second question is, this management have some guidance on the user growth front for 2020 in terms of MAU and DAU?
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One of our strategic go is to strength our advertising business by reducing external dependency. In the first quarter of this year, we officially launched the CooTek Ads Platform. And this year -- this quarter, we achieved a significant progress as the CooTek Ad Platform started to contribute the significant percentage of our total advertising revenues. So, yes, it as offset the impact from Google's action and boost our monetization efficiency, because the average ECPM is higher than other average [Indecipherable].
I think, if I can provide some detailed numbers here. So the average ARPU DAU of our portfolio apps in October is approximately 40% higher than Q1 average of ARPU DAU. At that time, we were not impacted by Google yet. We expect to -- that the revenue generated from our in-house ad network. We'll take more revenue percentage in the future. And we believe it will help to sustain our ARPU growth. And in terms of the DAU and MAU outflow, we don't provide guidance, both DAU and MAU growth, but I can give you some color about it. So our sophisticated growth platform is built by leveraging our unique in-depth user impact. So we are very confident on our growth capability. So the DAU of our content rich portfolio app started to bounce back and MAU continued its growing phase, even in Q3. So we're looking forward to a strong user growth in the next year.
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So in the third quarter, we have the engagement ratio, was it DAU divide by MAU, came down to 35%-ish and that's compared to the last quarter we have over 40%. So can you expand -- there will be more why we have these -- we have lower engagement ratio and also why should we think about these -- the trend going forward?
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So the engagement rate of our portfolio apps was 35.4%, in third quarter, down 7% sequentially. There are two major reasons. First, we could not use Google push notification service to reach and activate our users, after our developer accounts would disable. So push notifications email push and the retargeting advertising major channels connected to our personalized recommendation system, to recall and activate our users. To mitigate this impact, we have already developed our on-shelf hosted push system, all of our apps work under our shelf hosted push systems. And another reason for the decline is that some of our apps have higher, long-term retention rates and good ROI, but have naturally lower average engagement rate.
The MAU percentage of such app are increasing. For example, Cherry, which is a female lifestyle community app, it's engagement rate is around 25% to 30%, a little bit below average. But its long-term retention is very good, so it's MAU percentage is increasing. Another case is HiShow [Phonetic], which we released to China market, despite its engagement ratio, is a little bit lower than average. It's ARPU DAU is two times above average. So we don't think it's a problem because the overall ROI of those app are actually above average. We cannot -- just focus on engagement in the future, but product lifetime value ROI long-term retention rate and the value would bring to our users.
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So, Karl, I have a follow-up questions on the sales and marketing spend. You mentioned, since I --you're increasing the budget in 3Q, which drove help to drive the DAU and MAU growth. And then the sales and marketing percentage is actually higher than the revenue for the third quarter. So was these also one of the reasons that contribute to the faster fourth quarter revenue growth? So will, sales and marketing need to remain high to support the stronger revenue growth into the 2020?
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Yes. So we are investing more to acquire users because we're pretty confident on our user growth and the overall ROI and unit economics is pretty good, even without Google Play. So that's why we are confident to put more money to drive the user growth. And yes, because the ROI, the total assets at the entire ROI of our system is very good. So the budget we spend to acquire users and the part of the budgets we're just sensitivity revenue. So part of the revenue is coming from the -- this quarter's investments to user acquisition. And we expect that the percentage of our sales and marketing costs will -- just decrease. But still we will continue our investments on user acquisition in the fourth quarter and next year.
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Brian, maybe I'll just ask a two-parter with respect to the revenue guide for Q4. Can you help us better understand some of the comments you made around the exit velocity, specifically with respect to the U.S. e-commerce business or the AWS business and how that might inform some of the lower-than-seasonal trends that seem to be implied in the Q4 guide, specifically with respect to either optimizations on the AWS side or changes in consumption behavior on the U.S. e-commerce side?
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Sure thing, Eric. Thanks for your question. As I look ahead to guidance for Q4, I think the biggest individual factor is still going to be foreign exchange. This guidance includes 460 basis points of unfavorable impact year over year. FX is a bigger issue for us on our revenue growth in dollars than it is on our income. It actually has a slight favorability due to the investments we're making internationally. But put that aside for a moment. What we saw in Q3 was a really strong July with a great reaction to Prime Day globally. And the resumption of things like in-stock rates are starting to come back, and delivery speed was coming back. And that continued through the quarter, but growth rates started to slow a bit. And primarily in the consumer stores business, it was in international. North America, obviously, it was strong, but it started to slow a bit. But it was mostly in international where we saw the biggest impact, and we think that is tied to a tougher recessionary environment there. Compared to the U.S., it's worse in Europe right now. The Ukraine war and the energy crisis issues have really compounded in that geography. But when I talk about enterprise customers in AWS, yes, we've been working with customers to lower their bills. Just like all companies, they want to lower their spend when they're faced with uncertainty in the market. I would say one that's real valuable points about cloud computing is that it's turning fixed cost into variable for many of our customers, and we help them save money either through alternative services or Graviton3 chips. There's many ways that we have to help them lower their spending and still get great cost performance ratios. So what we're really excited about the business, both in the long term and even in the short run, you noticed we've added $4.5 billion to the $16 billion base we had of revenue last Q3, so the business is growing in absolute dollars at a really good clip. We do see some of the consumers are cutting their budgets and trying to save money in the short run. I would say that although we had a 28% growth rate for the quarter for AWS, the back end of the quarter, we were more in the mid-20% growth rate. So we've carried that forecast through to the fourth quarter. We're not sure how it's going to play out, but that's generally our assumption. We're excited about the re:Invent conference that's coming up in late November. We expect to have over 40,000 people in Las Vegas and many more tuning in virtually. So continue to drive value for customers with new products, new services and, lately also, additional ways for them to manage their budgets and optimize in what is shaping up as a tough economy.
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Brian, free cash flow generation has always been Amazon's focus in the past, but that went negative last year and likely this year as well. Can you just talk about the path to restoring meaningful free cash flow? And do you think that capex tied to data centers and the AWS ramp can ultimately step back, similar to what we've seen recently with fulfillment and transport?
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Yes. I think if you look at our free cash flow, there's multiple factors here. One is the drop-off in income for the trailing 12 months versus the 12 months before it, and a lot of that is driven to things that we've talked about on these calls. Ops cost, our network doubled over the last two and a half years. While we're making strides in productivity and network optimization, we still have work to do there. So we have to get our cost structure back to pre-pandemic levels in a lot of areas of the company and mostly in operations. There's a unique thing going on with inventory right now because we have a lot of weeks of cover mainly due to supply chain issues coming out of Asia primarily and we're seeing with our sellers, too. We just have additional weeks of cover. We think our model reacts quickly to customer demand. This is more about the other side of the equation, the supply chain and having more in stock. So what the issue there is that we generally have a favorable working capital impact from accounts payable that is more days than our inventory. That's been flipping the last year, and we expect that to normalize as we move into 2023. And then, capex is a big driver. We had, again, a doubling of the network, had very high capex the last two years. You'll see that we've lowered capex year over year. We probably cut about one-third of our budget from what we originally thought for 2022 while still focusing our capital dollars really on the AWS business and increasing customer demand or capacity for increasing customer demand in our stores business. So we're working hard on all those dimensions. And we expect, as we see a recovery in income generation, normalization of the inventory versus accounts payable cycle and efficiency in our capex spend, we intend to flip those numbers around.
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Let me ask two profit questions. AWS margins were a little lower than we would have thought. Is that just a reflection of the full quarter impact of that kind of stock-based compensation granted to those employees earlier in the year? Is that the new normal for AWS margins? And then international losses also were a little bit heavier than we thought, just talk about what drove those losses. And is that also the new normal for that segment?
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Sure. Let me start with AWS. So we did see a deceleration or a drop in op margin sequentially quarter over quarter. The broad disclaimer on AWS margins is that they will fluctuate over time as we balance investments versus renegotiating pricing with the long-term customer commitments, all as headwinds to the business, offset by increasing productivity and efficiencies in our data centers, which drive profitability. So there's moving parts there. I'd say what's happening lately is, yes, the stock-based comp. We have seen inflation in our wages this year and particularly on our Czech employees is heavily concentrated in AWS. So that's one element of it. We're also seeing energy costs that are materially higher than they had in pre-pandemic, electricity and the impact of natural gas pricing. So those prices have up more than two times over the last couple of years and contribute to about 200 basis point degradation versus two years ago. So we're fighting through some of that as well, which is a new thing for the AWS business. But we'll continue to look for ways to optimize our operations to use less energy. And as we scale, we'll outrun that growth trajectory. On international, international is always a mix of profitability in more established countries of Europe and Japan, offset by emerging countries and investments in Prime benefits. I think the biggest issue quarter over quarter, the increase in losses versus Q2 was tied to some additional operating costs in Europe. We've seen higher fuel costs there, even more certainly in the United States. And Prime Day always has lesser profitability because there's just a lot of deals. And it's a bit of margin from Prime Day in both North America and international. A big part of that is device sales. And again, we sell a lot of devices during our Prime Day events. We don't make money on the device. We make money on the use of the device. So that always can end up hurting profitability in the quarter. So there are some contributing things. As far as new normal, we're working very hard to make sure that current profitability is not the new normal, and we'll see how quickly we can make improvements. A lot of the improvements that I talked about on a macro level, capital efficiency, operations improvements are as important internationally as they are in North America.
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Brian, on AWS, I'm just curious when you talk about optimizing and efficiency, can you talk to what you're seeing from your customers why perhaps you're seeing such a big pullback in terms of near-term demand? How would you characterize those conversations? And I think the other question is related to backlog. Backlog has been running 60-plus percent, so the divergence between revenue and backlog is pretty large. Everyone's asking, how do you describe that divergence?
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Let me have David answer the backlog question first.
Dave Fildes -- Vice President, Investor Relations
Yes. It's Dave here. So I think our current backlog balance for Q3 is $104 billion. So it's about a little less than 60%, I think about 57% up year over year. And the new customer pipeline is healthy. I think with a lot of enterprises and customers, they're continuing to put plans in place. I think Brian will talk a little bit about some of the cost optimization in a second. Backlog growth, this figure, it can fluctuate quarter-to-quarter because it is, dependent on the commitments that you sign in the period and how those adjust but, yes, $104.3 billion for the end of Q3.
Brian Olsavsky -- Chief Financial Officer
Yes. And your first question about cost optimization, first, there are some industries that have lower demand that's showing up in our volumes as probably like other companies as well, things like financial services, the mortgage business being down, cryptocurrencies being down. We're very strong in some of those industries, and that's part of it. But basically, what we see is customers are looking to save money versus their committed spend. We have options for them to do that. They can manage workloads better. They can switch to lower-cost products that have different performance profiles. They can switch to Graviton chips that have higher cost performance ratios. So all really good things for the customer and for Amazon long term. Again, we think the benefit of cloud computing is really showing up right now because we allow customers to turn what can normally be a fixed expense into a variable expense, and they can let us manage the highs and lows of inflation and other cost of electricity and everything else. And they can get about to do their business using our services in a very highly secure way. So I think just like in 2020, these time periods are good for long-term adoption on cloud computing. But the offset in the short run is that some companies have demand that drops. I think what was different in 2020 was there were companies that went down and there's companies that went up quite a bit that were servicing high volumes during the pandemic. So that dynamic is not in place right now, and I think everyone is just cautious and they want to, again, watch their spend. And as CFO, I appreciate that, and we're doing the same thing here at Amazon.
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Two questions. First, could you provide some more details on the cost structure initiatives and when we could see those initiatives hitting the P&L? And then second, on the holiday season. It's a bit implicit in your guide and remarks thus far, but just curious of your expectations for consumer demand this holiday season versus last year.
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Sure. Let me start with the holiday. So we're ready to roll. We've got the best selection we've ever had. In-stock levels are really high. Delivery speeds are getting very close to where we want them to be. And we're ready to have a really good holiday season with our consumers this year. And the Prime Early Access sale, I think, created great value for consumers. It allowed them to get a jump on some of their purchases for the holiday and also just find some great deals. So we're happy with that effort. And the teams that put that together worked very hard this year to hold two large Prime events within four months. So we're very optimistic about the holiday. But we're realistic that there's various factors weighing on people's wallets, and we're not quite sure how strong holiday spending will be versus last year. And we're ready for a variety of outcomes. But we know the consumers when they're looking for good deals, and that positions us well. Advertisers are looking for effective advertising. And our advertising is at the point where consumers are ready to spend. So we have a lot of advantages that we feel that will help both consumers and also our partners like sellers and advertisers. So the seller in-stock is very high. We've had great in stocks from our FBA sellers. And so, we're ready to go. And we're very optimistic about the fourth quarter, just realistic about whether we may have a range of outcomes that we just have to be ready for when we are. On the cost structure initiatives, I think you're primarily talking about the operations world. There's three large buckets there, as I've said in the past, productivity, fixed cost leverage and inflation. On productivity, made good strides, but there's still a lot of work to do there and we know the job ahead of us. It's hard to improve productivity much in the fourth quarter because it's just a period of like maximum stress on the operations, and we're trying to fulfill every order in a very quick way. But our goal is to leave ourselves in a really good, strong condition for a fast start on a lot of initiatives in Q1 of next year. On fixed cost leverage, we've taken steps to alter our forward plan and take capex out. A lot of the capex we spend in any given year is feeding future years' capability. And we've tightened that up. We feel good about the arc of demand versus supply that we have in our fulfillment and transportation area. Inflation is a wildcard. We do as much as we can to save money in an inflationary environment. We've looked to make sure that our trucks are fully utilized as best we can, preventing long-zone shipments, things that like use a lot of fuel or use a lot of trucking or use a lot of shipments from other parts of the world. So we're working under the umbrella of not having it impact the customer. We're working very hard to save that. Those challenges will be there through the end of the year, and we'll be working on them definitely in the first half of next year as well. So we'll keep you posted as we have these quarterly calls on our progress and where we see opportunities.
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B
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a8404dfd2af46f1028d9dac38a34fc35
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Just two clarifications on what you just said. So first, on retail, you did see some good efficiency gains in 3Q, and you talked about $1.5 billion. As we look forward, if those three areas you just mentioned do turn favorable, how quickly do you think you could get back to kind of historical North America retail operating margins? Is that one year, two years? Any time frame on that? And then on AWS, you said the back half of 3Q was a mid-20s run rate. One of your prominent peers was talking about incremental macro weakness in 4Q. So could you just talk about, are you expecting the same thing in 4Q? Or are some of the price concessions you already made in 3Q kind of getting in front of that?
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Let me start with the efficiency. I just outlined a lot of it in the prior answer. But just to clarify, we were aiming for about $1.5 billion improvements sequentially versus Q2 and Q3. We feel like we came up about $0.5 billion short on that. Mostly in our productivity, with the Prime Day and the preparations for the Prime Early Access event, we have been running with very high inventory levels in our warehouses. But our inventory and our sellers, as we get ready for those events, paid off in the events themselves. In-stocks have been at really high levels. But in that environment, it's a little harder to work on. There's blockages to making improvement in productivity. There's a lot of extra work when you have space constraints. But we will continue that fight. And while I can't forecast into 2023 yet, and I'm not really only talking about Q4, my message is that we have work to do in 2023 that we are aware of and working on today.
Dave Fildes -- Vice President, Investor Relations
Yes, this is Dave. Ross, you were just asking around AWS. There's nothing really I'd add to what Brian had already said other than he's spoken about. We've seen the year-over-year growth rate come down as the third quarter progressed and exited in sort of the mid-20s growth rate. And so, that's informed how we're thinking about the guidance ranges heading into the fourth quarter, but nothing else to add on that.
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B
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980d24664a5ecfc9a4691b7cf6ac6f8f
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John, not a lot of room for questions, very thorough on the explanation here. But maybe if we can just talk -- take tax first, just on your thoughts on the sort of the competitive landscape and sort of your promotional activity. Obviously, we've seen a lot of commercials about going with an actual CPA that's been, sort of, the theme, I guess, more recently, especially during some of the larger football games and how that is sort of -- you guys are judging sort of that move, which I think started occurring last year versus what kind of you guys are doing. And on the promotional side, I believe you guys advertised a little bit more on national TV and maybe also even during some of the larger televised events, but just how you are being more promotional, whether it's the increased promo codes, pricing, up front in the season with the anticipation of making it back in the back half or just how you guys are attacking the market relative to your peers?
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Dan, thank you, and thanks for the question. I'll unpack it in sequence there. And let me start with overseeing, sort of, big picture. As noted in the prepared remarks, we're definitely seeing upticks in overall spending and noted as well the shift for more toward live. Our belief is that sort of -- I'm thinking about, sort of, TurboTax live there, of course. But our view is that the aim there is to take more and more people out of the storefront, making those folks who are there in the first place because they get some anxiety, perhaps more than complexity, anxiety around their tax situation, and we believe in general, the more successful the volumetric leader is in winning those customers over from storefronts to better should be over time for DDIY. They are advertising very heavily, and we expect to continue to do so. Now as it relates to our position in the marketplace, a couple of things. So we have seen some mix. I signaled on the last call that we had some really sharp improvements in analytics on how to spend our marketing dollars. And so we have made those shifts. We felt really good about the campaigns that we developed this year. We're seeing a positive response on those, and part of that is due to the fact that we are broadcasting on television. Of course, our spend levels are far smaller than others, but we think the messaging itself has cut through nicely. There's also been an important social component or we've had over 8 million views of our video campaign on social. We're nowhere near the end of the -- even the mid part of the season here, of course, but we feel good about how we're stacking up from a marketing point of view. Now as it relates to promotions, you may have seen some of our marketing that we advertised this concept of we pay you to file your taxes. So it's secret that there's economic value on a -- in a stored value card. That's how it works for us. We've seen a lot of interest on social and otherwise, around an offer -- an offering like that. So that's how we're seeing things back up, that's how we're competing so far. We've got ongoing tests around pricing and promotions, and we vary that based on new versus returning versus folks that have lapsed and -- we had a lot more this season to go and prosecute, and we're hitting No. 2 or so here, but like I'm liking what we're seeing with regard to marketing.
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A
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17f7919f2d0066d8687c805155d3863b
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Do you have a sense John, where you're finished kind of last year in terms of brand awareness and now, obviously, still early in the season. Any metrics you can share around either repeat or things that can give us sort of an update on brand awareness, which has obviously been the one issue, I think, that's play TaxAct in the past?
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Yes. We don't show those numbers and clearly with spend levels lower than others and being in a category that is, generally speaking, a once a year event. We're going to be that player that whose brand recognition fits with our market share, meaning we'll be third in brand recognition. But we think that the differentiation that we've built into the market this year, it's a good thing that people talk in one message, and we've got a guy match with the opposed message that's more around value is going to be good in the context that competing inside the DDIY category, while others try to bring people into DDIY. And it's something that we focus on continuously. More progress coming.
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B
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12518287b24b25526fda9ea7ce00913b
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OK, last -- then just last on wealth management. Just so I can understand, John, it sounds like integration, it was -- I think, we all sort of take for granted the size of the integration and shift you guys did to the new clearing platform. It sounds like even though by your standards, maybe a little bit of noise, I guess, around uptake and sort of adopting the new platform. Can you just give us a sense of when -- are you still able to still fully step on the gas here? Are you -- how long does this kind of noise persist, and ultimately, when do you feel like you're able to get more aggressive with some of the other initiatives that I think you want to roll out now that you've got the platform underlying?
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Dan, thank you for that question as well. So the way to think about this one is that it's -- I'm going to make two comments, first is, as noted, we actually took on three conversions in one. We actually debated when we ought to have more of a rolling thunder approach with the conversion to the -- on the National Financial side. It was timed and then that was then Envestnet and eMoney would come after tax season. And we just felt like that would be too much of an extended period of disruption. So we choose to do all three at once, and as we've also shared other -- there's been a lot more cleanup work than we expected with regard to getting advisors comfortable especially with those later two elements. That said, by the end of Q4, we were back within our stated processing level, just a few -- very few exceptions. Now as it relates to growth, the -- it's kind of like a tale of two cities to here to extent that larger advisors, the advisors that have been much more focused on growing advisory, focus had have been -- frankly our biggest producers. They embraced all the change, and we're actively working with those advisors to help them grow their practices, and there's a number of initiatives that are supporting them in that regard. And instead, then some of the smaller advisors who make their advise for whom they're going to spend a couple of hours a week on wealth management for whom getting off the learning curve has just been more difficult. They don't have a frequency of usage that the large advisor office with -- like a multi-person firm would have. And it's really that advisor we've been spending more and more of our time with. So we're not stalled out with regard to focusing growth initiatives, the pilot around advisor productivity. It's bolstering ahead. We're realigning some of our teams to support that new segmented approach to our advisors. We continue to move our advisors and focus on the right conversation with clients. We're not stalled, it's more like holding tank until we own it. It's more like cycling through advisors segment-by-segment and even advisor-by-advisor to get them up to speed, while the larger advisors are already partly moving up. That's why we saw the -- how nice this performance in advisory, by the way, in Q4, thought that maybe a bit of a challenge, but the reason was we believe that some of the larger advisors powered through the new version and kept on moving with regard to greater penetration advisory.
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A
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7107cb184440638b3582aaa3e7e71260
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So John, I think, you discussed in the prepared remarks some of the monetized units outlook for this year. Could you indicate the trend that monetize unit for tax season to date? I may have missed it.
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So -- well, thanks for the question, good morning, appreciate that. The headline here is a sharply favorable shift in mix toward monetized units. We've explained a little bit of that in the prepared remarks, but as you know and folks on the call know, we've been in a multiyear effort to shift our focus toward monetized units 0.1%, 0.2%. Monetized filers tend to be much more of a second peak sort of phenomena. And so in our instance, we believe that explains our slow start, although we're covering ground -- covering up ground, making up ground rapidly even over the last few days we've seen some nice progress there. But we have a goal of growing paid units on to follow up on our success of last year. We are up relative to this point last year, but I point out in fairness that its not as meaningful comparison since we did not have the basic's SKU last season until March. So it's shaping up in terms of monetized units, largely the way we would have expected to, our focus is to, again, to grow monetized units, we're making every opportunity to make sure we do that this season. And again, as noted, a sharp shift in mix toward monetized unit. So byproduct of our strategy.
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Great. So turning to wealth management. So there's been a lot of noise around tax season this year. As we think about that, has there been an uptick in conversations from tax professionals that are looking to get into the wealth management business? And relatedly it seems like what the conversion it may possibly have changed some of that advisor on board as we look out over the next six, nine months or so. I mean is that fair in like how should we be thinking about Dallas for growth over the course of next year for advisor onboarding?
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So let me cover the second point first around onboarding. There's really -- there's no negative with regard to the new advisor coming in. In fact, it's all positive and the reason for that is we're starting out of the gate with this terrific package of National Financial plus Envestnet plus eMoney. So they're working with sort of a best in show array of capabilities and so for that person coming in at tax only now becoming tax and wealthier in far better spot. What about the established advisor. Certainly, if they are on another clearing firm they got to make a change, but that was true before and the plus here is that they are now also going to a far better, let's call it a stack of capabilities and was true previously. So much so that we landed some advisors, it will begin to convert even late last year on the basis of now having built that sort of best in show lineup of those three capabilities. So it's not going to stop recruiting, in fact, it's a bit of a spurter recruiting and I feel like we're going to get people off to an even faster start with the quality of what they have to work with versus that was true, what was true previously. Tax, the tax reform and what does that do for tax professionals and thinking about coming into widening their profession to include wealth management. We think it is one more spur for those folks. First, big picture, what's happening in that business sort of as you think about tax only professionals, it's a couple percent growth, sort of year over year, it's not rapidly growing. And on top of that, it's increasingly less and less differentiating. So it's certainly true that the wise tax only professional is looking for ways to add value to their business. They're looking for ways to do more for clients and extend from the more commoditized simple preparation of taxes. And that's where we come in, right? So we come in exactly at that point. It's why we think we've gotten more interest in some of the events we've gone to. It's why we've gotten good uptick from great advisors because they see that it's kind of tough slogging to grow your practice once you've sort of filled yourself, if you will, to the right level of capacity on tax filing. So tax reform, it's one more reason for that advisor to think about how can I be strategic? How can I take advantage of change? And if that manifestation on the investment side that captures fascination of so much of these folks.
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A
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a53a30ace93f6c13d9513fca6b2a40cd
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Hi, guys. Good morning. This is actually Andrew Nicholas, on for Chris. I guess, first, can you talk about customer utilization at the refund market place so far this year. Obviously, it's early in the season, but any sense of what the average bonus is that you've seen customers get? And maybe even a sense of the economics of the program on average, recognizing at various little bit by the type of gift card and the merchant?
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So Andrew, good morning, thank you, the question. John, here, I'll take that one. It is early, but we're seeing some nice uptick in the marketplace. we're experimenting with how we present it. It's a -- in a way -- I mean the value proposition is clear, right? Hundreds of dollars up to $599, we're experimenting it with how to best convey that out to the consumer in terms of the web experience itself, but that said, there is several million dollars that have already been loaded onto these cards and for the consumer that is really value conscious, it's quite something to leave net positive, paying us a little money and leaving with a lot value on a card. And as it relates then to kind of the economics of it, essentially what happens here right is their's economic sense for our value card for obvious reasons. We pass nearly all of that on to the consumer as a way to attract people into our brand. And so it's not meant to be a moneymaker for us per se, it's much more meant to be an acquisition tool and one that we're going to continue to experiment with in terms of its presentation.
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intermediate
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[
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B
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9bfaf625c86224fa9a464cedfa4ee3ff
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Got it. And then turning to wealth management. I know you mentioned stronger relative growth among higher producing advisors, driving up the payout rate in the quarter, just curious, one, if there's also any seasonality in that number in the fourth quarter? And then two, if there's a way for us to think about that payout rate in 2019 or even longer term?
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Andrew, this is Davinder, I can think that. To take the first part of that question, there really isn't any seasonality that I would model in, it's typically pretty constant throughout the year. And in terms of thinking about going forward, in my remarks, I mentioned that we did have, we do have a bonus that we expect to pay in Q1 and then a little bit in Q2 and Q3, which I would say, is not going to be kind of a run rate type of a component on payouts. So I would exclude that and, I think, if you do the math, you'll find that that will probably take out about 1% or so from the calculated payout rate. So I'd kind of use that 77.5-ish for purpose of modeling.
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A
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4c74b5acffffec0b60dcf363a07d3275
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OK. And then one last modeling item, if you don't mind, Davinder. Can you tell us what the tax rate is that you assumed in the Q1 guide? And any outlook for the full year?
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Yes. As a reminder, Andrew, so we're still in a net NOL situation. So we don't expect to be a federal taxpayer this year. We do pay cash taxes or state taxes and that typically been around 2% to 3%, which is what we're using for Q1 and for -- really for the full year.
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A
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54f44c6981fc9aa7a3e5548f9f5bb376
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Why did Q3 revenue grow but gross margin declined?
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In Q3, we had increased depreciation, higher power costs and we recognized higher bonus costs due to the higher profit in Q3. Gold material inventory valuation loss compared to previous quarter.
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direct
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[
"direct",
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A
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0b7df6adb43b3cf463b1efc14abc589d
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Could you provide more color about Q4 revenue and gross margin?
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As we move into the fourth quarter, in memory, despite demand increasing in consumer and auto electronics, there is a semiconductor supply imbalance that may impact overall Q4 demand in the segment. Therefore, we are taking a conservative view about memory in Q4. And in DDIC, our ASP continues to increase, driven by customers optimizing their product mix and OLED increasing in Q4. Further, ChipMOS did get some rush orders from customers led by the uncertainty of power shortages in China. So, we are somewhat cautiously optimistic about DDIC to be flat in Q4. In all, given the strength in the first nine months of 2021, we expect revenue could be flat to down in the low single digits. Gross margin would be slightly impacted by revenue declines and higher depreciation in Q4.
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intermediate
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[
"direct",
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B
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2fdbb5589f5ed4f48aba239772552083
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Any impact to Unimos from the power shortage in China recently? If any, is there any counter measure?
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There was no impact and Unimos has been turning profitable.
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direct
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[
"direct",
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A
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9e28cc58fe816cd86135a06df7c32266
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Is there any customer input seeing signs of wafer supply improvement? How is ChipMOS offsetting the impact on operations of wafer supply shortages?
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So far, we are not seeing any real wafer supply relief. Under such situation, we did see customers optimizing product mix causing a longer test time. Currently, better UT for high-end testers led and worst UT for the others.
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intermediate
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[
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B
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4cfb4abe3e15b2f60061f4d4c5dda2b8
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Business momentum for memory products in Q4 by ranking, which is stronger, NOR, NAND or DRAM?
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NOR flash is better owing to auto and NTWS [Phonetic] application demand. Secondly, would be 2D NAND and then [Indecipherable] DRAM.
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direct
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[
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A
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72b9e33075767cbf2fffa36a07e94733
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How is the tax rate of 2021?
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As usually, about 18%.
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direct
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A
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fcdc5625bd066ec5498e2b0e294ddeea
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The question is asking about your '22 dividend?
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We don't expect any major changes to our dividend payout ratio, 50%, 60% of EPS. However, the final dividend will be discussed and proposed by our Board and need to get approval at our normal annual AGM.
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B
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9bec0d2ff8ff0e8d67e13c1a57dafe9f
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The first question is on communications and enterprise. Rajesh, you talked about 30 new designs. Is there any way you could talk a little bit about the timing, and when those will start ramping into production.
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Yeah. I mean actually, Tore, thank you. We are ramping up on these right now. It's a slow ramp. It's not an overnight ramp. And as we have discussed in past calls, they're not all just pure play 5G, some of them are satellites, some of them are computing, some of them are in the networking area. And so as such, the ramp is spread out over time. It's not typically like communications that it takes 18 months for these to ramp up. So, I would say that they're ramping through 2021 into 2022.
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A
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f45259bbb9eab1f0632be12044de0bea
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And you talked a little bit about 400-gig optical modules and that being an opportunity based on our work that market's going to start ramping quite meaningfully in the second half of this year. Would that be -- would you expect that design wins to start ramping.
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Probably the middle of next year is my forecast because these -- a lot of work that we're doing with the future standard bodies, I think they're still in work. They're still in flux. There are still some details that are needed to be ironed out. So I would say about a year from now, maybe slightly more, but around a year from now, we should start to see some of the rollouts.
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direct
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[
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A
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0176afeb6ce68fdac7dcd79217707c09
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Just one last question for Art. Art, your inventory days are at 60 days, pretty low, but I think all companies now have low levels. Could you walk us through a little bit, how you expect to increase your capacity -- your inventory throughout the year.
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Sure. Our inventory, as I mentioned in my commentary, actually went down during the quarter, even though sales went up, of course, those two are somewhat related. We will start to build inventory back up during the course of 2021. So you should expect it to increase in Q1 and beyond. We are ordering ahead on wafers, both MEMS and our CMOS wafers, so that we do have adequate supply to satisfy this pretty strong demand that we're seeing. Certainly in the first half of this, and hopefully for the entire year.
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A
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9092d7194f1617bd4525a960b5ac7cbd
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So my first one in terms of the positive revision to the December quarter guidance, can you just walk us through what changed within the few weeks after you provided your guidance for the fourth quarter on your September earnings call? And just any color there on what drove the upside would be helpful.
|
Sure. So I'm actually going to walk us back to Q3 for a minute because it's the same trend that we saw in Q3. Going into Q3, we provided guidance. We've had pretty substantial sequential revenue growth going from Q2 to Q3, so we felt good about that. We gave that guidance. The order rate just was extremely strong through the course of Q3 and we increased our guidance at the end of August because of that. And we ended up beating that number. Kind of the same scenario going into Q4. We raised our number going into Q4. The order rate has been extraordinarily strong. We had by far the largest record bookings in Q4 than we'd ever had by a large margin. And so, we did raise guidance at the end of November and we beat that modestly by the time we finished the quarter. So I attributed to basically, overall strength in our market. And again, order rates have been extraordinarily strong for us.
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[
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A
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df0adc70f9c0b6b10beb3bbc1d6b078f
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And for my follow-up with the supply chain issues that have taken place last year in the quartz industry. Is that leading your customers to change how they view and assess the diversity within their supply chain. Just kind of wondering if there are any opportunities for you guys just based-off on customers trying to diversify more away from this quartz industry.
|
Yeah. So we had a very specific event that we talked about earlier, which was a constriction in the supply of quartz. That was of course a kind of a very short-term event, but it was very pronounced. But what it led to was many of the consumers of the quartz products did not, for example, know that they were -- for example, they may have been getting products from five different vendors of quartz, but they did not know that the analog component was coming from one factory. So what looked like a diversification was really all coming to them. So I think it was a bit of a wake-up call for some people in the industry. And so there was a short-term impact, and then there was a longer-term impact. And the long-term impact I think is going to continue for a while. If you overlay on top of that, a general tightness in the semiconductor industry then you have a situation where it's a little bit of a perfect storm. And as Art has already indicated, we had a very, very good booking quarter in Q4. And we were a little bit cautious in making sure that there weren't any double bookings going on, and we're pretty satisfied that there were none or none that made it through to our system. But of course, you never really know. But in general, I think we've been very assiduous in making sure we have a very clean booking overall. The other thing I'd point and I'll also make is that we are -- we do solve tough timing problems. We are not a commodity supplier, so we do charge a premium. So as such those who use our products recognize the value of our product, whether it's in performance or in supply chain or in quality. And so they tend not to move away once they adopt the SiTime solution.
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[
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B
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421957069e9ebf5b88903f8efae26645
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Following up on the last question about the ordering and visibility. Can you talk about -- if I missed this already, the lead times you're going to customers and whether you've been able to keep them under check by ordering wafers aggressively.
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Yeah. I think one thing we have done is we've sort of played it wisely for the company both ways, while we have been very good at ordering and giving our supply chain a lot of transparency into our needs. I think we've done a very good job of that, whether we're dealing on our MEMS wafers or TSMC wafers, or indeed the backend. We've also gone the other way a little bit and make sure that we tell our customers and our distributors that lead times are in fact going up because I don't think there's any walking away from the fact that lead times have gone up because there is tightness. A lot of our products come from TSMC, 180 nanometers, which is one of the biggest capacity that they have at TSMC, but it's also one of those that is very popular. And so we have recognized that as a continuing trend through this year 2021, and maybe went into 2022 and perhaps even beyond that. So we have quoted longer lead times, but they are well within customers' requirements and we do a good job of managing that.
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intermediate
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B
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abeaf7af12aa441271a2e927b1f515e6
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And then Art, if you talked about this already, the first-quarter outlook. Can you talk about what that is by segment just to get some color around the guidance.
|
So, I'm not going to refine my guidance that precisely for Q1, but what I will say is the decrease in Q4 to Q1 is all in the mobile IoT and consumer space. We're expecting segment growth in industrial and comms and enterprise going from Q4 to Q1. And the decrease in mobile IoT consumer that is just kind of our normal seasonality. And it's even less seasonality than we've seen in past years. I was just going to add one thing to that. Sorry, our largest customer, as I mentioned in my discussion was about 48% of our sales in Q4. Based on my current internal forecast that drops to probably about 35% of total sales in Q1 plus or minus. So you can see what's decreasing from Q4 to Q1 kind of based on those numbers.
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B
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And then last quick question for Rajesh. In optical, it's impressive you're winning there. What are the factors that are helping you win design? Do you think versus the competition as that market starts to come online.
|
Yeah. I mean, it's very specific, it's the bandwidth, but it's bandwidth with size and temperature. So I think those are very, very important pieces in there. And the fact that we have also performance factors like jitter and stability to go with it. I think it's -- I'm very gratified with that win design -- design wins because the product was introduced relatively recently last year, I think around the Q3 timeframe, and has done very well for us. And we're very happy with it. It continues to do well.
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So you talked a lot about ordering add-on wafers and some other materials. Just curious if you have any view on the impact of the supply constraints on the gross margin trajectory in both the near and kind of longer-term.
|
Well, we think there may be in the future. We haven't seen anything yet. But most of our gross margin is pretty -- it's not based on our increase in gross margin is not based on either increasing prices because of shortages or a decrease in gross margins because of costs from our supply chain. But I think it's possible that in future the increasing cost may happen, but we have no evidence of it. It's just that we are careful that we're a new territory here because I think this is not a quarter or two quarter or one-year shortage. I think this is sort of a secular shortage because people forget that semiconductors are desperately needed for all the ADAS, all the automotive, the 5G, the healthcare, the computing all of that. And I think this is a wonderful renaissance time, a wonderful golden period for semiconductors in general. So, we have our eye on the supply chain, but as of now, unlike some people that we have heard anecdotally, we are not raising any prices. Yes. So, Jake, I'll add to that also. Just to make it clear, the gross margin expansion that we have had and that we expect to continue in 2021 is not coming from reduced wafer pricing at this point. The gross margin expansion is coming from new products, which generally have higher ASPs, higher gross margins, and as that becomes a larger percentage of our sales that increases gross margin. We're starting to take more sales direct. So that bypasses the distributors that improve gross margins, we get great leverage on our manufacturing overhead, as overall sales go up, and we've got a number of other initiatives. Internally, we've got a list of 10 initiatives that we are working on that have expanded our gross margins and that we expect will continue to expand our gross margins.
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B
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Hi, everyone. Thanks for taking the questions. Kudos on the solid quarter here. I guess in terms of guidance, Sid, I'm just trying to understand a little bit about the thought process. And reiterating guidance, you just did $134 million in Q1 revenue. So you're basically implying flat revenue for the next three quarters to get to the low end of guidance, maybe $140 million a quarter to get to the high end. And we've typically seen Q1 be on the low end of revenue seasonally for you outside of inventory build period. So I guess the question is, is the guidance embedding a lot of conservatism here? Is it due to supply chain risk? Or is there something about Q1 results that maybe aren't going to flow through into higher growth in the next few quarters like we typically see? So just trying to reconcile a bit here.
|
So Brian, in terms of -- I apologize for that. In terms of our guidance for the year, we do believe that the 560 -- the $530 million to $560 million is in the range that we expect for the year. I know that when you do the math, it doesn't quite look like there's -- as we said on the other call, we expect the second half to be better than the first half. But the ongoing pandemic has resulted in supply chain disruptions, including some semiconductors. And we think it's best right now to maintain our guidance, which we're currently comfortable with.
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B
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34f1e65db3e75f929d55ba2e0f273b38
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Okay. Fair enough. Just to be clear, there's nothing unique about Q1 like pull forward or inventory builds like we've seen in certain periods over the past several years. You wouldn't -- there's nothing you called out. So I'm assuming it's -- if there's nothing notable about the sort of demand patterns you saw in the quarter?
|
No. There's nothing in there. I mean, historically, as you've seen, quarter-by-quarter, it can be lumpy by customer. And as you can see in this quarter with Chinese customers being higher versus last quarter.
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A
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Fair enough. And then last one for me also on the guidance, and I'll pass it on. Gross margin, 74% on materials. I know it's going to be lumpy and bounce around. It's proven to be that way, just if you look at Q4 to the Q1 progression. But coming into the year, it sounded like you had a bit more muted view on what the gross margin result would be for materials in 2021 versus historical, and then you come right out and you're back to the historical level. So any thoughts or changes in thoughts around the gross margins that you could achieve on materials for the year?
|
No. Obviously, our gross margins are, as we stated, dependent upon our product mix. And this quarter's product mix really translated into about 70% gross margin range. We still think that for the year, it's going to be 65% to 70%. And as we talked about in the fourth quarter, there were some things in the fourth quarter that really affected, which are developmental materials, which were sold in the fourth quarter in a larger quantity than historically, and that's lumpy also.
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You have [Indecipherable] my question. I had two of them. First one, really good sales from China, and I understand your largest customers obviously expanding in China. I'm just wondering, as they expand and as their efficiency and yield improves, do you think there is a risk that the business from that customer might slow down given that the had leadership in the past, which might get is all down the road. Then I had a follow-up.
|
It has historically, with Chinese customers, been lumpy. And so yes, it's difficult for us to predict. I mean, obviously, we spend a lot of time talking to our customers, and we've built in what we believe to be where we think we'll be for the year into our guidance. But it really -- there is a number of issues that will affect the rest of the year, which -- there's COVID-19 issues and some of the semiconductor weakness issues. So we're comfortable where we are.
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B
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591e61c88d6a8c90f875658c95f2814b
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Got it. Got it. That's very helpful. And then as a quick follow-up. Sir, how should we think about the OpEx growth for this year? Is this the seeing as you reiterated last quarter?
|
Yes. We gave guidance in the last quarter of OpEx growth, which -- when talked about it, we expect it to increase in the range of 20% to 25% year-over-year. R&D up about 25%, SG&A, about 15%, which -- and increased spending on OVJP and that -- and developing that technology. And we expect our tax rate to be about 19%, give or take, a few basis points. We do expect our 2021 operating margins to be approximately 40% to 45%.
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779b7d1429d35662f7e3cced9320d8e9
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Yes. Thank you. And Steve, thanks so much for all the details, especially with the evolving end market penetration and landscape. I just want to reconcile something. When I look here at Samsung and LG, it seems to me that over the past maybe three to six months, there is less of a OLED capex and especially with China, doing really well with LCD, maybe the LCD capex has gone up. And I'm just trying to reconcile in the near term if there is a downward pressure on OLED capex, how does that change your view on end market demand or a square inch of OLED shipment in 2022? And I have a follow-up.
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Well, I think right now, in terms of what the customers are saying and all of our customers have noted on recent calls, they're committed to OLEDs. And I think that there has been -- there's obviously demand and market issues that may caused some changes, but we believe that the proliferation of OLEDs is really in the very beginning. And it's a really young industry. We think that our customers are really wed to OLEDs, and everything you hear about it. Will there be some things that maybe get delayed a little bit here and there? Yes. But overall, we really are very bullish on where the market is going.
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B
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Got it. Thank you. And then -- and I'm just trying to better understand end market dynamics. And I do think that OLED TVs offer something unique, especially with Samsung trying to build out a market presence in the high end with the quantum dot OLED. But is there anything other than that like in terms of quality of the display or 8K that you can offer us to better understand how OLED compares to emerging new technologies like mini LED?
|
Well, mini LED is an LCD technology. I mean OLED technology is -- has been -- it's power efficient. It gives you the best picture quality, whether it's TVs or from mobile devices. And it's not a backlit technology. It's less complicated. And as you see that for mobile devices, we're almost -- we're 1/3 of the smartphone market with OLEDs, and we're moving into the low and mid-range with OLED displays when mobile devices. So the benefits of an OLED compared to LCDs, whether it's mini LEDs or other type of LCDs is the benefits of all OLED technology. It gives within form factor, I think that flexibility, bendable, rollable technology is something that no other technology can do. So when you look at all the benefits of OLED that we've talked about for all these years, that's really why it is in the mobile devices first because of power efficiency. And for TVs, it's the best picture quality.
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A
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Hi. Good afternoon. Thank you for taking the question. I guess first question, pretty surprised your deferred revenues actually increased Q-on-Q, and your LG revenues came in a little bit light, at least versus our expectations. So curious, is that a result of your new agreement with LG? And I guess, could you expand on that?
|
Yes. The new extended 5-year agreement with LG and Visionox were effective on January 1, 2021. They end at the end of 2025. The impact is under ASC 606, we expect just to continue. But the fact that we did this, this is a new agreement essentially for LG. So you do see changes because we signed these agreements in deferred revenue.
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B
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d214dc690f45661a47c51c200cb99ae3
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So was there an expectation for greater revenues here in 2021 before signing that agreement? And what kind of change has that had on your outlook for calendar '21 revenues?
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We're comfortable with our guidance where we are. I didn't expect it to change our 2021 revenue guidance by signing these agreements. I mean when we gave our guidance, we kind of knew what was going on with these agreements. They just weren't executed until then. But we knew what the results would be.
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c105a2ef9a27eff00e6645cca963729f
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Great. As my follow-up, you had big numbers from both BOE as well as Tianma. And I guess the question here is, is that supply chain risk mitigation in terms of building some inventory? Or is there concern in China around getting access to materials out of the U.S. given rising U.S.-China tensions?
|
No. The revenues in China did increase obviously. But historically, they have really been lumpy. There's nothing that we've called out specifically in this quarter as we have in the past when the customers told us that that's what they're doing. We just think that it's customer-by-customer and purchasing department by purchasing department.
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B
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Thank you very much. Just a couple of questions. You said you have about -- I think this was right, 30% of the smartphone market at this point. What percent of the market do you think is addressable to you given where pricing is maybe in the next couple of years? Just trying to think of what opportunity for upside there is, especially with some of the comments out of Samsung recently.
|
Yes. I think that the addressable market, eventually, we believe, will be the entire smartphone market. Samsung is moving from the high end to the mid-range. And they now have some low end phones that -- I think entry-level phones that are in the $240 range or something like that. So we do think that this will continue to grow.
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A
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And how are you thinking about China TVs from an OLED perspective -- not necessarily the vendors, but the market in general, I know there was some pressure on China's TV market. I guess it was last year. And are you expecting to see it kind of rebound when you look at the second half?
|
In terms of market perspective, and where -- it's difficult for us to talk about one area specifically in another. I mean I think that OLED TVs are the best TVs ever. I think that some of the pressure that you saw was pretty much across the board on the demand side, there was weakness because of COVID-19.
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B
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Okay. My final question is just with regard to inflationary pressures that people are seeing out there. Are you seeing any pressures on materials required by PPG? And do you feel like you have the opportunity, if you need to I'm not sure you even would need to hear, but to push pricing through to some of your partners, again, on the material side?
|
There's two answers to that question. One, as we've stated in the past, our contracts have pricing for the length of the contract. So pushing something or would be difficult. The one thing that we talked about is iridium and iridium has gone up. We've we have actually, for a number of years, been managing iridium, and we've been building inventory that you can see on our balance sheet of raw materials going up every quarter and that we want to make sure that, a, we have a constant supply and have a significant amount of inventory that we have, and that has allowed us to manage our cost structure.
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A
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Thanks for taking my question. My first question is in reiterating your full year revenue guidance, it sounds like you're being a little conservative because of the supply chain disruption, do you have an estimate how much that may impact your revenue guidance for this year? And if you can follow-up to that is where are you seeing the most impact of those supply chain disruptions? I assume it's not from your own supply chain? And then I have a follow-up. Thanks.
|
Well, I mean, to be honest, I mean, given -- we obviously don't give quarterly guidance or give guidance in all the components that we are seeing. But one of the issues that I just talked about with China was iridium. But our materials have already in it, but that's not the only component. So that there's a number of -- in that is a number of other materials, overhead and a lot of other things that's in it. So that is not going to impact -- every dollar doesn't go dollar increases. So -- but in terms of what we're seeing, we are still comfortable with our guidance. We were -- as we said on the last call, you've got COVID-19 issues that still could impact what we're doing. And the demand side, whether it completely recovers and how fast it does, just why we have a range of $530 million to $560 million. So we are still comfortable with where we are at this time.
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B
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58e68c9ef77eb53db8a53f6777a006b6
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Okay. Maybe my follow-up question is on the IT side of things, I know there are a number of models that companies have announced but Apple has officially announced the mini LED display. Does that change your deal about your opportunity for OLED display? And specifically in the IT market? I know you addressed the TV market a little earlier and a different question. Thanks.
|
Well, I think that the industry is still young. You've heard there's a big push from Samsung on the IT market. I think talking about Apple and mini LEDs. Their tablets are LEDS or LCDs anyway. So -- but I think there is a big push for the benefits of OLEDs, and we just continue -- we feel that, that will continue to grow. Because the IT market using OLEDs is really very, very small.
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B
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I think within the follow up. I just want to check, Sid or Steve. To the extent you can talk about. Obviously, there's a Display Week coming on, and everyone has read about the Samsung abstract and the blue. So let's see if you can talk about it, kind of curious your view on it. And along the same path, if and when blue gets commercialized, is it going to be plug and play? Or do you need to change some of the design, like a heat shrink or any such thing when you try to put it into a smartphone?
|
Well, thank you. Obviously, Display Week is coming up, and there's a lot of chatter about what will happen. There's really nothing we can say until the papers are presented. So regarding that, there's nothing we can talk about what was coming up. We do obviously talk about a paper that was talking about blue that has the same author that had it in last year. In terms of commercial blue, we have stated that it's not plug and play. You would need to make modifications to your drivers and your back plane in order to adopt our technology for blue because phosphorescent uses 75% less power. So it is a redesign it isn't new capex. It is really just a redesign. So as they introduce new products and new SKUs, they will design those that our technology into those. So as we stated, a number of times in the past, even if I had something that met all the commercial specs today, it would be nine to 12 months that before you start seeing it in products. But we are continuing to make excellent progress.
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I wanted to just spend a minute on kind of the earnings outlook for 2021. I guess kind of a long-winded question here. But if we think about kind of the core earnings power of fiscal 2020 I think plus or minus I had it in like the $93 million to $96 million range. And I guess as we think about how that transitions into 2021 is -- I guess is there still -- is it still correct to assume that this $15 million to $20 million of annual I believe it was income from the H&R Block partnership will be additive to that core fiscal 2020 run rate?
And then that there would be additional growth opportunities on the core business as well as you guys continue to move forward. Is that kind of a fair -- without putting too specific numbers around it a fair way to think about how the earnings profile could look next year? And is there any other kind of thoughts or items that you would point us to as we kind of think about where the trend is heading?
|
Mike this is Glen. I'll take a shot at that. So, yes, H&R Block will be additive in 2021. And as it relates to our other businesses we would certainly expect organic growth in a number of them. I would also point we have some runoff portfolios though primarily in the Community Bank and also the student loan portfolio that year-over-year will be a drag on absolute dollar earnings and what we've also talked about is remixing our balance sheet. And we think that will drive earnings increase without increasing the overall size of our balance sheet.
And remember that -- excuse me -- that the -- we'll have a full year coming in, in September. We had six months of earnings at a higher interest rate than in 2020. And we'll have a full year of the impact of the reduction in interest rates in 2021.
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A
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a1880a8ceebaced388c913750e99e24c
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I was curious if you could just maybe comment, I think the -- I'm sure someone else will ask about kind of Crestmark and pipelines. But there's obviously the balance sheet side here. But as we think about the fees and the payments side of the business here, what are the kind of one or two or biggest growth opportunities that you see on the horizon for 2021 that you think could be the most impactful for Meta at this point?
|
Well. As we said we signed some new deals. The H&R Block will certainly have an impact on that side as well, since we took over the breadth of their business, which includes their card programs, in addition to their tax loans and business. So that will have an impact on that portfolio as well. We also have started to see the genesis of the faster payments business taking hold. I think that's a good key income play for us. And we have several programs launching. It will be a ramp-up period from the start. So we will start to -- probably the end of 2021, I think see an impact from that more so.
And then in 2022 and beyond, as that continues to grow. There's a lot of interest in that in the marketplace. So we have high hopes for the future of that business line as well. We also entered some other business lines in acquiring. And that should ramp up a little bit. I think also that starting from scratch, there will be a longer ramp-up period before that's truly material. But we'll see some more business from that. And if you start compounding those new opportunities, I think that they start to have an impact, in aggregate even earlier. Do you have any follow-up Brett?
I think it's it.
And there's also other business, we've signed and are continuing to sign. So there's MoneyLion launching, which we was announced that we'll start to see that ramp up. And we're excited about the prospects of that business. So there's a number of new initiatives, I think that have come on recently as well that will start to have an impact as the year progresses.
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A
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Starting with just kind of like loan yields they were up nicely over quarter-over-quarter and definitely seeing a remixing within the portfolio here this quarter especially on an EOP basis. Just kind of curious, how you're thinking about loan yields going forward here just into the fourth quarter? It seems like a potential for decent leg up.
|
Yeah. So we would agree with that. It's in certain portfolios are going to come in higher than others or lower given the rate environment. But as we continue to shift that mix the Community Bank has lower yields those run off. We do more commercial finance. So we run off securities portfolio and Community Bank. Just that swap set will help the overall yields.
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B
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And then just on the business front just kind of curious, as to what you're seeing for non-interest-bearing deposit growth from your card business? I know the EIP deposits kind of steer, what's going on there.
|
Yeah. This is Brad. When we take out the EIP piece, we still have some growth that has occurred year-over-year the last couple of years and would expect that to continue to go. We're in that business. We're seeking that business and we'll be picking more up. The EIP bubble just hides it a little bit.
Yeah. What's hard though Steve is, so we have the very discrete card, the stimulus cards that were loaded on our cards that were issued from Treasury so those are the numbers we've been calling out, we've also called out we've seen above-normal growth in overall deposits twofold, a little bit slower consumer spending we believe, but also folks that are getting stimulus money and then taking it and putting it on one of our partner GPR cards.
And so it's hard to tell exactly that the money is fungible where that came from, but that's pretty consistent with what talking to our peers across the industry that everyone is at elevated levels of deposits. So in absolute terms probably card deposits will come down year-over-year. If you try to back out our core business, we would still continue to expect some growth there.
And there are the new programs I discussed H&R Block, MoneyLion and others. So some of those like H&R Block is converting a portfolio. So we'll see some immediate impact from that business and then the others are -- will be growing over the year as well. So we should -- we still expect to see strength and opportunity and growth in our payments business over the coming years.
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A
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3ef33d3aad00e9533cdd1f1f19dc0164
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And then I'm not sure that this was answered. Just on the commercial finance portfolio, you had good quarter-over-quarter growth. I know you guys alluded to more normalization in certain portfolios. But how is that pipeline looking? And how are you thinking about loan growth? You tend to see pretty good growth in the December quarter.
|
Yes. I mean, I think we're seeing more transactions to take a look at in the pure commercial finance. So you're talking about your asset-based lending and your factoring some of the other things because of yield, the markets are coming down and there are some cases where we're choosing not to play, because the yield is too low. So I think you're going to have some mix in that. But if you think naturally through the economic cycle this is the time that commercial finance starts to build and shine.
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B
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Just on the deferrals where they were at the end of the quarter, is there any expectation or any color you can give based on your conversations with borrowers of what percentage -- what piece of that 6% may need further attention at the end of the deferral period?
|
Well, so obviously the biggest piece of that is the hotel-motel portfolio that we have in the residual Community Bank. And we are seeing improvement particularly with the type of properties that we have. But certainly, they're going to need continued assistance through the winter months. And then when we come out in the spring, we'll kind of see what happens and are they getting closer to the normal levels where they can resume traditional P&I payments.
So that's the big thing. We've mentioned in there the theater relationship relatively small, but you have that. And then there's some things that are in the small ticket finance, again, not very large at all. And all that depends on what's going on in particular marketplace geography. There's a lot of variability around the country on who's open and who's not and where there's -- those that are still shut down to a bit, they're going to struggle for a period of time yet. So we'll see what happens with those.
And I think it's important to understand that a lot of the hotels as well are paying some interest payments not just -- it's not full principal and interest being deferred. So they are making some contribution.
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B
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b723361865b4bb3b0710c83ec06d733f
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And then you also talked about if we look at where Crestmark sort of the net charge -- cumulative net charge-offs in the last downturn in the Great Recession, I think you put it at 2.5%. Is there any -- as we sit here today and as you look out and obviously a lot of uncertainty still on the credit side. But do you expect that that is likely to be lower this time around higher? Is it just too early to say? Or any thoughts on that front.
|
Well, one of the things that's a good indicator of how that's going to go is the pure commercial finance. I'm talking about asset-based lending and factoring. You'll notice the balances have gone down considerably, which means that those products are working exactly as designed, which as the volume comes down you collect the receivables you pay down the debt. And that's why you have even in a downturn environment such a low loss rate.
So if the balances help you that gives you some indicator of where we think that's headed. We're continuing to watch delinquencies in that space other than the areas that I called out, there's no specific thing that's happening. You're not seeing much of a change at all. So we feel pretty good about where that portfolio is today.
However, our crystal ball isn't any better than yours as Frank. So we continue to monitor the portfolios very closely and we'll react to their performance as is required.
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B
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I wondered if you could provide any help with the run rate on the expense side, particularly, I don't know if there's anything you can break out of other expense and where that might trend going forward.
|
Yeah. We called out a couple onetime items. We prepaid $110 million of long-term debt that we don't need anymore and our borrowings. And then, there were some employee severance costs and some other year-end type of expenses as we prepared to invest for 2021. I would expect outside of the March quarter that our expenses in the other three quarters would -- in 2021 would be less than they were in this quarter. So, certainly, under $80 million outside the tax quarter.
Well, what we called out for again in the earnings release and in the script was $1.7 million prepayment penalties for paying down long-term debt at the FHLB, and then $1.5 million of severance costs.
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direct
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[
"direct",
"intermediate",
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A
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bc9f01502fdf90f51bc97fc5637661a3
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Maybe just trying to think about some of the moving parts on net interest margin first. Could you one just break out what the purchase accounting accretion was in the quarter? What the expense savings will be from the FHLB prepay? And then, it looks like of the 110 basis points of pressure from the EIP deposits it looks like as it stands at October 2020 you're probably going to get about half of that back with the balances sitting at about 829 right now. Do you think that those deposits -- do they go to zero? Or do you -- do they level out somewhere and then you start to deploy that liquidity elsewhere on the balance sheet?
|
Hey, Wally, this is Glen. The latter. We think the final tail, they'll pay down another leg this quarter, but the final tail peers -- people are using them for the savings account or certain folks are. And so we expect to have some level of those deposits throughout fiscal year 2021 and we'll deploy them as we have opportunities with earning assets. Purchase accretion as -- that's run itself off. So we're not getting any more benefit from that. Think of that the Crestmark portfolio is primarily short term in nature. So it might be a basis point left and that's about it from there. What was the third part of your question Wally?
Yeah. So it's about a 10-month payback. So we'll benefit all things being equal save about $2 million of interest expense next year
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direct
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[
"direct",
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] |
A
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112650e8e8223bbc000378d24c8aed6b
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On the buyback you said, I believe that your appetite would be governed by your internal capital constraints. Any commentary you could provide around, what capital levels would make a buyback unlikely or however you could frame the capital conversation? And then also, are there any constraints at the holding company as it relates to just cash on hand to continue to buyback or plenty of opportunity to dividend up etc.?
|
Yeah. No constraints at this time. And we've signaled on a -- our capital ratios will move around a little bit during the year i.e. tax season. But on an average, we're going to be looking in the 9% leverage or north of that and 12.5%, 13% on risk-weighted.
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direct
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[
"direct",
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"fully_evasive"
] |
A
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f2a9fe8180fb5547c2f7da58d7a8c9a4
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Yeah. You got it right. Thank you. Good morning, everybody. It was kind of hard to hear everything, so forgive me if I'm repeating something you guys said, but trying to understand the underlying strength in the business. I think you said $10 million to $15 million didn't ship in the quarter. If it did, the book-to-bill would be more like 1.03 not 1.07, and the backlog wouldn't be up 15%. So can you talk about -- maybe the actual backlog level and why we shouldn't think underlying demand is not as robust as it sounds when we make those adjustments? And secondly, is that 10 to 15 that didn't ship was that in Europe? And is that part of the reason why the European performance was not as strong? Thank you.
|
So Larry, a couple of questions in there. So first of all, most of that backlog that didn't ship in the first quarter was in the U.S. area. So you saw some lower growth in the U.S. areas around gas detection and head protection. Fall protection was strong, but the backlog continued to build there also, and that was because we lost a few days of production. So the backlog build was predominantly in the U.S. based on that. The underlying business what we saw across the business was fairly good strength. The first six weeks of the quarter, the incoming business was a bit soft, but we really saw business pick up significantly from week seven on through today, where the incoming business has been very strong. So that's what gives us confidence in and our longer range outlook of the business for the balance of the year. The only thing I would add there, Nish, is, with respect to Europe, I think, Larry, you had a question on Europe, and in my prepared comments, I talked specifically about Europe growing 3% revenue wise and 7% on the earnings line. And so we still see good robust levels of growth coming out of there. With that said, order activity was up 8% in the quarter in Europe, and as Nish had indicated, the shipping and backlog that we saw associated with the systems change was primarily in the U.S. So good healthy demands coming out of Europe in the first quarter.
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direct
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[
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A
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9979d006e570318bd8ada465a462ed20
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OK. Great. Thanks. And then this is my second question, and I'll let it go. You guys talked about LUNAR, and obviously, we saw that the -- at the fire show recently. I'm curious, can you just remind us on the regulatory approval time frame and the commercialization time frame for that product?
|
So for that particular product, Larry, there is no approval process, and that's just a matter of getting the product to market. We anticipate launching that product sometime in 2020. Hopefully, we're in a position to take orders at next year's FDIC. That's the goal for the product. But that's on us as far as getting that product to market. That's really not an approval situation that holds us up.
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[
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7c276575588f78cb790f5a5db18b327f
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Hey, guys, how are you? The one thing that stuck out was the margin in the international business. You talked about kind of -- you framed out the Middle East, and maybe you could kind of elaborate on maybe what that project work was, how much that cost in revenue and then ultimately earnings, and then what country that product was going to or will be going to later this year.
|
Hey, good morning, Ed. Yeah, really, the shortfall and the challenges we had when we are in international were predominantly around the Middle East, as Ken mentioned earlier. The good news with the Middle East is the fact that the backlog has built up there significantly in the issues around fixed gas and flame detection. So the backlog built up quite nicely in that area. We have a very large backlog for fixed gas and flame detection going into the second and third quarters of the year. So we'll start to see that ship throughout the year. And there is some optimism that that business continues to pick up for us in that part of the world. So we see that as some upside to the margin for international as we go forward.
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intermediate
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[
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77385411ab50171c5aac75e2e523d039
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Are you willing to quantify the revenue and earnings impact that you saw in the quarter as it relates to that?
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The only way that I would -- I guess, I would look at it is, we had margin improvement in Europe, we had margin improvement in China and in Southeast Asia. So we had good margin improvement across that swath of business. The challenge we have that is in the Middle East. It is very much dependent upon project-oriented business and FGFD-oriented business. And so if those projects don't come through or aren't shipped, they have a pretty big impact, and as you know, the margins on these businesses are very healthy. And so those businesses, we have a backlog in that business, a backlog that we haven't seen since 2017, quite frankly. So we have a very healthy backlog. And we think over the coming quarters, we'll start to see a reduction in that backlog, most likely the second half of the year.
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"direct",
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9afa174104df0a26d887545445a1781a
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Got it. And I just want to be clear, this is more to do with timing, not to do with geopolitical or economic conditions in any particular country, so for instance, Turkey.
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Absolutely. It's a matter of timing of business, and it's all project-based. And so what we're seeing is fairly normal cycles.
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b35f0bf95159d0b5af21bebf50f59e8a
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Got it. And the other thing that kind of stuck out in the release was the fall of projection. You had some really good growth in the Americas, constant-currency growth internationally. I just wanted to be certain, and I don't think there is, and you talked about the backlog and the order trend. So it doesn't sound like it, but is there any seasonal trends within fall protection that we should be -- we should be aware of, kind of in the first quarter of the year that might impact the growth?
|
No, not at all. Actually, that growth we're seeing is really robust, and really, when you look at fall protection seasonality, it should improve second and third quarters. The incoming business is really strong. We've really hit the mark on these new products that we've developed and launched over the last 18 months, our sales organizations hitting stride with customers and winning some business. We feel really good about the fall protection space and the investments that we've made there and the stride we're hitting.
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59c5bfe72da00bd1421082cbc7201d50
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And just to get a sense as we kind of work through some of this backlog, where do you -- let's look three years out, where's the business today from a percent of revenue of the quarter? And where do you anticipate that business will go?
|
Yeah. Obviously, the core business continues to grow and become a larger portion of our overall business. We continue to see that trend moving in that direction. Clearly, we're making significant investments in those core products, and the growth of the core product areas is outpacing the adjacent product areas. So we just see that trend continuing, and any adjacent will become a smaller piece of the business as we go forward. We do quite well in the quarter. As you know, from a profit standpoint and market share standpoint, we're pretty optimistic about that.
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intermediate
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[
"direct",
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B
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5efaab800d5d738d09d0d2e145ff5ba4
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Hey, guys. I was just curious on the cost side. You guys continue to show really great cost control. Was there anything kind of either more one time or short term in nature related to the strong cost control in the first quarter? Or is that the kind of expectation we should have going forward?
|
Hey, [Inaudible]. No, there wasn't anything in there from a one-time standpoint. We just continue to look for opportunities to improve our efficiencies throughout the organization, and I think what you saw in the first quarter was a result of that. So as we go forward we continue to look for those opportunities to leverage our capabilities around the world and look for those efficiencies. So there was nothing unique in the quarter.
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A
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77dbfa66a97d34389bbd7e155c46a4ae
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OK. And then just on the acquisition announcement, is there any approximate way of thinking about the accretion that's likely to come from that over, I don't know, either the first 12 months or after you've gotten to your synergies? Or what is the new way of thinking how that's going to contribute?
|
Thanks. Yeah. Hey, [Inaudible], it's Ken. Thanks for the question. What we have disclosed to date is that the synergized adjusted multiple to be around seven times. So we do expect some accretion in the first 12 months. What we'd like to do is to get through the closing activity. We intend to close it at some point probably in mid to late May. And once we do that, we'll provide more definitive guidance around what we would expect on the accretion and cost to capital returns over time.
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intermediate
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[
"direct",
"intermediate",
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B
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2579631a8af4be2aa4046c89f8b50f9a
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Could you share about what percent of the engine sales in the first half were light-duty?
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Okay. The light-duty sales will be -- just hold on a minute. You're talking about four-cylinder engines here, right? So it'll be about... It should be about 53% of the sales.
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c770d9328e2f0353051e9eac9368da31
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As far as the gross margins, what initiatives are you guys putting in place or -- to get those back to somewhere close to more historical levels? So they've obviously been falling quite a bit lately.
|
Yes. So I think the -- one of the main reasons for the decline in the negative gross margin -- sorry, the gross margin is that we're selling more off-road engines this year compared to last year. And that has an impact on the mix and directly has an impact on the gross margin. And, we're also selling more National VI engine this year compared with the same period last year. So because of that, we have not reached the economy of scale yet for National VI engines since because the National VI engine emission standard is only going to be fully implemented from 1st July this year, which has just been done, happened, right?
So what we are going to do going forward to help to improve the margin, one is to go back to our suppliers to negotiate on the pricing going forward as our National VI engine units sort of go up or improve for the next six months or even into next year because that's -- for vehicle engines, we can only sell Nat VI. And for those service, the negotiation for this year is still ongoing, so we expect to finalize some of them in the third and fourth quarter. So for those that we finalize in the third and fourth quarter, we will be able to -- if there's any reduction that we get, we should be able to get it for the whole -- the sales for the whole year. So there should be some that will relate back to the first half.
Secondly, we will -- we are using the R&D to help us to cost down further for our new engines, for National VI engines. National VI is -- for your information, National VI engine is a new platform that we have developed in the last few years. So we're going to use R&D to help -- to continue to help us to reduce the costs through R&D.
And the third initiative that we're doing will be to negotiate with our customers now to try to increase our pricing, especially for some of the lower-margin product. Through these three initiatives, we believe we can improve the gross margin going forward especially into the next year.
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[
"direct",
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ce25d8a8743c30475d1a9a25c08ce21d
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On the economies of scale, because you've talked about that a few times in the past, what's the unit amount or the target where you'll hit that point and we'll see the margins improve from that?
|
I mean this is a -- when we negotiate with a supplier then we will have to have certain volume commitments, right? So as volume increases, especially now after the implementation of the National IV engines going forward, most of the engine sales will be National VI except for those we export to some of the developing countries. So with that, and the volume that we're achieving, so far this year, we have achieved a volume of sales -- total sales of 285,000 units. So with that, we should be able to go back to the suppliers to negotiate.
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intermediate
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[
"direct",
"intermediate",
"fully_evasive"
] |
B
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cf7221a0c0e2e55e61faf88d1dacdb57
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So I mean, between everything going to National VI now, the negotiation with suppliers and possibly getting retroactive pricing on that, gross margins in the second half should be quite strong, correct?
|
It should be better for the National VI engines, yes.
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direct
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[
"direct",
"intermediate",
"fully_evasive"
] |
A
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