Question-and-Answer Session
Operator
(Operator Instructions) We’ll go first to Glen Yeung with Citigroup.
Glen Yeung - Citigroup
Thanks. Dario, questions for you to start with; I’m not sure I understood what you were saying about R&D. Your suggestion that R&D in the fourth quarter will be up 3% to 4% because of some of the expenditures for starting up SP1 will still be R&D expenditures at that point?
Dario Sacomani
Correct. The timing of when we turn it on, it could be early in the fourth quarter, it could be the beginning of December, it could be towards the back of December, so what I did is I guided you guys as though it was all going to be for the quarter in R&D. If in fact we get earlier qualification than that, than some of that is going to just shift from R&D to COGS, but I tried to guide you with a flat gross margin and a 3% increase in R&D. If that switches a little bit due to qualification timing, you will still be okay on your bottom line.
Glen Yeung - Citigroup
I guess the question is why wouldn’t gross margins be higher than in higher revenues if you are not putting the expenses of SP1 into COGS?
Dario Sacomani
I anticipated that we would turn on depreciation to something in the range of $7 million to $10 million, and how much of the R&D material actually gets reclassed up into COGS. Like I said, I didn’t know yet so I tried to guide you so that you would get the right bottom line.
Glen Yeung - Citigroup
I’m sorry, I’m still a little confused here. So are you suggesting that gross margins could in fact be higher than flat and depending on what happens to R&D, or is there a reason that gross margins would have been lower in the fourth quarter if not for the issue of SP1?
Dario Sacomani
No, absolutely not. I think given the ASP environment, I think that they would have been up but I am assuming in that number I gave you around $7 million to $10 million of incremental depreciation and I’ve assumed that all the engineering material continues to be in R&D. If in fact some of it transfers up to COGS, I’m expecting a lower gross margin. But no, I think excluding SP1, I think it would have improved.
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