Richardson Electronics, Ltd. (RELL) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome, and thank you for joining today's teleconference, FY '19 second quarter earnings call for Richardson Electronics. [Operator Instructions] I'd like to begin today's conference by introducing today's speaker, Ed Richardson, CEO. Please go ahead.

Good morning and welcome to Richardson Electronics conference call for the second quarter of fiscal year 2019. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power and Microwave Technologies Group; Pat Fitzgerald, General Manager of Richardson Healthcare; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback. I would also like to remind you that we will be making forward-looking statements and they are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. We are pleased to report net sales for the second quarter of fiscal 2019 grew by 5.7% versus the second quarter of fiscal 2018. We still have double digit growth for the year compared to last year. Last year marked the highest level of sales since 2011 and included an extra week in the first quarter. Both PMT and Healthcare sales in the quarter were above prior year, so it is clear our key initiatives are driving growth. Canvys has grown nearly 10% year to date versus the first half of FY18. Jens Ruppert continues to do an excellent job managing growth in the display business. Both PMT and Healthcare sales in the quarter were above prior year. So it's clear our key initiatives are driving growth. Canvys has grown nearly 10% year-to-date versus the first half of FY '18. Jens Ruppert continues to do an excellent job managing the display business. Gross margin was the weak point in the quarter, coming in below our expectations. This was due in part to product mix and also to manufacturing variances. We made some changes in the quarter to improve gross margin in future quarters. We will explain in more detail throughout the call. SG&A on an adjusted basis continues to be well under control. I will now turn the call over to Bob Ben who will share the highlights of our second quarter and year to date financials. Then, Greg, Pat and Jens will provide more details on their business unit performance.

Thank you Ed and good morning. I will review our financial results for our second quarter and first six months of fiscal year 2019 followed by a review of our cash position Net sales for the second quarter of fiscal year 2019 were $41.3 million compared to the prior year’s second quarter of $39.1 million, which was an increase of $2.2 million or 5.7%. Net sales increased $2.2 million for PMT and $0.2 million for Richardson Healthcare. Net sales for Canvys decreased by $0.2 million. Gross margin for the quarter was 31.4% of net sales compared to 34.2% of net sales in last year’s second quarter primarily due to a change in product mix and unfavorable manufacturing variances for both PMT and Richardson Healthcare. Canvys gross margin increased due to an improved product mix and lower costs on selected products sold. Operating expenses were $13.4 million for the quarter compared to $12.6 million in the second quarter of fiscal 2018. Operating expenses increased due to a $0.2 million of severance expense related to actions taken to improve the manufacturing variances and $0.3 million in higher legal expenses. It is anticipated that the reduction in headcount will result in $0.5 million annualized savings in cost of sales. In addition, last year's second quarter included a $0.2 million bad debt recovery. Operating expenses as a percent of net sales, without the severance expense and the higher legal expenses, decreased to 31.2% in the current quarter from 32.2% in last year's second quarter. The Company reported an operating loss of $0.5 million for the second quarter of fiscal 2019, compared to an operating income of $0.8 million in the second quarter of fiscal 2018. Excluding the severance expense and higher legal fees, the Company would have reported break-even for operating income for the second quarter of fiscal 2019. Other income for the second quarter of fiscal 2019, primarily foreign exchange, was $0.3 million, compared to other expense of $0.1 million for the second quarter of fiscal 2018. There was an income tax provision for the quarter of $0.2 million, which reflected a provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Although there is no tax benefit shown on our financial statements from U.S. net operating losses, we can use our net operating losses to offset any cash tax liability reported in our U.S. Federal Income Tax Return. The remaining amount of Federal NOLs is $17.1 million. Loss from continuing operations for the second quarter of fiscal 2019 was $0.3 million, compared to income from continuing operations of $0.2 million in the second quarter of 2018. Excluding the severance and higher legal costs, profit from continuing operations would have been $0.2 million in the second quarter of fiscal 2019. In addition, during the second quarter of fiscal 2018, the Company received an income tax refund from the State of Illinois, inclusive of interest and net of professional fees, of $1.5 million. This refund was a result of the conclusion of the Illinois amended return related to the sale of the RF, Wireless and Power Division in 2011 and was therefore, classified as income from discontinued operations. Overall, we had a net loss of $0.3 million for the second quarter of fiscal 2019; as compared to a net income of $1.7 million in the second quarter of fiscal 2018. Turning to overview of the results for the first 6 months of fiscal year 2019. Net sales for the first six months of fiscal year 2019 were $85.5 million, an increase of 12.3%, from the first six months of fiscal year 2018 net sales of $76.1 million. There were 26 weeks in the first six months of fiscal 2019 compared to 27 weeks in last year’s first six months. Net sales increased by $7.9 million for PMT, $1.2 million for Canvys and $0.3 million for Richardson Healthcare. Gross margin decreased to 31.5% from 33.5%, primarily reflecting a less favorable product mix and unfavorable manufacturing variances. Operating expenses were $26.5 million for the first six months of the fiscal year, which represented an increase of $1.6 million from the first six months of the last fiscal year. The increase was due to additional compensation and other expenses related to the increase in net sales, severance expense and higher legal expenses. Operating expenses as a percent of net sales without the severance expense and the higher legal expenses decreased to 30.4% in the first six months of fiscal 2019 from 32.8% in last year’s first six months. As a result, our operating income for the first six months of fiscal year 2019 was $0.4 million as compared to operating income of $0.8 million for the first six months of fiscal year 2018, which included a $0.2 million gain from the sale of a building. Excluding the severance expense and higher legal fees in the second quarter, the company would have reported an operating income of $0.9 million for the first 6 months of fiscal 2019. Other income for the first six months of fiscal 2019, including interest income and foreign exchange, was $0.2 million, compared to other expense of $0.1 million for the first six months of fiscal 2018. The income tax provision of $0.4 million primarily reflected a provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Income from continuing operations for the first six months of fiscal 2019 was $0.1 million, compared to an income from continuing operations of $0.1 million in the first six months of 2018. Excluding the severance expense and higher legal fees in the second quarter of fiscal 2019, profit from continuing operations would have been $0.6 million. Overall, we had a net income of $0.1 million for the first six months of fiscal year 2019 as compared to a net income of $1.6 million in the first six months of fiscal year 2018, which included the state income tax refund of $1.5 million that was classified as income from discontinued operations. Turning to a review of our cash position. Cash and investments at the end of the second quarter of fiscal 2019 were $53.2 million compared to $54.8 million at the end of the first quarter of fiscal 2019 and $59.3 million at the end of the second quarter of fiscal 2018. Subsequent to the end of the second quarter of 2019, we repatriated $5.7 million in foreign cash back to the U.S. Total cash repatriated free of U.S. income tax since the end of the second quarter of fiscal 2018 was $29.5 million. We had capital expenditures of $1.1 million in the second quarter of fiscal 2019 compared to $1.7 million in the second quarter of fiscal year 2018. Approximately $0.5 million related to our manufacturing business, $0.2 million to investments in our healthcare growth strategy, $0.2 million to our IT system, and another $0.2 million for facilities and other projects. On a year to date basis, capital expenditures totaled $2.2 million as compared to $2.7 million in the first six months of fiscal 2018. Lastly, we paid $0.8 million in dividends in the second quarter of fiscal 2019. Now, I will turn the call over to Greg who will discuss the results for our Power and Microwave Technologies Group.

Thank you, Bob, and good morning, everyone. In our second quarter of fiscal year 2019, PMT sales were $32.3M up again vs $30.0M in Q2FY18. Based on our demand creation model, strong booking trends with our new technology partners, numerous design wins and our unique global business model, our business grew 7.5% over prior year. Our gross margin was 31.3% compared to 34.1% in Q2 of last year – due mainly to product mix and manufacturing under absorption. Our improvement in sales performance is driven by growth within our core electron device business (EDG), as well as very strong growth from our new technology partners in PMG. We are taking advantage of our long-term customer relationships while our customer count continues to grow with our expanded product range. Favorable market conditions in the industrial, RF and Wireless infrastructure, and power microwave markets are leading this growth. We also continue to experience market share gains and revenue growth for products in both of our core business units. As market conditions change, we respond quickly through internal initiatives, including a reduction in force in Q2 FY19, designed to improve efficiencies and help offset the slowdown in some markets. These actions allow us to generate more opportunities in growing markets using our existing global infrastructure and headcount. These programs are also a significant contributor to PMT’s year-to-date profit improvement. revenue growth is being supported by key technology partners such as Qorvo, CPI, MACOM, Anokiwave, USCI, CDE, and Thales. More specifically, key markets and applications showing growth in Q2 include 5G wireless infrastructure, SATCOM, Defense communications, industrial, high power microwave, Marine, LINAC and Avionics. Engineered solution sales into the Semiconductor Wafer Fab Equipment market slowed in the quarter, but are still above prior year on a year to date basis. Fortunately, the anticipated decline in semiconductor wafer fab sales is being offset by sales within PMG. We continue to see strong growth and are very excited about the booking trends in our new growth markets. In developing the strategy for PMT, we added key technology partners such as Qorvo, Anokiwave and MACOM. These suppliers support the numerous products and applications that will be required by the 5G infrastructure rollout, SATCOM and Defense markets, GaN power, and other RF and Wireless applications. We are also partnering with specialty suppliers focused on the next generation of testing and measurement needed for 5G. With these technology partners we can do component level design-in and support the majority of the customers’ board level needs. These customers are the Key OEMs in the world as well as Tier II and Tier III customers that are supporting a portion of the larger OEM’s systems. Our customers welcome RELL’s local field engineering team to support their designs, and our technology partners love our global reach and the ability of our field engineering resources to design in their product and do true demand creation. We track design wins on a global basis. In studying our growth in design wins, it is clear our management continues to do a very good job identifying key suppliers, niche markets and applications. Through our team of experienced RF technical resources, we offer the top design resources in the field to support this growth. We are adding many new customers each quarter. When you combine that with our backlog, we are confident our growth in revenue and backlog will continue. I can’t stress enough the value of our unparalleled capability and global go-to market strategy that is unique to the RF and Microwave industries. We can support this fact through our revenue gains, our growing list of new customers every quarter, and with our targeted list of Electron device and disruptive advanced technology partners who choose Richardson Electronics to bring their products to market. Our world leading position in the manufacturing and distribution of electron devices supports legacy equipment as well as new equipment where solid state cannot replace tubes. We do have some headwinds going into Q3FY19. The Semi-Fab market is showing some slow down. Tariffs on products made in China and sold in the US as well as the new China tariff on US made products going into China may also have some short-term effects. So far the impact has been more of an administrative challenge. In spite of these challenges, we are committed to finding solutions to continue our improved profitability with top line growth each quarter through the combination of our experienced PMT team and our unique model. With that I will turn it over to Pat Fitzgerald and Richardson Healthcare.

Thank you, Greg, and good morning everyone. I am happy to report that shipments of our ALTA750 CT tube continued to build in the second quarter, and that the installed base is steadily growing. Field performance has met expectations, and we began to realize improvements in internal production yields in November and December that should begin to show up in gross margin improvements in the second half of the fiscal year. We now have multiple customers who have come back to buy their second, and in several cases their third, ALTA tubes. We expect ALTA750 revenue will continue to build as people become aware of the ALTA Tube, gain confidence in tube life, and are able to break away from pre-existing commitments with the OEM. Healthcare sales in the second quarter of fiscal 2019 were $2.5 million, up 7.6% from prior year sales of $2.3 million due to strong CT Tube sales and continued strong Equipment sales, partially offset by lower Replacement Part revenue. While sales of Replacement Parts were down overall in the quarter compared to prior year, we did experience our third consecutive quarter of double digit growth in our core Toshiba CT Replacement Parts sales, which has tracked to the introduction of our ALTA replacement tube. Gross margin as a percentage of net sales was 29.4% in the second quarter of fiscal 2018, as compared to 42.6% in the same period last year, due primarily to a mix of products that favored lower margin Equipment sales as well as unfavorable manufacturing variances associated CT Tube production earlier in the quarter. Our margin exiting the quarter already showed improvement in line with improved production yields. We added multiple P3 parts contracts to our portfolio in the second quarter. These new P3 agreements are recurring revenue contracts where Richardson has agreed to provide replacement parts, and in most cases replacement tubes, in exchange for a fixed monthly fee over a three year period. P3 contracts are attractive to our customers because they allow them to quickly see the value of the Richardson offering as compared to the OEM, and it allows them to budget operating expenses. It also helps overcome any potential resistance to purchasing an alternative CT tube. If the tube fails during the contract period, the replacement is on us not the customer. We are currently in negotiations with customers to cover hundreds of CT scanners under P3 agreements. We are also offering P3’s with installation provided by service companies we have trained. Installation can cover the life of the P3 contract or it can be shorter term depending on the needs of our customers. This option allows our Hospital and IDN customers to move more quickly away from the OEM and to choose between in house service, a third party service provider, or a combination of both. To be clear, we are not competing with our customers by providing service; we are bringing them service opportunities. We provide CT system training for the hospitals, IDNs and third party service organizations, as well as 24x7 technical support via phone. CT Tubes, led by sales of ALTA tubes, were up in the second quarter compared to last year. We are increasingly selling ALTA tubes instead of Certified Pre-Owned OEM tubes. We still see a limited market for Pre-Owned tubes and will continue to offer these as an option for customers who do not have the budget for an ALTA tube. We also continue to need the Pre-Owned tubes today for our growing business in Europe. We are working on obtaining CE approval required to sell our ALTA tubes throughout Europe and expect to receive approval in the fourth quarter of our fiscal year. We are also working on our next CT replacement tube. We are aiming to produce the first engineering prototype of this next tube model before the end of FY '19. At this point, we are not prepared to forecast what percentage of our ALTA tubes will be sold on a transactional basis versus a P3 agreement. It is up to the customer to determine which method—transactional purchase or full coverage—is best for them based on individual circumstances. Equipment sales were up strongly in the quarter compared to prior year. We see Equipment sales as strategic to our overall business, creating sockets we can sell Replacement Parts and Tubes into in the future. We sold our first pre-owned CT systems with ALTA tubes installed at a premium price in the second quarter and we expect this activity to continue. With this model we are able to enhance margins on pre-owned Equipment sales, and at the same time create a supply chain for Certified Pre-Owned CT tubes without having to harvest complete CT systems to get the tubes. This helps us with inventory management and cash flow. We remain excited about our strategy in Healthcare. We are playing a significant role in the development and sale of diagnostic imaging replacement parts with the goal to help lower the cost of Healthcare delivery on a global basis. In this regard, the interests of Richardson Electronics and our Hospital and Third Party Service partners are well aligned. Hospitals are under more pressure than ever before to reduce operating costs, and capital for new equipment purchases is limited. We have made significant investments to support our customers with these challenges. This includes the ALTA750 that we are stocking in strategic locations throughout the country to provide rapid delivery. We now look to our partners to leverage our solutions and grow their service presence in this space so that we can fund the next phases of Healthcare development. Replacement Parts, CT and X-ray tubes, Service Training, Refurbished Equipment, as well as Power Grid tubes, Coil Repairs and Cryogenic solutions for MRI systems, Richardson Healthcare has established excellent relationships with hospitals and independent service organizations on a global basis. Over the past several years, we have significantly strengthened our value proposition for healthcare providers looking to lower their costs and increase efficiency. The launch of our ALTA750 CT tube takes us to the next level. We remain open to additional acquisitions in this market with our primary interest in companies with models that we can expand internationally. We are also evaluating additional partnerships and organic investment in product line expansion in segments that we feel are underserved. I'll now turn the call over to Jens Ruppert, to discuss Canvys’ second quarter results.

Thanks, Pat, and good morning everyone. Canvys, which includes the engineering, manufacture and sale of custom displays to original equipment manufacturers in the industrial and medical markets, delivered strong performance with sales of $6.5 million during the second quarter of fiscal 2019, a decrease of 3.1% over the same period last year. On a year-to-date basis, sales are still nearly 10% above the first half of fiscal year 2018. The revenue decrease in the quarter was related to some one-time projects in FY18 that didn´t repeat this fiscal year. I am pleased to report that gross margin increased as a percentage of sales to 32.8% from 31.7% the same period last year. The year-over-year gross margin increase was related to a favorable product mix. Our backlog is still strong, and we are cautiously optimistic about continued strong customer demand throughout North America and Europe. Our backlog ships over 12-24 months and is impacted by customer call off orders that can vary quarter to quarter based on customer sales, regulatory issues, and other factors. During the quarter we received several new orders from both existing and new medical OEM customers. Applications include surgical navigation, a system that enables surgeons to precisely track the location of surgical instruments throughout a procedure; microsurgery, where our displays are connected to high-resolution cameras used on microscopes for highly delicate operations where precision is needed, and radiographic imaging, where our displays are connected to CT scanners that allow doctors to see inside your body. A CT scanner uses a combination of X-rays and a computer to create pictures of your organs, bones, and other tissues. In the non-medical space, we received a significant order for teleprompter, talent monitors and clocks used in the broadcast market for popular news stations around the world. We received additional orders for applications including human machine interfaces for high-speed, high-precision CNC milling machines; large size printing machines used to print billboards; and commercial CT scanners used to scan luggage in airports. CT scanners in such an application offer better threat detection and much faster passenger throughput. We also received orders for displays used for ROVs remotely operated vehicles exploring subsea oil fields. We are making progress with new customers and programs in the area of diode lasers, and robotic surgery. Robotic surgery, or better robotic-assisted surgery, is one of the most regulated areas in healthcare; there is a rigorous evaluation process required for market approvals and therefore product rollout can take a long time. We are experiencing some headwinds too. The lead times for Intel CPU´s used for our All-In-One offering increased from several weeks to 6 months. Intel delayed the introduction of their newest 10nm generation CPU and is unable to meet the additional demand for their current 14nm CPU. While we have secured some CPUs based on run rates and forecast, we anticipate the shortage will last through the first half of 2019. In spite of these challenges, considering all the new programs we are working on, I am optimistic that we will continue growing our business by adding new customers and programs. I will regularly review and adjust our business strategy with the goal of further improving the operating performance of the division. Maximizing cash flow is an ongoing priority. We will work closely with our partners to help us reduce inventory while being able to meet the demands of our customers. I will now turn the call back over to Ed.

Thank you, Gentlemen. It remains clear our strategic objectives are having a major impact on Richardson Electronics performance. There are challenges we must overcome, but the team is taking quick action as required. EDG is still growing as we find new opportunities and take market share. PMG revenues are increasing double digits, and we expect to continue this growth rate as 5G rolls out. Canvys is focused on winning new business and adding to its backlog. We are just gaining traction in Healthcare. It is a matter of proving to our customers that our ALTA750 CT tube is as good as or better than the OEM tube. Our P3 agreements help alleviate this concern by placing the risk on REL. We are also waiting for Toshiba scanners to come off OEM service contracts. Most contracts are one to three years. While this process is slower than we anticipated, it is clear that there is a high level of interest in alternative parts and service. Our training classes in Fort Mill, South Carolina and in the Netherlands are full. This is a good sign that both hospitals and third parties are preparing to service Toshiba equipment. In the interim, we will double our efforts to identify where Toshiba scanners are located and when they come off contract. As we like to say, the best is yet to come. Over the past quarter we attended two investor conferences: one in Dallas in November and a second in Los Angeles in December. The interest in Richardson Electronics was excellent, and we are scheduled to attend several more conferences throughout the year. Bob and the Finance team have done an excellent job repatriating cash from our foreign subsidiaries. We will continue to invest in our growth initiatives. In addition to these investments and our quarterly dividend payment, we are pleased to announce that our board of directors approved our share repurchase program. This program enables us to repurchase up to $9 million in common stock. At this point, we will be happy to answer a few questions.

[Operator Instructions] And we do have a couple of questions over the phone line. Caller, go ahead.

This is Eric. Okay. I didn't know whether I was on or not if something happened. So let me start off, Greg.

You're on.

Okay. So Greg, would it be possible for you to kind of summarize the -- perhaps the largest and maybe the second-largest driver of the slowing of the growth rate by over half, just in summary?

Yes. So within the quarter, the slowest growth was the semiconductor wafer fab market that's been slowing. We're getting a forecast that it will continue to slow down. However, I think as you and I talked about, Eric, the growth of the new technology partners completely subdues that and allows us to have close to double-digit growth. In fact, for the year, we're at double-digit growth of 13.4% even with the downturn in the semi fab market. So the biggest driver in terms of the sales number and the growth percent was the semi fab shipments.

Oh, okay. But that was still up, correct?

No, it was down in the quarter, semi fab shipments.

Okay, all right. So you're saying the actual revenue was down or the growth rate was down in the quarter?

The revenue was down in the quarter and growth rate, both growth rate and revenue.

Okay, I got you. So did the sort of spat that the developed world is having with Huawei and ZTE have any effect on you?

No. A lot of it is preproductions. Our book-to-bill in that business is up very high double digits, and our book-to-bill is 1.18. So people are continuing to build the prototype orders, and the protocols still being defined are still very active. And we booked orders in the quarter with Ericsson, Commscope and ZTE or like I said before, there's a handful of subcontractors that are building products for ZTE, and that's where we've been very successful. And that continued to grow, both in sales and bookings.

Okay. So you said the book to bill is 1.18. I believe in the last quarter, you quoted just over 1. Are we talking about the same thing here?

No, for the group. In terms of the two businesses, as you know, Eric, is 80% to 90% MROs. We have a book-to-bill of one. That's actually pretty good, but it's a much larger number. So the book-to-bill for the group is below one, slightly below one. But for the new technology partners or the PMG business unit, that was 1.18 with double-digit growth.

Got you, okay. This one's for Jens. So Jens, going -- listening to the last call, I wasn't expecting revenue to go down in your business, but I suppose it's kind of lumpy. Do you have a book-to-bill number that you could quote as of now?

Yes, I think the book-to-bill is below one right now. So we had a revenue decrease this quarter. However, the backlog is still higher than it was last year at that time. So we are optimistic the business will grow.

Okay. You mentioned also in the last quarter that the backlog was the highest it's been since you've been there. Were there cancellations within that backlog in the quarter?

No, no, we did not have any cancellations. Absolutely not.

Okay. Pushouts.

Yes. It's always in -- my system is really [indiscernible] business product that they're using for certifications and stuff like that. So sometimes you have pushouts. Or that ordering patterns from our customers don't order the same amount of systems every time here. Product deals, they are not according to my calendar, yes. So we have some pushouts absolutely, Eric.

Okay. So would you characterize that was the major problem in the quarter?

Yes, yes, absolutely. And compared to last year, we just had a tough quarter. I don't know what to say, yes.

Are you saying this was a tough quarter compared to last, obviously.

And we had a tough quarter. Again, the backlog, it's really [indiscernible] success. So I still stick to what I said last quarter, that we will see growth year-over-year. And on the bottom line, we're doing well. So it's a good business.

Okay. Well, just to drill down a little bit, were these pushouts -- did these pushouts happen in the late weeks of the quarter? Or was it fairly steady throughout the quarter?

I think it's fairly steady. We have a high diversity on customers. So several customers just pushed out their projects, and others are ordering aspects. So it's really -- it's very hard to predict for us. We have very good stock situations with customers. Meat products, we are able to ship worldwide. So it's not only related to the last weeks.

Okay, all right. Last one for Ed or Bob or Wendy. Can you give us an idea of when you're open to be in there, to be buying back stock? Are you open right away?

Hi Eric, it's Bob Ben. No, the board just authorized this buyback program, again, as I stated, up to $9 million on Tuesday. So we have put the paperwork in place, and it'll take us a little bit of time. So give us another week on that or so.

Okay. Moving on to the next caller, we have Mark.

Mark Zinski here. First question is just for Bob in terms of that legal expense for the quarter. Is that kind of a one-off? Or is there any kind of trend going on there?

I would say that most of that is a one-off. I mean, from time to time, legal goes up and down. But I would say most of this quarter was a one-off, which is why I did the comparison that excluded it from some -- from last year and how it would have impacted.

Okay. And then I think last quarter, you had guided for about free cash flow usage of about $4 million for the year. Are you still kind of -- are you comfortable with that number still?

I think that's close. It might be a little bit higher than that. I mean, when you look at our free cash flow, it was minus $4.9 million in the first half of the year. But we are taking some actions on our CapEx to further reduce that. So I would say $4 million to $4.5 million in the second half would be -- negative would be more in line

Okay, great. And then, Greg, on the 5G, could you provide any color as to what you're seeing in China versus the U.S. in terms of adoption and growth rates there?

Yes. It seems that China's ahead of putting their 5G or their 5G protocol infrastructure in place ahead of North America and Europe. That's been -- for a while, there was a little bit of a slowdown. We thought it'd be more active by beginning of 2019, but I think the second half of 2019, we're going to start seeing some bigger numbers, and we have some very large design wins there. So we're expecting a good 2019 at that. They're ahead of North America in terms of getting the protocols set, getting the products out there. It's a little bit different. I think China has stated many years ago when they put in their 4G, they were going to be a technology country, not a plastic toy company -- country. And they don't worry about the number of subscribers. It's funded by the government. They're going to put that infrastructure in, whereas in North America, the subscribers have to kind of pull -- the mobile technology can ask to pull the infrastructure and the protocol in place.

Okay. And are you seeing similar sort of uptake patterns or growth rates like you did with the 4G phenomenon

Yes. And if you just look at the whole infrastructure, there's other parts of that, I'll say, like the SATCOM market. I mean, people wanting all this data and video and everything even in remote locations. So now the SATCOM market is really picking up, and that's putting in satellite communication -- to give the same capability that you would if you had a very expensive base station like pico/microcell in the city in these remote areas. So it is getting traction. It's going to be bigger than 4G because really, 3G and 4G were more upgrades than a rollout. And 5G is going to be a complete rollout: different antennas, different pico/microcells, different protocol. So the end result will be much bigger. The timing of it, that's just something we've -- as you said before, Mark, I've been involved in 1G to 2G. I would have crossed -- and forecasting that, I've never been able to do as well as you'd like. But it's coming.

Okay. And in the expense scene, is there any discernible pullback in investment spending due to uncertainty around the U.S.-China trade agreement.

No, we haven't seen it at all. Mark, we haven't seen it at all.

And then my last question is just for Jens. In terms of Canvys, is that -- the revenue decline more project and lumpiness related? Or are you seeing real weakness, let's say, in Europe, for instance?

I think I said it, so it's project related. I don't see a weakness overall in the business. Of course, the currency, it's a little under pressure in Europe, so our European sales is a little down because of that. However, we have a very strong performance in North America currently. And also in Europe, we are working a lot of new programs, new customers. So again, it's not -- I don't see a trend downward just because the quarter was below the last quarter. Absolutely not.

Okay. Moving on to the next caller, Howard Brous.

This is Howard. I want to get to -- I have a follow-up question on tariffs with China. Are you experiencing a delay in receiving parts or a shortage of parts as a result of the problems with U.S. and China?

This is Greg. On the semiconductor side, no, we're not. Lead times have gone up in that industry, However, it's based on demand. Really, the tariff issue, both product coming from China to the U.S. and then vice versa, is really just more of an administrative issue for us. We haven't lost any customers or any business or we haven't seen any slowdown in business because of the tariffs. It's just mainly an administrative issue. And this team, because of our experience being a global company for many, many years, has done a great job in managing that and keeping our profits where they should be.

All right, fair enough. And I guess this question's for Ben. When should we expect in the following year free cash flow -- positive free cash flow? [Audio ends abruptly]