Question-and-Answer Session
Operator
(Operator Instructions). We'll go first to Steve Ferranti with Stephens Inc.
Steve Ferranti - Stephens, Inc.
Nice job on the margin expansion during the quarter. I guess that leads sort of into my first question. Third quarter did see some nice operating margin expansion. It looks to me like your fourth quarter guidance might imply sort of flattish operating margins. Can you comment at all on that?
Larry Sala
Sure. There's a couple of factors. One is a little bit higher tax rate in quarter and the other is a mix shift for us that's definitely expected to be less favorable.
In our Wireless business, we saw significant demand for our standard component products out of China last quarter. We definitely expect that demand to be down relatively this quarter, driving a mix to more custom business in our Wireless business.
So yeah, both factors of tax rate and mix shift, we expect to have a little bit more pressure on our margins this quarter.
Steve Ferranti - Stephens, Inc.
Does the higher Space and Defense contribution in the fourth quarter, will that help or have a negative effect on margins?
George Blanton
In general it will help, but not to the extent of the margin benefit we get out of our standard component products. We also, on the positive side, expect to continue to get some benefit from the cost reduction activities we had in place for the fiscal year. So we saw a good portion of that benefit in the third quarter. We hope we continue to see incremental benefit in the fourth.
But to directly answer your question, generally Wireless to Space and Defense, we see comparable gross margins, but are replacing the standard component product revenue with Space and Defense. We definitely would see a decline in profitability as a result of that.
Steve Ferranti - Stephens, Inc.
Then just where are you guys in terms of some of the cost reduction efforts that you had going on? I mean I think we've seen some nice progress there on the operating margin side. Can you kind of talk us through what your plans are for fiscal '10? How we should think about the activities on that front?
Larry Sala
We've had some pretty good cost reduction efforts in some of our operating expenses in terms of some things like professional services and some of those expenses have been offset by some yield issues that we've had on some new development programs. We continue to see the cost reduction efforts in Q4 and they will continue into FY '10.
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