EMCORE Corporation Q2 2023 Earnings Call
Okay.
Good day and thank you for standing by welcome to the EMCORE Corporation fiscal 'twenty twenty-three second quarter earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.
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Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Tom in a cello Chief Financial Officer. Please go ahead.
Thank you good afternoon, everyone and welcome to our conference call to discuss <unk> fiscal 2023 second quarter results.
The news release, we issued this afternoon is posted on our website EMCORE dot com.
On this call, Jeff furniture and of course, President and Chief Executive Officer will begin with the discussion of our business highlights I will then update you on our financial results and we'll conclude by taking questions.
Before we begin we would like to remind you that the information provided herein may include forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Exchange Act of 1934 piece.
These forward looking statements are largely based on our current expectations and projections about future events and trends affecting the business such forward looking statements include projections about future results statements about plans strategies business prospects and changes in trends in the business and the markets in which we are.
Operator.
Management cautions that these forward looking statements relate to future events.
Or future financial performance and are subject to business economic and other risks and uncertainties, both known and unknown that may cause actual results levels of activity performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward looking statements.
We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business, which are included in the company's filings are available on the SEC's website located at SEC Gov.
Including the sections entitled Risk factors in the company's annual report on Form 10-K.
The company assumes no obligation to update any forward looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.
In addition references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors, but non-GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods.
Esters are encouraged to review these non-GAAP measures as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release.
With that I'll now turn the call over to Jeff.
Thank you Tom and good afternoon, everyone.
In Q2, and core made significant progress in its transformation into an aerospace and defense business inertial navigation grew 21% over the previous quarter to $24 3 billion driven by strong performances from our Tinley Park, but lake and Alhambra bog operations.
Yeah.
Consolidated revenue totaled $26 8 million, which was up 7% from Q1 'twenty three.
Aerospace and defense generated 94% of revenue inertial navigation with 90%.
Broadband overall was 6%.
Hence after was 4%.
CATV represented less than one 5% of our topline.
There were encouraging improvements in the business as it continued to work through the operating challenges of a significant transformation.
Generating a GAAP operating loss of $12 2 billion, our non-GAAP operating loss and adjusted EBITDA. Both remained roughly flat at a negative $8 million and negative $6 5 billion respectively.
Essentially the improvements in gross margin and revenue in aerospace and defense were erased by the continued erosion of broadband.
The restructuring that we announced two weeks ago represents the logical conclusion to the end of the broadband era at EMCORE.
As we pointed out in our announcement, we made a determined effort to sell the broadband defense Opto businesses, which started last September .
Although we had significant interest which manifested itself.
A signed letter of intent and term sheet, we could not reach a definitive agreement or close the transaction.
Historically and of course board had made numerous attempts to sell the broadband business beginning all the way in 2014 employing different banks.
At multiple points in time over the past nine years.
The inertial navigation business continued to grow both organically and through M&A during the period.
Finally, reaching the point, where EMCORE became two distinctly different companies.
In this tale of two companies the inertial navigation and broadband businesses developed with independent personnel and assets.
Loan intersection of these two businesses was the indium phosphide wafer fab, which is being shut down as part of the actions. We announced however, we prepared for this decision by building a significant stockpile of indium phosphide chips for our fog products.
And consolidating our chip, making operations for quartz Mems and lithium niobate in Concord in.
In summary, the actions, we've taken effectively carve out the assets and other costs in the broadband business <unk> core without affecting inertial navigation.
Core is now a pure play in inertial navigation.
This transformation is really just the beginning of the next set of changes in our manufacturing operations. Many of the improvements that we made in automated assembly for cable television that resulted in a reduction in fixed assets.
Proved productivity and profitability will now be applied to inertial navigation.
Over the next few years, you should expect to see a reduction in the manufacturing floor space, we require a reduction in inventory and improvements in profitability.
Our final objective for broadband is to serve our customers last time buy requirements and ensure an orderly exit from the business for customers and employees alike.
We are still processing last time buy orders, but believe that the total amount should be approximately $10 million, which will ship over the next two quarters or so.
Turning now to aerospace and defense I'll begin my comments by stating that we had strong performance in our space and navigation Tinley Park in Alhambra operation.
Q2's book to Bill was a little low at 0.85, but several significant orders were pushed out due to contracting priorities inside of the Doj.
We expect the book to Bill will be approximately one two for the June quarter.
Demand was solid across the board with civil aviation seeing a surprising upswing we.
We also received orders for new UAV platforms, which are expected to total $5 $6 million over the next few months as full funding is released in parts.
We also booked significant follow on business for the fiber optic gyros that control targeting tourists from two important customers.
Bae's armored multipurpose vehicle program is continuing to pick up momentum as it heads into full rate production.
International bookings were strong for <unk> based platforms stemming from our strong position in PV Crows in escrow <unk> Guardian two programs on the naval side of our business. We received new orders for the next generation Mark 54 lightweight torpedo abuse and continue to ship against our.
Mark 48 torpedo backlog.
<unk> torpedo programs are emerging and we are being called in to leverage our expertise in the demanding vibration environments of undersea weapons.
On the precision guided munitions side of things, we were slowed down a little bit getting export licenses, but are working with our customers to qualify products with less restrictive licensing requirements.
Beyond program capture we are seeing important signs of acceleration in key programs into the low rate of additional production phase, which is a key indicator of long term growth.
In particular infrared search and track has become a key area of focus and our multiple design wins in this application stand to benefit.
Our IRS tea product has now achieved an important production readiness milestone with Boeing Lockheed at NAV Air and we are ramping up production for these important deployments on the FAA 18 Hornet.
The space and navigation team has built multiple <unk> inertial measurement units in support of the design integration and qualification as it continues to meet shipment targets per board.
These two systems are critical to the launch schedule for United launch Alliance. Our expect our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches going forward. When these products hit full production. They are expected to produce 20% to $25 billion.
Of revenue per year, and helped significantly improve gross margins.
<unk> had a nice uptick in shipments this quarter, but margin didn't scale quite as well as we expected largely because of the timing of certain charges, which can be lumpy.
As the entire company moves to its new ERP system in the coming months, we expect that these fluctuations will be less pronounced.
Before I move onto guidance I'd like to provide some comments on the recent acquisitions and our integration programs, which are a key area of focus this year.
Both the L three Paris space and navigation business as well as the former PVH inertial businesses are performing well and are clearly accretive.
On the integration side of these acquisitions space.
Space and navigation is running a common ERP system with the rest of them core and has made the cutover from <unk> Harris systems with a resulting reduction in TSA costs we.
We are expecting the transition for Chicago to complete the June quarter, but we've already moved that Rhode Island engineering team out of PVH as building and have now switched both the Chicago and Middletown offices over to the EMCORE domain.
We expect to integrate <unk> into Concord in Chicago. After we complete the ERP upgrades and exit transition services. Ultimately this will make EMCORE and more efficient and will help us improve our processes cost and inventory.
Turning now to guidance in the current quarter, we expect that semiconductor shortages will slow down production for some products tamping down growth a bit for inertial NAV in the June quarter.
Additionally, we are moving forward on our last time builds from a standing start and have not yet scheduled production dates. Excluding these last time buy builds we expect revenue in the 25% to $27 million range for the for the June quarter of which 24 to 26.
Is the inertial navigation business with that I will turn the call back over to Tom.
Thank you Jeff.
<unk> revenues for fiscal <unk> grew 7% on a sequential quarter basis to $26 8 million.
Despite the soon to be shutdown broadband segment, contributing only $1 6 million or about half of the already low level for this business in the quarter before.
A&D segment revenue grew 16% sequentially to $25 2 million.
More importantly, inertial navigation, which is the A&D segment without the potential defense opto electronic products grew by $4 3 million or 21% to.
The $24 3 million and was 90% of total and core revenue.
All product lines within inertial NAV were up in the March quarter, when compared to the December quarter, Q, Mems and the Alhambra based fog business performed well and the two most recent acquisitions in Tinley Park in Budd Lake both turned in excellent results.
Bind Tinley Park in Budd Lake accounted for 64% of inertial NAV revenue.
Moreover, both acquisitions continue to be nicely accretive to the bottom line.
Let me now turn to the rest of the operating results of the focus of which will be on a non-GAAP basis.
Gross margin improved in the March quarter, 24% up from 22% in the December quarter, driven primarily by the increased revenue.
Conversely, the extremely low level of broadband revenue dragged down the overall consolidated margin to 16%.
Operating expenses were $12 4 million in fiscal <unk> compared to $11 8 million in the prior quarter to $600000 increase was largely due to material expenses for development work on Fox programs.
On a consolidated basis, the operating loss in the March quarter was $8 1 million compared to $8 million a quarter before adjusted EBITDA was flat at negative $6 5 million net loss was.
$8 3 million or <unk> 18 per share compared to $8 2 million or <unk> <unk> per share in fiscal <unk>.
Shifting to the GAAP results for a moment fiscal <unk> net loss was $12 2 million or <unk> 27 per share. This included $1 $3 million of transitional expenses stemming from last year's acquisitions and 900000 in litigation expenses that included a $500000 payable as part of the settlement agreement.
Turning to the balance sheet, we had cash of $24 8 million at March 31, compared to $24 2 million at December 31.
$600000 net increase included $15 4 million in net cash proceeds received from the financing completed in February .
Offset by the following uses of cash during the quarter.
$6 5 million adjusted EBITDA, $4 8 million for working capital related to normal business operations.
<unk> 4 million for acquisition transaction costs 400000 per litigation related expenses $1 million used for financing activities and 700000 per capex.
Before we get to your questions I'd like to review several items related to our recently announced restructuring program.
This plan includes one the shutdown of all of EMCORE is linear optics operations, which consists of cable TV chips wireless and sensing and defense opto electronic product lines as well as the closure of the indium phosphide wafer fab.
Second a related reduction in force of approximately 22% of our total workforce by about 100 employees, primarily in Alhambra and China.
This action has already begun with expected completion by around the end of July .
Third reducing our facility footprint by approximately 25% by vacating a portion of the space currently in use in Alhambra and Concord as well as exiting our remaining small facility in China.
These actions are anticipated to be completed by the end of September .
For severance cost, which we anticipate will be a combination of accelerated stock vesting and cash over time.
We expect to record a GAAP charge in the June quarter of around $2 1 million.
We also anticipate yet to be finalized GAAP charges for facility consolidation.
<unk> of which will coincide with the dates we actually vacate the various spaces.
Bulk of which is likely to happen during the September quarter.
From a P&L perspective once the program is fully completed the restructuring to reduce cost and expenses by a total of at least $12 million annually and is predominantly attributable to the elimination of broadband.
It is expected that the activities related to the shutdown of the broadband segment and the defense Opto electronics product line will eventually be reported as discontinued operations timing.
Timing of this will depend largely on the extent to which we have completed production for last for customer last time buys.
Our results of operations going forward from that point will consists solely of our inertial navigation business, including including lithium niobate and courts chips used in our fog and quartz Mems products.
So with that we are now opening up the call for your questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
And please standby, while we compile the Q&A roster.
Our first question comes from Richard Shannon from Craig Hallum.
Your line is now open.
Okay.
Hi, guys. Thanks for taking my questions.
I'm not sure if I have a good sequence of these maybe I'll just kind of go rush out over these.
Jeff first question for you is that catch correctly that you have not baked any last time buys into the revenue guidance for this quarter.
That is correct, where essentially it okay standing start here some of this is going to require.
Okay.
Semiconductors, where we don't have the lead times completely squared away.
And.
We are looking at a substantial number of chips that are going to go through the fab and <unk> got time for wafer qual and other.
Things that you just can't see that.
So that's why we haven't really taken today.
Okay.
Okay fair enough.
I think you referred to some shortages of components coming in that hurts your Q Mems.
Products was it Q1 is that the right one Jeff.
No actually it is.
I'm not going to hit us a bit Budd Lake this this quarter.
It's.
The sort of thing where <unk> got circuit boards that were supposed to arrive.
End of April beginning of May and now we're getting June July date.
We have finished for the finished assemblies.
If that happens we expect that we'll.
Get a push some revenue out into the September quarter.
Okay.
I suspect for most of your products, we probably wouldnt consider these boards to be commodities are these specialized in some way.
And can you describe the constraints and there is this something that kind of a onetime thing or do you have continued risk from us.
There is certainly nothing you can read into it.
If I had to guess it would be FPGA is because they've been.
Exceedingly difficult and Theres, probably some high rail components in there but.
That's just call it an educated guess.
Okay, Alright fair enough.
Maybe kind of a two part question I know you said this on the last earnings call and you just repeated here today about expecting a book to bill of about one point to and I can't remember if this was referring to A&D in total or just in the IMS business.
But can you can you kind of give us a sense of where these where these bookings.
Bookings are coming from and what kind of lead times of those come before they hit the revenue line.
Yes.
When you say lead times.
Oh, Okay, so time to bill.
Some of it youll actually see virtually immediately as soon as the orders are less because they are for product.
Alex that are normally rolling through.
The assembly lines.
And it's a wide variety of things. So I'll give you an example.
One of the drones that we got a big win on and there are a couple.
We got only about a third of the order that we were expecting and as we talk to supply chain and our customer. They said Hey, we just haven't had all of the funding released from.
The particular.
Branch of the service that buys these things and that's just sort of comment on what Youre seeing to a degree is just jockeying around of dollars.
Partially because of the way that expenditures are set up for the Ukraine right. So.
It has caused.
A bit more reshuffling of dollars than normal, but we're not expecting this to be a long term Dave okay.
Okay fair enough and maybe a couple of quick questions from me and I'll jump out of line here.
Yeah. So.
You talked a fair amount about the entertainment programming and your comments from last quarter, but hopefully qualifying by the end of this year and getting to a nice run rate hopefully at some point after that at a very healthy level, maybe in the interim here how do we think about kind of the progress here over the next few quarters.
And I think you mentioned in the past so hoping you could get to a breakeven point, which I believe you're looking at somewhere in the $30 million range or a little bit more.
How do we think about the kind of linearity in the kind of a source of drivers here strong from your guidance Youre getting to that breakeven point and do you think it can be.
By the December quarter, or if not when do you kind of foresee that happening.
Yes.
I'll answer this in parts I'll give the second part about breakeven to Tom, but essentially you are already starting to see it so.
The <unk> program is currently being run on time and materials and then on top of that.
There is additional.
An additional contract for us to buy long lead materials for.
Call it roughly the first year's worth of production.
Pretty significant about of money its I don't know eight $9 billion something like that and so what youre seeing is some of that material coming in it will become.
Units next year, even though we don't have the purchase orders for the assemblies now because the final price wont be set until were done with qualification and then youll see it return to a normal sort of hey, we're going to order X number of these that there is a fixed price associated with it.
So what youre going to see over the next couple of quarters and I had mentioned this before but I did provide a lot of explanation is a nice gradual ramp and that ramp is going to come from first.
No.
Let's call it material purchases increased amounts of activity time in materials engineering and manufacturing engineering ultimately the assembler and technicians over the next two quarters and so youre not going to see a step function in this and so those are the things.
<unk> that youre looking for.
Again, when you think about it though and you say, okay, well and of course already out buying and this is under contract with space and sensors that ultimately USAA.
As already out buying long lead materials that go all the way through 'twenty four I think thats, a pretty strong indicator of where the program is.
Fair enough that's good.
Good explanation there.
A couple of quick questions for Tom and I will jump out of line here first of all what kind of shares outstanding you're expecting for this.
June quarter, and as you're getting.
Increased sales within the A&D are high in this business, which everyone in person what kind of.
Margin fall through should we see there.
Richard was the first one shares outstanding by June .
Yes.
So this quarter you can see it.
And the average because of the shares that we issued in February .
When it's all done you should be around $53 5 million shares.
Okay great.
Okay.
Arthur.
Yes.
We move from 'twenty to 'twenty four.
On over $4 million, an increase in revenue in A&D and that jump in margin probably would have been a little bit better than that had it not been for some other items that Jeff alluded to in his prepared script. So.
With growth in this quarter not as much as last quarter, but.
Still growing youre looking at high 20.
<unk> 2728 in that range.
All the things being equal.
But the key by the way that's for inertial NAV Slash A&D.
Not for the consolidated company.
The other piece.
And Richard I think you were asking about was the breakeven point change relating to the restructuring and how that all plays out.
I get that right Richard.
Certainly it was a question of interest for us.
Okay.
<unk>.
Lower.
After all the restructuring program is completed and we are a strictly in inertial navigation business.
The.
The opex profile changes and so.
What used to be call it roughly about $11 million and gross profit needed to overcome opex.
Opex net of depreciation.
That's now lowered to call it nine five somewhere in that range. So.
I think if you did.
Just over $30 million call. It 31 in revenue and just over 30% in gross margin that math would get you to a breakeven point for adjusted EBITDA.
Okay perfect. Thanks, guys I'll jump on the line.
Yes.
Thank you very much.
We're going to give it a few more seconds. If you have any questions.
Thats Star one on your telephone.
One moment please.
Our next question comes to Us from Brian can Flinger of AGP. Your line is now open.
Hey, Thanks for taking my questions.
On the semiconductor shortages by Lake.
Is your confidence level that this won't impact in September and December quarters in a negative way.
Well first of all it's not the same thing.
This is.
Well the same thing.
We think it's an isolated incident.
It's not like the manufacturers come back and said well what we told you was 40 weeks is now 80 weeks, it's not that at all.
Two cards with a couple of common parts that have been pushed by two months. So.
And this is what I say, it's an issue.
Now, we're talking about something in the order of half a million to a $1 billion worth of revenue, but that would have occurred in the June quarter.
We look at roughly 10% quarter over quarter growth or something like that it's just not going to be quite that much because.
You've got visibility to knowing exactly what needs to ship exactly when it needs to ship and we're looking at.
The.
Material that's in circuit boards.
It just is what it is right.
I'm not the only guy talking about this.
Sure so.
Moving on to precision guided munitions you touched on the international piece.
I know you had a large order that you shipped in December .
You had talked about at that point.
Opening doors to large orders, both internationally and domestically there and that you were qualifying and SD 170 with either the <unk> content, maybe if you can provide some progress youre, making there would be great.
Progress is fine again.
What we what we said and we talked about domestic was domestic in terms of Turkey, where apple saw on rocket sound a tube attack.
They have a different set of requirements for their internal programs I E feeding the Turkish military.
And what they are allowed to sell in the outside world and so we're qualified for export right now and Theres actually been some large opportunities for us.
And even though we do not carry the most.
Strict in form of license, which is ISR.
The.
The Commerce Department has gotten some pushback from state.
And so.
Some of the EHR licenses that we were expecting to get.
The business is ours okay.
They just haven't come through we don't have a hard no on a couple of them but.
Keep pushing out the date.
Working the problem the potential solution is to go to a product that does not require a license.
We have one that is right underneath the spec at which licensing is not required and so that's the one that we're working on to replace the units that we've been working with.
So.
It's the licensing thing it happens in certain parts of the world countries that where our friends before.
Yes.
Administrations change their idea of friends or changes and we just have to live with.
Great. Thanks.
One follow up.
Last one for me and Tim will you gave us some great details and it's great to see.
See that you are ordering.
Core product for through 2024.
Talking about milestones that you are going to expect to achieve in March can you share.
Date on those milestones that were hidden any details on them.
The label.
The only thing that I would say is that we're expecting to read share hit our critical design review.
Roughly in in August and so we're expecting to have integration complete by then.
And that's been excellent to.
To look forward.
Great. Thanks very much.
Okay.
Thank you.
Please standby for our next caller.
Our next question comes from the line of Richard Shannon with Craig Hallum.
Alright, guys.
A couple of Big picture questions for you Jeff.
First wanted to look to get your sense.
Kind of the evolving.
Geopolitical situation, especially as it impacts the United States.
Budgets and also internationally, if anything thats relevant and kind of the impacts positive or negative that you see with your portfolio today.
Okay.
Well great question, so the way that I see the current budgeting situation inside the Dod is theres, just a lot of scrambling to reorient.
Plans because.
When you talk about.
Support given to foreign countries.
Usually tends to come right out of the stockpiles of.
The U S military and then later on they have to figure out how they're going to replenish it.
So it's not like.
Case, where lets say that.
U S government offers $10 million.
Do your crane and somebody's out there writing a check book no they're counting the value of things that are.
Our essentially said to Ukraine, and then later on we're figuring out how to pay for replacements.
So it's there's a lot of noise. There is a lot of shuffling around but I'm not sure that I would read anything more into it.
Then that just creates some short term problems that push orders from one quarter into the next.
But.
It just is what it is.
But beyond that as you take a look at the heightened sense of.
Preparedness that I see when I go out and talk to.
International customers.
When I look at.
Who is interested in what I think that overall the spending.
Let's call it backdrop is going to be more aggressive.
The sorts of things that.
Our not just NATO countries, but major non NATO allies like for example, Taiwan.
Things that they're interested in the number of them.
Our only going up and so the challenge is that.
For several of US that are sitting in the critical path. Some of these things is to find a way to.
To get the supply chain the whole supply chain, because we are part of larger weapons systems.
Organized too.
To be able to supply that so I think that the budget environment in general is.
Very strong for products like ours.
Interesting when you take a look at give you. One. One example, you take a look at the amount of GPS.
<unk> that is going on in the Ukraine.
<unk>.
The smart guys over in the Pentagon have taken a hard look at this and have extrapolated that too well what might happen, if China decides to be more aggressive toward Taiwan.
And I think Thats resulted in a lot more emphasis on finding solutions and the inertial navigation space, where GPS denial is not a problem.
So overall.
There is.
The rising tide that lifts all boats in this area.
It's certainly at play but in inertial NAV I think even more so.
Okay, great great thoughts here Jeff.
As we have seen this political football happening with our R. R.
Budget deficits do you have an experienced and what are your thoughts here on whether we get some if we get some sort of.
Shut down or even get close to it other impacts to funding like I think you mentioned in some other programming all the funding must be released do you see any potential issues from that happening here in the near term.
Well.
The game of chicken to constantly goes on with with budgeting between.
Three branches of government and usually two of them.
It's certainly a concern.
I doubt that.
Either side of the aisle wants to see something like that happen.
But it would certainly be concerning if it did I can't imagine it would go on for very long a solution would be reached especially in light of what's going on in the in the banking world right now.
Putting U S credit worthiness on the line at a time like this site.
And imagine someone with a rational mind wanting to do that but.
This is politics.
No.
Sure.
I don't have any well formed thoughts Richard about how it would affect us.
I think the overall concern about.
<unk>.
Certain countries, becoming more bullish or it is going to outweigh most other factors.
And that analysis, though.
Okay.
Alright, as always I appreciate those thoughts, Jeff I think Thats all for me and I'll jump out of line again, thanks a lot.
Okay.
Thank you.
With that I would like to now I will turn it back to Jeff for the chair Chief Executive Officer for closing remarks.
Thank you.
I'd like to thank all of you for your interest in EMCORE and I do want to close my comments with.
A little bit longer set of points that I normally would.
And that relates to our broadband team.
The broadband team really led the way in hybrid fiber coax technologies that allow the world's cable networks to grow.
Simple radio based systems into the backbone of Internet services around the world.
<unk> linear <unk> became the de facto standard for advanced CATV networks in which Covid started to shut down everybody.
Network providers turned to EMCORE to upgrade the transmission networks that really made worked from home a reality during the pandemic.
Linear ml technology allowed the company to capture business from our competitors generate significant profits and cash flow that allowed the company to make this transition to aerospace and defense, giving EMCORE a bright future so to our broadband team I would simply say thank you all for your hard work and creativity through the <unk>.
Years, and Tom and I want to wish you all the best of luck in your future endeavors.
And Thats all.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Thank you. Thank you.
Okay.
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