Q2 2020 Applied Optoelectronics Inc Earnings Call
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Good day and welcome to the applied Optoelectronics second quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this evening.
It is being recorded I would now like to turn the conference over to Monica Gould Investor Relations for applied Optoelectronics. Please go ahead ma'am.
Thank you I'm Monica Gould Investor Relations for applied Optoelectronics and I'm pleased to welcome you to eight why second quarter 2020 financial results conference call. After the market close today why issued a press release announcing its second quarter 2020 financially south and provided its outlook for the third quarter of 2020.
They released is also available on the company's website at Aon Dash Inc. Dot com.
This call is being recorded and webcast slides are linked to the recording can be found I mean on the Investor Relations section of the AOL I website and will be archived for one year.
Joining us on today's call is Dr. Thompson Lin a wise founder chairman and CEO Dr., Stephen marry a white, Chief Financial Officer, and Chief strategy Officer.
Thompson will give an overview of a wife Q2 results and Stefanie will provide financial details any outlook for the third quarter of 2020.
A question and answer session will follow our prepared remarks before we begin I'd like to remind you to review a white safe Harbor statement on today's call management will make forward looking statements. These forward and its involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results.
Differ materially from does anticipate it in such forward looking statements.
In some cases he can identify forward looking statements by terminology such as believes anticipates estimates intense predicts expects plans may should could would well or things and by other similar expressions that convey uncertainty of future events or outcome.
Yes.
Looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses trying innovations.
As well as statements regarding the company's outlook for the third quarter of 2020.
Except as required by law, we assume no obligation to update forward looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations.
More information about other risks that may impact the company's business are set forth in a risk factor section of the company's reports on file with the FCC, including the company's annual report on form 10-K for the year at December 31, 2019 in the company's quarterly report on form 10-Q for the period ended March 31 20.
20.
Also with the exception of revenue all financials discuss today Arda non-GAAP basis, unless specifically noted otherwise non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with gap.
A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.
Before moving to the financial results I'd like to Nance said, Hey, why management will virtually participate at the Jefferies 2020, semiconductor I T hardware and communications infrastructure summit on September 2nd and at the H.C. Wainwright, 22nd annual Global investment Conference in September 15th.
These discussions will be webcast live in a link to the webcast will be available on the Investor Relations section of the a website <unk>.
We hope to have the opportunity to interact with many of you virtually.
Additionally, I'd like to note that the date of our third quarter 2020 earnings call is currently scheduled for November 5th 2020.
Now I'd like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.
Well you monetized single Baby bond will join US today for all that is once again.
Oh, you enjoy waikiki and that's continued to support one another in all customers during the cold we'd like Houston Damon.
Oh couldn't don't Miss is go out to old it wrong. The walls were impacted by the buyers and we send all six total forced responders and this is your workers who continue to tick is the polled all communities.
Well into the quarter, they ought to be bird Q2 revenue of $65.2 million.
Which was above our guidance of $55 million to $60 million.
To be able to you grew 50% come due to a second quarter led to you.
If you go up as a sequentially.
Mark in the fourth quarter year over year gross said AOL has recorded since the third quarter 2017.
Well pull most was driven by improved be men, so hard to asked in the customers.
Inquiries Kosmos type as occasions.
And recurring but do you not to come so given that by Fiveg deployments in China.
Non-GAAP gross margin of 23.1 person was on the low end <unk>.
Since range.
Due to product mix as well some colby 19 related expenses.
The can deal into the quarter oil not good new lows, Tony four cents per share what not we saw expectations.
We said that.
Continuing improvement swap cost reduction efforts and more favorable product mix.
He will lead to improving gross margin over the next several quarters.
And we anticipate revenue to be up more than 20% sequentially.
And to me, Poland Olive garden switch.
We are encouraged by the increase destined to be men fraud diverse set of customers and improving fiveg related activities that began earlier this year and will continue into Q3.
During the quarter, we're happy that wins, including full was tick up customers.
Was that related to Fiveg network deployments, mainly in China.
The other for design wins, well with existing customers.
Yes in the second.
Additionally, we are pleased to report that we saw increased the men for all one or the prototypes in Q2 total duminy in full one or the per dollar increase almost 350% fronts empyrean lessee.
Market in the second quarter.
Low you over your goals.
Did you see is.
During the second quarter, we saw significant improvement.
Hum cable sectors.
Currently we are not telecom segment more than doubled sequentially and outpace alethia TV business.
Julien by increase by the activity.
Okay, well segment improved sequentially as we begin to see includes auto for all four product related to see a tier upgrades in most of the makeup.
We're pleased to be pulled it would we see our fourth significant orders foresee a TV production ready to I missed the upgrades in Q2.
Which would begin to ship in Q3.
As we stated enough previous owning cold.
We have tick a very actually to be sure the safety and where beans, although I employees, well continue to support our customer needs and the needs of the communities, which we operate.
Oh this is and the victory Rong Luo topic to normal operation due to our street or the he does.
News and Sip dealer commendations.
Okay. Okay. We're continuing to theaters you force list Aaos precautions to pave the way of phase of our employees.
Ill communities.
With that I'll turn the call although to Stephen will be viewed attitudes about Q2 performance and our book Useighty seven.
Thank you Thompson.
As you May recall, we had disruptions and operations in our China factory during Q1.
However, as Thompson mentioned due to the hard work and dedication of our employees and supply chain partners. We are back to normal operations and have increased capacity in both our wafer fab in sugar land as well as our factories in China, and Taiwan compared to our capacity pre cobot.
We continue to see high demand from our datacenter customers, who remain focused on improving network performance in light of the increased traffic related to the shift towards working from home.
We also received our first orders from CHP customers that we believe are related to network upgrades by Misos also responding to stresses on their networks.
Looking ahead to Q3, we're expecting over 20% sequential growth at the midpoint of our guidance range and a continued improvement in our gross margin.
Turning to our quarterly performance total revenue for the second quarter was $65.2 million, which was above our guidance range.
Our datacenter revenue rose, 58% sequentially, and 65% year over year to $52.6 million and accounted for 81% of our total revenue.
This was our highest datacenter revenue quarter in two years.
In the second quarter, 33% of our datacenter revenue within our 40 G transceiver products and 64% was from our one hundredg products.
As Thompson noted this marks the second quarter in a row of year over year growth in our one hundredg transceivers.
Importantly, we continued to see increased data center demand during Q2 from a diverse set of customers.
Overall for the quarter, our top 10 customers represented 86.9% of revenue.
Which is down from 90.9% in Q2 of last year.
We had 310% or greater customers in the quarter all of which we're in the datacenter segment.
These customers contributed 35%.
15% and 12% of total revenue respectively.
One of these datacenter customers was a new 10% customer for a why where we have been gaining share.
This new customer is the U.S. based hyperscale cloud operator that has primarily been purchasing our one hundredg transceivers.
We also have seen increasing revenue from a large U.S. based switched router vendor who approached the 10% revenue Mark this quarter.
Rounding out our top five customers was the datacenter customer in China.
Looking at our customer base as a whole in addition to the 10% or greater customers. We had three other customers who each contributed between 5% and 10% of total revenue.
To put this in some context in Q2 of last year, we had only to 10% or greater customers and one customer between 5% and 10%.
Now we have six customers each over 5% and we're pleased to see that our efforts in diversifying our customer base continued to show tangible results and that many of these new customers are contributing meaningfully to our results.
In addition to the market diversity, our top 10 customers are also geographically diverse out of our 5% or greater customers in Q2, all but one where U.S. based multinationals and the remaining one with the China based switched router vendor primarily serving the data center market.
Looking at our top 10 customers in Q2 seven were U.S. based multinational corporations two were based in China.
And one in Europe.
Turning to our cable TV television product segment.
We were able to resume manufacturing at a normal capacity during the quarter and recorded a sequential revenue increase of 45% to $6.1 million or 9% total revenue.
However, CTV revenue remains below the $9.8 million, we recorded in Q2 of last year.
The sequential increase was driven by an increased order flow in North America for cable TV upgrades.
As I noted earlier, we saw our first significant orders for CTV upgrades driven by the shift to working from home this quarter, which we will recognize as revenue in Q3.
For the remainder of the year, we expect to ramp up production to meet order demand.
Revenue from our telecom products rose to a record $6.2 million and accounted for 10% of total revenue.
Reflecting an increase of 141% for the first quarter and 279% from Q2 of last year.
These results continued to be driven by increased fiveg demand in China.
Based on current order trends, we expect to see continued strong sequential growth in CTV and telecom revenue in Q3.
In Q2, we generated non-GAAP gross margin of 23.1% compared to 27.2% in Q2 of the prior year.
Gross margin was at the low end of our guidance range of 23% to 25% due to unfavorable product mix, mostly in our datacenter segment.
Along with increased costs, including manufacturing and shipping costs related to coated.
We expect gross margins to recover to pre covered level as we implement cost reductions that were delayed by the pandemic.
We also expect to see improvements in our product mix that we anticipate will improve our gross margin.
Total non-GAAP operating expenses in the second quarter were $20.6 million or 31.6% of revenue.
Compared with $19.5 million or 44.9% of revenue and the same quarter last year.
Operating expenses increased from last year, due mainly to increased shipping costs sales commissions and insurance costs.
Non-GAAP operating loss in the second quarter was $5.6 million compared to an operating loss of $7.7 million in Q2 last year.
GAAP net loss for Q2 was $18.6 million or loss of 89 cents per basic share compared with the GAAP net loss of $11.4 million or 57 cents per basic share in Q2 last year.
On a non-GAAP basis net loss for Q2 was $5 million or a loss of 24 cents per basic share.
Which was inline with our guidance range of a loss of $4.1 million to $5.7 million or loss of 20 cents to 28 cents per basic share.
And compares to a net loss of $5.2 million or loss of 26 cents per basic share in Q2 of last year.
The basic shares outstanding used for computing the net loss in Q2 were 20.9 million.
Turning now to the balance sheet.
We ended the second quarter with $58.9 million in total cash cash equivalents short term investments and restricted cash.
This compares with $62.5 million at the end of the first quarter and reflects $15.5 billion in cash used for operations.
As of June 30, we had $97.3 million in inventory compared to $87.1 million in Q1.
The increase was driven by additional raw materials purchased for production orders on hand and forecast orders.
We made a total of $5.8 million in capital investments in the quarter, including $5 million in production equipment and machinery and an immaterial amount on construction and building improvements.
This is lower than we had anticipated primarily due to a coded related pause it construction on our new China factory.
Note that we expect to resume spending on our new facility in China in Q3, and we anticipate this to be reflected increased spending on construction and building improvements.
Including this resumption in building expenditures and other equipment necessary to increase our production capacity. We expect total 2020 capital expenditures to be approximately $42 million.
Although I would caution as in years past, but this number is likely to be reevaluated as our plans continue to evolve.
Before we turn to our outlook I would like to provide an update on the at the market offering we announced in February.
To date, we have raised $22 million in gross proceeds under this program, including $7.7 million raised in July which will be reflected in our Q3 financial statements.
We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use.
Moving now to our Q3 outlook.
We expect Q3 revenue to be between $76 million and $83 million and non-GAAP gross margin to be in the range of 25%.
The 26.5%.
Non-GAAP net loss is expected to be in the range of $4.6 million to zero point $6 million and non-GAAP loss per basic share between 20 cents.
Three cents using a weighted average basic share count of approximately 23.4 million shares.
With that I will turn it back over to the operator for the QNX session operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question will come from Alex Henderson with Needham and company. Please go ahead.
Very much I appreciate that.
Actually I have two questions. The first one of the.
Hyperscale customer.
There was say other supplier into that customer if I believe.
Which was in a light.
Hi that that some supply chain disruptions.
You think that that's a part of the reason that you got in or do you think that.
You would have been in regardless of what the competitor supply availability it looks like.
Does that have any impact on the way you're thinking about.
Look.
I can't say, if theres anything specific about any of our competitors that would have.
Impacted this customer's decision I mean, it's a customer that we've been working with for some time too.
To to gain some traction there and I think Dave.
Appreciate it you know our ability to supply and obviously.
The complete profile that we bring to the table with with cost.
And quality and delivery advantages.
So I think it was much more about US then about some competitors losing.
Moving on attraction glad to hear that.
The second question I wonder due to delve into the telco piece.
I mean, it seems pretty clear that what's driving this is the.
Chipsets going into Cyprian front haul for Fiveg that.
Is a huge potential build over time, not just in China, but globally.
And I'm assuming that these are chipsets that are selling in there can you give us some sense of.
So what's the rate of chips is there going into that market looks like.
How many are diodes, how many are emails.
And to what extent.
You see that ramping up from here.
Any sense of what the Tam is for that market over the next 345 years.
As that Fiveg footprint gets build out.
Yes, so there's a few questions embedded in there as far as the ratio or the precise types of lasers.
I don't have a break down on that I mean, it's the combination of.
DFB lasers that we're selling.
Some emails and but very small and some transceivers.
The precise.
Take down I don't have available now.
As far as you know the.
The Tam there.
It it really remains to be seen I think I think in China alone, which is where we're seeing the most activity right now.
They're talking about you know tens of millions of towers.
Which would be you know.
Several many tens of millions of radios, each of which would require a front haul transceiver.
So you can kind of get an.
An appreciation at the size of that market is really large.
In anticipation is not that Eli is going to be.
You know.
A majority player or anything like that in that market, but I think that it's very reasonable to for us to expect to get.
You know 10, 20% of that market and hopefully expand.
Overtime and as as as the opportunities and the rest of the world outside of China begin to materialize to to continue to grow that market share.
I just finished one last question on that same subject the the impact of this.
The utilization rate and your fab I think is gonna be pretty significant.
Do you expect to see a couple of points of margin expansion as the.
Im sorry ramp.
Relative to the.
Other transceiver business because of the overhead allocation associated with that.
And I will comment on the exact magnitude that we expect to see we have given guidance of course that indicates continued improvement on a gross margin we mentioned that in our prepared remarks as well.
You saw the improvement from.
From Q1 to Q2 already.
And that's due to a number of factors, but certainly cost reduction.
Overall coming from higher fab utilization is a big part of that and we would expect that to continue as long as the growth in that.
Chip market continues.
Thanks for the answers and thanks for the great quarter.
My pleasure. Thank you.
The next question will come from Simon Leopold with Raymond James. Please go ahead.
Great. Thank you guys. Thanks for taking the question.
First just a very quick easy clarification.
The percent of Datacom that was.
Okay did you say 54 or six before.
I'm sorry, you cut out there just a little bit I think you're asking about the datacenter revenue that was 100 gig and if so thats, 64% six four.
Great. Thank you sorry about that I'm, not I'm, a little bit internet and our disadvantaged.
Thanks, a lot of tropical storm.
So I'll try to pick up and be quick I.
I Wonder if you could maybe bridge the gross margin it was a little light this quarter I'm on very good revenue and similarly light in the guidance I'm. Just wondering if you could explain how much of the pressure it's called Baird expects it how much maybe it's mix and the telecom products.
Sorry are dilutive to the gross margin just help us understand those factors.
Sure some in.
Some of it is co but not a lot I think the mean facts or is it well really two things, it's it's product mix related and its cost reduction.
Related now those are in other words those are the two things that we have two levers that we can pull from here on to try to continue to see improved gross margin as I mentioned in the previous question or answer to the previous question.
You know the fab utilization helps in terms of improving our cost structure, but just like other ways of reducing the cost over time. It does take time for those to flow through because we have significant amount of inventory on their cycle time associated with it. So you know the improvements that we expect to see.
We believe are real and they're coming but it takes some time for them to actually materialize in the in the financial statements.
Great and then just one last one if I might.
Hey, Good data center, 10% customer, which is really good news.
Thank you see a sustainable or.
Basically as far as you can forecast or was there something one time about this quarter.
No I mean, this customer has actually been growing with us for for some time slowly.
And they just made it into that that 10% category this quarter, but I would not expect that to be a.
Flashing the Pan type of thing I think we've done a good job with this customer they all account seem to.
Seems like us as a supplier and you know barring any unforeseen circumstances I don't see any reason why they wouldn't continue to purchase from us.
Great. Thanks for taking the question.
Hi, My pleasure Sir.
The next question will come from Paul Silverstein with Cowen. Please go ahead.
Thanks for taking the questions hopefully that's different than what else informing us do put on on the gross margin on stuff and you have visibility so getting back to third post person. If you do can you give us some sense for when that is.
I appreciate that it takes time to flow through for your previous responses, but any visibility right now.
I mean.
I think our goal is still good to get back to to the 30 plus percent range I could see us getting into the upper 20% range by the end of the year.
Whether we could hit 30 in that timeframe I mean, I suppose there's some scenarios that where that could happen, but that's that's probably not as likely.
But I think we're talking about a matter of quarters not years for us to get back to that 30%.
No trusted competitive dynamics are not meaningfully different today than we were previously either better or worse.
No I mean, we haven't seen anything any real changes in the competitive dynamic.
All right and one other question margins from a pricing for special another resets wants to twice per year, depending on the customer I assume that's still true but in terms of those resets any insight you provide in terms what is looking like.
You know nothing specific obviously, we don't give that type of guidance typically.
I can't say that you know we are seeing pretty strong demand right now.
And in past situations, where we've seen that kind of strong demand typically.
That provides a little more a little more pricing leverage on the suppliers as opposed to the customers, but again.
That's just an observation from prior periods I can't really speculate about the.
The pricing resets that we might see in the future.
Understood. One last quick question I assumed by definition when we're talking about the trying to bungie opportunity. We're talking about three maybe four systems customers that you do or cancel into Texas that opportunity in terms of Wallasey, T. Fiberhome and perhaps what was Alcatel Shanghai Golden Monkey Zikos outside.
Yeah, just I think that's correct in terms of the end customers just to be clear many of our customers. We do sell directly into some of those customers, but many of the customers are.
Chinese based transceiver manufacturers that then supply those transceiver. So we would supply laser diodes for example into those transceiver manufacturers. They would manufacture the transceivers and then sell them to the end customer so much of our business is likely not to be directly with those big guys, but I would assume.
Based on my knowledge of the market there that your list of end customers is accurate.
Got it and did you say, how many of those transfer customers you're selling in sort of can you share that with us.
I don't know exactly because a lot of and there's probably.
More than a dozen.
That's all I mean I'll pass on thank you.
No problem.
Our next question will come from Samik Chatterjee with JP Morgan. Please go ahead.
Yes, hi, Thanks for taking my question. This is set up on performing I think we're just start with the lead us into segment and I think there's just so I think couple of quarters, while it is 100 gig.
So just wanted to wireless and.
What we're seeing that I mean have you started.
Thank you that customer already has that started to that and any update on probably when revenue.
Im talking about so again.
What are the might there thanks.
It sounds like I'm, sorry to say that your line is very difficult to understand so I missed that question can you try to repeat it.
Oh, Hi, it's not so this is why not summit.
Just back on the beat us into segment on 400 gig specifically, so I think it was a couple of quarters ago that you highlighted a design win that Oh within NEM customers. So I just wanted to get US and have you started to ship could that got someone already on any update on when you look at Washington come from that so what are some of the milestones there that could.
Can track.
Okay. So the question was regarding 480.
We haven't shipped significant quantities to that customer or any other customer four hundredg yet.
My sense is that the 400 G.
Because of Cove. It I think some of the 400 G qualification efforts are are taking longer than expected.
I don't think Thats anything unique to Eli I think you know for the information that we have is that a lot of particularly the hyperscale customers many of them are.
You know working from home just like many of us and.
That complicates qualification efforts because you've got engineers, they can't come at the lab or otherwise constrained and their ability to.
Complete those qualification efforts so.
You know so my sense is that that 400, you revenue is probably pushed out.
A little bit, but that's not necessarily bad thing for us either I mean, if you look at our results. This quarter were seeing very strong uptick in one hundredg revenue.
And I would expect that to two to continue to to be there until until such time is 400 she is ready.
Got it and if I could just ask a follow up on the telecom and market. I mean can you help us think about what's still put on great. So they've been you'll get expecting from that business as we look into the second off and good economic factors, how should we think about like the sustainability of the mine golf cell sites from China, because that some of the equipment.
Yeah, those have quite out that is a high inventory position across Oems back maybe it back some budgets in the region in the second up so it just wanting to understand what the drivers Dan as you look into the second.
Yeah, we don't we don't give.
Breakdown by by segment on a forward looking basis, but.
You know I imagine this will be just like any other nascent market right they'll probably be some ups and downs as we go forward, but I think the.
On a quarter by quarter basis, you Mason some variability there, but I think the overall trend towards.
Increased volumes with this fight in Fiveg deployment. This happening I think is pretty clear.
Okay got it thank you for taking my questions.
My pleasure.
The next question will come from Dave Kang with B. Riley. Please go ahead.
Hey, Thanks for taking my question.
I was wondering if you guys are if you guys could provide more color around new customer wins are there any are there any four hundredg customers that are you guys had in the pipeline or.
Is that.
Is that.
That push out still.
Kind of how you guys are trending.
Well as I mentioned before I think a lot of the 400 GE qualification efforts are getting pushed out.
We did not have any 400 you wins this quarter.
But I also to be clear, we didnt have any.
And he notifications that we that we are no longer under consideration for foreign currency in other words were kind of at the status quo that is I think that the qualification efforts have just gotten pushed out slow down a little bit.
With our customers and that's true for us as well as for any of our competitors and.
So <unk> as I said earlier, you know I think our business is 100 gig is growing very nicely and so you know the four hundredg delay isn't necessarily a bad thing for us It gives us some time to.
Work on the cost of Manufacturability those devices.
I can only be a good thing for us when the time comes.
Okay. Thank you.
My pleasure.
Again, if you have a question. Please press Star then one our next question will come from for Hot now Jim with Cowen. Please go ahead.
Hi, Stephane, Tom Thank you for taking my question.
Much of my questions have already been answered, but I'll ask your.
A question in terms of Oh, any trends youre seeing among your largest hyper scale. The U.S. based hyper scale customers often need to push up well the supply chain out of China into outside of China, maybe the you us.
I think given the fact that Microsoft and Amazon dual fuel.
Customers have or have been wind for.
The significant U.S. government.
Contracts are you seeing a request a pull in from your customers.
Some of your supply coming out of China can you provide some color on there.
Well sure as we evaluate as we've noted for the last few quarters, we've been producing more and more of our products in Taiwan as opposed to China.
And the customers are certainly aware of and supportive of that I think right now the focus has largely been due to the tariffs situation not because they necessarily have a.
Mandate to two to move out of China as the political situation with China continues to evolve obviously, you know that could become more of a factor but for now I think it's mainly just the cost reason, where they want to why they want us to produce more in Taiwan.
But it's certainly been a factor of conversation with customers yes.
Can you share with us today, how much of your production is outside of China now of course.
For the patent situation.
It's a really difficult question to answer for hard because what we've been doing is we've been we've been moving certain parts of the manufacturing from China, Taiwan, and we've been doing other earlier parts of the manufacturing process in China. So it's it's not like we've completely move production from China to Taiwan, it's been more of a reassignment of manufacturing activities between the.
Two plants.
So.
Related to previous question on loan growth margin do you think.
Moving your production or if you settle onto a more several routine supply can they are auto Taiwan.
Do you think that that would help your gross margin cost structure going forward is that what you were alluding to let you said.
Our cost structure.
Okay.
Depending on is that you know driven by the fact that you're still transitioning a lot of your production out of China into party lawn and that's not being up from incremental costs over the near term, there's theres some incremental cost in there, but I actually think look the labor cost for example in Taiwan is more expensive in China. So.
So on balance once we once we hit a steady state here.
The gross margin if we can't do significant cost reduction like we have been doing then the gross margin would tend to trend down because of that the reason why we think it's gonna go up is again product mix and very attention a very very good attention that we're paying to our cost.
Cost of production and the ability to continue to improve our manufacturing approve our supply chain to get that cost to come down and that's that's a big part of what we're expecting in order to see the gross margins get back to that upper 20% and then ultimately 30% right.
Got it appreciate the answers I'll step back into queue.
Okay.
Again, if you have a question. Please press Star then one.
[noise] [noise]. This concludes our question and answer session I will like to turn the conference back over to Thomas Allen Chief Executive Officer for any closing remarks. Please go ahead.
Okay, and things will join US today as always thank you to up the investors customers and employees for your continued support and we look for virtually the in many of you at all come at Investor conferences.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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