Good day, ladies and gentlemen, and welcome to the FY '18 fourth quarter earnings call. At this time, I would like to turn the call over to your host for today, Ed Richardson. Please proceed..

Good morning, and welcome to Richardson Electronics' Conference Call for the Fourth Quarter of Fiscal Year 2018.

Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & 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'll be making forward-looking statements and they're 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. I'm pleased to announce that we had continued growth in revenue and profitability in the fourth quarter. Revenue grew 21.8% in the quarter to $45.5 million. For the year, sales were $163.2 million at 19.2% growth over the prior year.

This is the highest quarterly and annual revenues since we sold RFPD in March 2011. During our fourth quarter, we continued to benefit from a strong economy and upside from our growth initiatives, particularly in PMT. We've been investing in the Power & Microwave Group and revenues are growing, supported by the rollout of 5G.

Our core EDT business, including our manufacturing group, also performed well. Tube sales were strong and we benefited from high growth in the semiconductor wafer fab equipment market.

At the end of the quarter, our Healthcare Group announced the launch of our new CT tube, the ALTA750, which is a replacement for the Toshiba Cannon Medical Systems CXB750D. Up until now, there's been no third-party tube available to replace the CXB750D. This was a huge milestone for the company.

Richardson Electronics is now part of a very elite group of global companies with the engineering and manufacturing expertise capable of producing new CT tubes. Canvys completed its year with another nice quarter.

The display team in Boston and southern Germany have done an excellent job stabilizing the business and finding new opportunities for future growth. Profits improved every quarter during the fiscal year, thanks again to the hard work and sacrifices of the entire Richardson Electronics team.

I'll now turn the call over to Bob Ben to share highlights of the fourth quarter and full year financials. Then Greg, Pat, Jens will provide more details on business unit performance..

approximately $1.9 million related to our investments in our healthcare strategy; $1.0 million into our IT system; $0.6 million to our manufacturing business; and, another $1.7 million for facilities projects. Lastly, we paid $0.8 million in dividends in the fourth quarter and [indiscernible].

Now I will turn the call over to Greg who will discuss the results for our Power and Microwave Technologies group.

Greg?.

Thank you, Bob, and good morning, everyone. In the fourth quarter of FY18, PMT sales were $37.2 million versus $28.8 million in Q4 of FY17. Based on our demand creation, strong bookings in Q3, new design wins, and our unique business model, our business grew 29.1% over prior year.

In addition, our gross margin improved to 34.3% compared to 33.2% in Q4 of last year. Our improvement in performance is driven by sales growth within our core electronic device business including engineered solutions as well as strong growth from our new technology partners.

We’re taking advantage of long-term customer relationships, while our customer count continues to grow with our expanded product range. Favorable market conditions in the industrial, semi fab, wireless infrastructure, and power energy markets are leading the way for this growth.

We are also implementing numerous internal programs to improve margins, efficiency, and inventory turns while taking advantage of our global infrastructure. These actions continued to contribute to the company’s overall profit improvement.

We continue to experience market share gains and revenue growth for both products in the Power & Microwave group as well as our core electronic device group. This growth is being supported by key technology partners such as Qorvo, CPI, MACOM, Anokiwave, USCi and Cornell Dubilier and Thales.

More specifically, key markets and applications include 5G steerable beam antennas, front end modules, millimeter-wave test equipment, semi fabrication, power management and industrial heating.

Sales in our electronic devices group including power grid tubes and accessories as well as engineered solutions manufacturing in LaFox were strong in the quarter. Sales into the semiconductor wafer fab equipment market grew again during the quarter and industrial markets in general are performing well.

This growth is driving demand for both engineered solutions and components. We are excited about the 5G market as it develops throughout the world. We have added a number of technology partners, who are leaders in the 5G technologies. We’re starting to see preproduction orders to support this infrastructure rollout.

Our list of design wins at major telecom OEMs throughout the world have continued to grow in the fourth quarter and will certainly grow consistently in the coming quarters. We’re also excited about continued strong booking trends from our new technology partners and applications outside of 5G.

In fact design wins on a global basis and studying this growth in design wins, it is clear our team continues to do a very good job identifying key suppliers, niche markets, and applications. Through our team of experienced technical resources, we offer the top design resources in the field to support this growth.

We are adding many new customers each quarter and 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 in global go-to-market strategy that is unique to the RF and power industries.

We can support this back through our revenue gains and our growing list of customers every quarter. And with our target list of electronic devices and disruptive technology partners who chose Richardson Electronics to bring their products to market.

Our world-leading position in the manufacturing and distribution of electronic devices supports legacy equipment as well as new equipment where solid state cannot replace tubes.

These same customers also need solid state technology through our key technology partners as well as in-house manufacturing, global field design engineers, and infrastructure, we have proven our ability to support all of our customers' RF and power needs throughout the world. We do have some headwinds going into FY19.

The semi fab market is showing some slowdown and we’re working closely with our customers to manage this situation. Tariffs on products made in China and sold in the US may also have some effects in the quarter.

However, through the combination of new products and new customers and our unique global model, we are committed to finding solutions to continue our improved profitability with top line growth each quarter. And with that, I’ll turn it over to Pat Fitzgerald and Richardson Healthcare..

Thank you, Greg, and good morning, everyone. I’m happy to report that we’ve completed clinical testing of our newly manufactured CT tube, the ALTA750 during the fourth quarter. The beta test tubes performed well on hospital-based CT scanners, supporting patient loads of up to 50 patients per day.

As a result, we were able to conduct a final design review and released the ALTA750 for sale to customers in late May. We shipped our first new tubes for revenue in June with the first order coming within days of the official product launch.

We expect ALTA750 revenue will build throughout the year as people become aware of the new tube and are able to break away from preexisting commitments with the OEMs.

Healthcare sales in the fourth quarter of fiscal 2018 were $1.6 million, down 43.1% from prior year sales of $2.9 million due primarily to the sale of our PACS display group in late FY17.

On a comparable basis, sales in the quarter were down 16.6% compared to Q4 last year due primarily to lower sales of replacement parts and CT tubes, offset partly by higher sales of equipment.

Gross margin as a percentage of net sales increased to 34.9% in the fourth quarter of fiscal 2018 as compared to 30.8% in the same period last year, due primarily to a mix of products that favored higher margin parts and tubes.

On a full year basis, sales were $8.2 million, down 32% from $12.1 million in fiscal year 2017 due to the sale of our PACS display business. On a comparable basis, sales for the full year were up 2.1%. The growth is a result of increased sales of equipment, CT tubes and service training offset partly by lower sales of replacement parts.

Gross margin increased to 41.5% versus 39.2% in the prior year. While sales of replacement parts were down in the quarter and for the full year, the number of replacement parts transactions increased in fiscal year ’18.

We attribute the decline to price erosion driven by smaller parts competitors combined with service entities choosing to replace parts at a lower level. For example, some servicers chose to replace a mother board where in the past they may have replaced the whole computer.

Sales of CT tubes were down in the quarter due to availability of tubes but were up for the full year. Equipment sales were up in the quarter and for the full fiscal year.

We believe that creating a sustainable supply of CT tubes with our new ALTA750 tube will ultimately lead to more rapid sales growth in all areas of business including CT tubes and replacement parts as alternative service providers are able to take system maintenance away from the OEM.

Our equipment sales will also grow as customers will be able to buy refurbished CT scanners from us with confidence now that there is a third-party CT tube solution on the market. We continued to see strong demand for service training.

We trained more than twice the number of engineers on how to maintain CT scanners in fiscal 2018 than we did last year. The increase in service training supports the assumption that more hospitals and service companies are interested in servicing CT equipment as a result of our new CT tube.

We are investing now in training programs for additional brands of CT scanners and also in newer platforms such as the Toshiba Cannon Prime CT platform to support future growth. Sales in Europe and Latin America were both up for the year and we expect this trend to continue. We opened our European parts and training center in Amsterdam in 2016.

We have seen growth in demand for diagnostic imaging replacement parts and CT service training as European partners develop their service capabilities, leveraging our local footprint and inventory. We estimate that as much as 90% of the European market is still covered by the OEM. So we have ample room for growth.

We support the Latin American market from our US operations. I am pleased to report we signed our first P3 Protect contract in the quarter and have a very full sales funnel of these opportunities.

We expect P3 Protect agreements, which generate recurring revenue for healthcare, will increase over time and be a growth driver for both replacement parts and CT tubes. These contracts provide hospitals and third-party service providers with parts and tubes in exchange for a fixed monthly fee, typically for a three-year period.

The availability of our new tubes, together with an industry-leading DOA rate of less than 1% on replacement parts and 24/7 trained technical support gives us strong advantages as compared to other third-party support solutions. Our strategy in healthcare has not changed.

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 interest of Richardson Electronics and our hospital and third-party service partners are well aligned.

We have made significant investments to support our customers. This includes the ALTA750 that we're stocking in strategic locations throughout the country to support rapid shipment. 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.

We are fortunate to have an outstanding team of experienced CT tube engineers and technicians and we have sufficient capacity to build up to 1,000 tubes per year. As we focus on the launch of the ALTA750, we will also ramp up the research and development efforts for our next tubes.

With replacement parts in CT and X-ray tubes, service training, refurbished equipment as well as power grid tubes, core 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 new 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 fourth 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 continued its strong performance with sales of $6.6 million during the fourth quarter of fiscal 2018, an increase of 17.2% over the same period last year.

We also had a very strong order book performance with a quarterly book to build of 1.3. Our improvement in performance is primarily driven by an increase in customer demand and continued additions of new customers and programs globally.

I'm also pleased to report that gross margin increased as a percentage of sales to 32.7% from 27.1% the same period last year. Year-over-year gross margin increase was related to a favorable product mix and foreign currency effects.

Our backlog increased quarter over quarter and we are excited about the continued strong customer demand through North America and Europe, driven by a healthy economy. During the quarter, we received several new orders from existing customers as well as new customers in the medical space.

Applications include human-machine interfaces for digital radiography and robotic surgery. We won a new contract for custom touch screens used to control medical devices in integrated operating rooms to simplify and streamline the OR. This monitor will be fully compliant to the newest medical regulations.

We also won programs for displays used in dental treatment centers to view intraoral camera images, digital radiography, patient education over TV, application systems that enable surgeons to precisely track the location of surgical instruments throughout a procedure and patient monitoring systems that have enhanced patient care and improved clinical performance.

While medical remains strong, the industrial and transportation markets are also experiencing growth. We received additional orders in non-medical areas, applications including human-machine interfaces for wood processing machines, tailored prompt displays and telemonitors used in the [indiscernible] market.

We also received the first mass production order for a new all-in-one product for the transportation space that we have been working on for several years.

These onboard passenger information systems are installed in France to provide basic and advanced information to passengers such as the current location of the trains, next stops with expected arrival times and connections.

The first shipments are scheduled within the first half of fiscal year '19 and we are expecting more throughout the coming years as new trains are purchased and older trains are reconditioned. For the fiscal year 2018, net sales for Canvys increased 29.9% to $26.7 million from $20.5 million during fiscal 2017.

Sales in North America and Europe were up equally. In Europe we had reevaluation of the Euro that helped as well. Gross margin as a percentage of net sales increased to 31.5% during fiscal 2018 as compared to 28.0% during fiscal 2017, mainly due to product mix, ongoing cost improvement programs, and foreign currency effect.

These growth applications where we deliver innovation that matters are surgical navigation, radio therapy, patient monitoring, dental equipment, and tailor prompt antenna monitors.

The division did a good job controlling costs and continued to work closely with our Asian partners to deliver the highest quality solutions at competitive prices for our customers.

From the variety of customers and applications and the value of orders from existing as well as new customers, it is certainly clear we have our customers' outstanding products and services. With an increased backlog of $6 million compared to last year, we are starting the new fiscal year strong.

In fiscal year '19, we keep the momentum and I will continue to refuel and adjust our business strategy with a goal of improving the operating performance of the division. Fluctuations in currency may affect both revenue and margin in fiscal year '19. There has been lots of discussions on the impact of China tariffs.

At this point, we do not anticipate any impact on our display business. Maximizing cash flow is an ongoing priority. We will continue to work 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, and congratulations to you and your teams for returning Richardson Electronics to profitability in FY '18. As we look to the future, our objective is to capitalize on the investments we've made in healthcare and in the Power & Microwave Group and by so doing, achieve continued growth in revenue and profitability.

Our sales in healthcare will build gradually as Toshiba CT scanners come off OEM service contracts. The sales team is actively engaging with hospitals and service providers and showing them how our solutions can help them increase uptime and lower the cost of healthcare.

The availability of our new CT tubes and replacement parts gives them more options than ever. With our P3 agreements, our customers can choose what level of coverage they want. We can provide all of the parts and the CT tubes at a fixed monthly cost or we can sell them parts and tubes as they need them.

As more equipment comes off contract, our parts sales will increase proportionately. We're not sitting idle while this is happening. We're building tubes for stock and are strategically locating them around the country for quick availability. We're also working to get the tube registered in other countries.

We've already started working on the development of our next-generation CT tubes. While speed is a priority, we know from experience we cannot rush this process. We currently have sufficient capacity to build up to 1,000 tubes per year, but we have room to grow without significant capital requirements.

PMT will benefit from the rollout of 5G and our growing list of specialized technology suppliers. Our team's done an excellent job showing our partners our ability to create demand. Recently reported softness in the semiconductor wafer fab equipment market will likely temper some of this growth over the next couple of quarters.

Our relationships with our customers in this market segment are strong and as their business grows, so will ours. We're being reassured that the slowdown is temporary and that the sales growth will continue in calendar year 2019, although visibility is somewhat limited. Our display business should remain stable and on par with the fourth quarter.

One new factor we're contending with is the recent implementation of tariffs on certain types of products sourced in China and sold to customers located in the United States. It's difficult for us to assess the total financial impact. For the most part, it will be administrative challenge. We already stock inventory outside the US.

So 60% of our sales are with international customers. We've recently filed exclusion requests for some of our products where the only source of supply is China. We're a tube company and very few manufacturers are investing in tube production.

Over the last 5 years, net sales for PMT, including our core tube business, have increased 18.3% and we've delivered stable gross margin over this period. In the most recent year, Canvys also produced year-over-year growth and contributed to the overall profitability. In addition, we've seen increases from our growth businesses in PMT and healthcare.

We'll continue to exercise caution in spending and look for ways to bring costs down as a percent of sales. We'll spend more in areas such as merit and healthcare expense, where it's important to take care of our employees. We'll also continue to support our growth initiatives, as they're critical for long-term increased profitability.

We're committed to putting as much money as possible from incremental revenue gains to the bottom line. Our objective is to do more with what we have while taking advantage of opportunities as they arrive. We remain open to acquisitions but currently there's nothing imminent. At this point, we'd be happy to answer a few questions..

[Operator Instructions]. And the first question comes from the line of Mark Zinski..

I guess I'll start off with the prognosis for CT tube sales in the next fiscal year.

Just to try to get a little context, do you have an estimate as to how many of those Cannon tubes are currently in use?.

Well, we currently -- we believe that the number of scanners that use this particular tube type and there are different variations of this tube type, but we believe it's about 7,000 globally..

Okay, 7,000 globally. And do you have certification to address all of those scanners presently or are there some geographical certifications you're waiting….

No, so currently we're able to address the US market freely, because we have US FDA approval and any market globally that where the US FDA is all that's required and there are quite a few where registration is required but it's fairly straightforward.

There are other markets like the EU and China and Brazil that require a very specific process, which we've started. So we're really looking primarily to the US market this year with international eventually, probably going to be more than the US market should be maybe a 60/40 or even greater split over time. But initially it'd be the US market..

Okay, and can you disclose the pricing on a typical tube?.

Yes, so we've launched between 75,000 and 95,000 depending on their relationship with us and their volume..

Okay, great.

Over to Greg on the semiconductor headwinds, are -- so those, are the headwinds mostly related to uncertainty about the tariffs or is there an industrial supply -- is there a supply issue or anything of that nature?.

No, I think it's similar to any major market growth, whether it's the semiconductor wafer fab market or infrastructure or etc. There's always an adjustment period because everyone's going -- getting backlogs. Lead times on components have gone through the roof so there was a large backlog out there so they could make sure they get their parts.

So what we're being told is it's going to be a slowdown, probably high single digits in our fiscal Q1, Q2. But they have very little visibility for the second half of -- or the first half of the calendar year FY '19. Some of it has to do with the rollout, which kind of correlates with our other business of the handset business for 5G etc.

They've kind of slowed down the build out of wafer fabs. So it's -- what we're being told is partly an adjustment period. There's still a large piece of business for us. We still have a good backlog that we'll be shipping the first 2 quarters of this fiscal year.

So visibility is partly an adjustment period and I think it's just a slowdown in the build out of all these wafer fabs to support this global need for handset business going forward..

Okay, but you're seeing -- you saw 5G related revenue this quarter?.

Yes. 5G is still strong for us. You know we saw high double digit growth in bookings and billings in the new technologies group. That includes a hold on the China business, which was a large part of our design registrations and our design wins. So we're continuing to see 5G infrastructure.

We booked a couple large orders with Rohde & Schwarz and Ericsson in Europe. So yes, it's continuing to grow high double digits..

Okay.

And geographically speaking, like Europe, can you comment at all as to what the market demand is like over there and is there any increased uncertainty about the impact of the tariffs in general?.

Well, the tariffs for our products, we haven't obviously done a complete review on processes used in place, our products built in China and sold in the US. So the effect on European opportunities and customers right now is pretty normal..

Okay. Okay and then let's see, Ed, I'm going to try to pin you down on some general guidance for next fiscal year, if I may.

Do you expect to be profitable?.

Absolutely..

Okay.

And do you expect any -- so you expect some top line growth? You're just not sure with these various headwinds as to the extent of it?.

Yes, we have thanks to some of the new product lines that Greg has brought on board and Canvys, we've got a lot of backlog that's already in place.

So at least for the first 6 months and even longer, Jens got a few of his products that are what, Jens? Shipped out over 18 months?.

18 months, yes..

So that backlog really makes us very secure for 6 to 9 months anyway..

Okay and then lastly, the R&D spend for Richardson Healthcare, do you expect that to continue?.

Yes, I think, we didn't spend a great deal last year in R&D. It depends on how you look at it. What we categorize as R&D and I'd say it's about flat for next year. As I mentioned and Pat mentioned as well, we're looking at the next generation of CT tubes we're going to develop.

So that's going to cost some money, but you know the original R&D that went in place has had a lot to do with equipment and building the infrastructure to build the tubes, which is now in place. And as we've mentioned, we've got capacity to build 1,000 tubes a year..

Okay and then just last question for Pat, what -- if you could describe at all kind of the, you know how the sales cycle would work for the CT tubes? Do the customers, prospective customers want to do a small order and test them out a little bit? And then, if they're successful then they'll increase the next order substantially or how do you envision that potentially developing?.

Sure, sure. So we see some of that already so there's some people limited amount who were off of OEM contract already where orders have been placed and they're eager to get an experienced base to widen that.

And you see the vast majority of our sales process though is working with people who have scanners that are under one form of OEM contract or another. And of course most of them have known for some time that it's coming, have maybe begun to take steps, but now that the tube is out, they will begin to then not renew contracts.

So we see it as a little bit of immediate demand because there's already a certain number of scanners that aren't being -- you know don't have commitments to the OEM and then what happens is over time, over the next really 12 to 24 months you start to see more and more where customers don't renew the contract and choose to take it on themselves..

Okay.

Ed, just a quick refresher, your tubes are on average at -- was it like a 20% to 30% discount to the OEM replacement tube?.

Yes, I would say that's a fair range. It depends what they have as an arrangement. It's a pretty steep discount to the OEM list price but that's meant more as a reference.

If a customer has a, let's say a risk pool, where they're putting in significant dollars, they're able to buy the tubes at a greater discount and that's really what we see as more the actual price. And we're below and we need to be below that OEM price because we've got a new product..

The next question comes from the line of Eric Landry..

Greg, is there an update on ZTE? Have they been able to start ordering yet or is that still on hold because I know you mentioned an order from them in the last call before the dust up?.

Yes, the restriction was lifted July 13 and typical Richardson aggressive demand creation fashion, we were back in ZTE on July 14. And we're back with them and including all their subcontractors, supporting them. So it's up and running. So in essence, we thought this summer, as you and I had talked about on the call that their rollout would happen.

So everything's been kind of pushed out a quarter. I guess the good news is that they're still up high double digits in bookings and billings throughout the ZTE business for the infrastructure business in China being part of that. So we're looking for a nice rollout here over the next 3 to 4 months..

All right, so there's been some interpreting correctly, there has not been any type of a strategy on the Chinese part to sort of slow roll any type of orders here just to sort of counteract what our President has been saying.

You have not felt that? Is that accurate?.

I'm sorry, Eric, a slow roll on the parts that are made in China that are sold here on the tariffs?.

No, no, no I'm just saying, is it possible that China is saying, well we're just not going to order a bunch of stuff from the states while we're sort of negotiating with President Trump. And I'm wondering if that has been in evident in your order book? I'm just thinking out loud..

Yes, I know exactly what you're saying and I'm sure that's going to happen on some products. But the products we deal with, we have such a huge advantage technology wise against what they build or in our case what people can build against [indiscernible] that they kind of have no choice.

I mean for them to be successful in building their equipment, they have to use the best technology and that's what we have. So we have not seen any sort of, actually the opposite, at least for a push back for us because it's an American company..

Long story short, they need you?.

Yes, they need us. They need our technology..

Okay, great. So 5G, I think you mentioned that before that the 3G and the 4G rollouts were both very lucrative for the business that eventually got sold in 2011. Since then, there's been significant consolidation at least over here.

Does that affect the dynamics of the sort of the build out that there's significantly fewer players right now spending the CapEx or do you expect the same type of dynamic this time around as you enjoyed several years ago with the 3G and 4G rollouts?.

Yes, Eric, I was just looking at this, this morning. This is my fifth rollout of infrastructure from a seller market. I interned at Motorola in the late 80's. 1G rollout, 2G rollout in 2000 and then, of course, 3G in 2010 and then now 4G upgrades and 5G.

And what I've seen differently with the 4G upgrades and the 5G is with the consolidation, there are more customers because what these consolidations have done, you have these big conglomerates now on bay stations but then you have a whole group of customers that are building subsystems that buy our parts that support that chain of product.

And so they need our talents, our global field RF engineers and our product types and our technology more than ever. So there's more customers that are going to need our support because they're not going to get the attention of the OEM who's going to be focusing on the large consolidated groups.

So there's more customers that are going to need our talents with 5G rollout than there was with 4 cause everyone was spread out..

Okay.

And it's accurate to say that your competitors are still not sort of interested in these couple hundred thousand dollar orders or accounts or what have you?.

Right, in terms of our competitors being the larger industrial distributors, if they're involved at all in this type of market, it's in the cloud, it's in internet of things and it's -- they won't send a field sales engineer if they have any that are RF capable into these, what they consider, smaller $100,000, $50,000 accounts, which is exactly [indiscernible]..

Did you pick up any new business from your largest wafer fab customer in the quarter or the past quarter?.

Any new business? Well, we've quoted a number of new opportunities. We're now a design house and we're seeing more and more opportunities. Wasn't a large amount of bookings of new business but right now we've just been focusing on taking care of them on this huge backlog so they can continue to get market share and increase their business with us.

But we are quoting more new business than we have in the past..

Okay, so is it possible that some of this new business may take up what might amount to a bit of a slowdown here in the next 4 quarters, might offset it?.

I don't know about the next four quarters, but it could subsidize it going forward. I don't know the timing of it right now, Eric, but definitely will subsidize the downturn in the existing legacy business, sure..

Okay, great.

Hey, Jens, I think you mentioned -- did you mention a mass production order or a mass transit order or was it a mass production order in mass transit?.

Yes, thanks for your question, Eric. It's a mass production order. You know we finally ramped it up and they placed mass production orders, yes..

Okay, so..

It's both..

Okay, good. So I did have it right. All right, so I don't believe I've heard you mention mass production.

Would that indicate that that is sort of a higher volume than what you've typically been doing over the past couple of quarters?.

Yes, in the transportation space definitely. And again that's just market research, right, so it's just new for us because we recently I think last year, we launched the all-in-one product and we have noticed several different product offerings on the higher end and the lower end. And we're attracting this market more aggressively right now, so yes..

All right, I guess I got a little spoiled over the past couple quarters and I noticed this is the first one in several quarters where you haven't grown sequentially actually.

Was there, by chance, anything that was held over into the current quarter from last quarter or are we should we look forward to a $6.5 million run rate than the $7.5 million of last quarter?.

Yes, address the first of your question so there wasn't anything we hold up to ship and backlog actually increased. So it's just the nature of my business. We have high loads of shipments going out and there's maybe a month or two you ship nothing for this specific customer. So it's just a matter of timing.

So we expecting growth, as I've said before, for the whole company and all business units [indiscernible]..

What was the last part, Jens? I didn't catch the last part.

You're expecting growth in what?.

We are expecting growth in the whole company for all 3 business units and Canvys is a part of it. So I expect that revenue will continue to grow for Canvys as it did over the last years..

Pat, you mentioned that you've sold your first tube in June and you signed your first P3 protect contract and I assume that was sort of all tied together.

Has the order -- have the order patterns in sort of your first, what is it first 6 or 7 weeks of business been what you thought?.

Yes, I think we're -- everything is moving as we would expect at this point. I think given how many are still under some kind of a commitment, I expect it's going to build probably every quarter as we go. But I would say it's within expectations..

Okay. I'm going to try and pin you and Ed and Wendy down here a little bit.

If this call next year, we're talking about tube sales in I don't know in the $7 million to $8 million range, would that be about what you'd expect or would that be -- would you be thrilled with that? Or is there anything you can say regarding sort of that level?.

You're specifically talking about CT tubes?.

Yes, just the 750 ALTA..

Yes, I think that's high. You know what we have and Pat has alluded to it, you know all these scanners we think probably 70%, 80% of them are under service contracts with Toshiba because the tubes have not been available from anyone else.

And if you don't have a service contract, you get to pay retail price, which is double what we sell them for today. So no one does that. You know they keep their equipment under contract with Toshiba. Now we've been talking about releasing this tube for quite a while, as you know, but at the same time most of these customers say, well that's nice.

Prove it to us. So maybe, most of the contracts they start out being three-year contracts. And it may be now that some of them have let those contracts go down to one year, because they think a tube is coming out. But it's going to take a while for the equipment to come off of contract.

And our job now is to spread the word and get everybody comfortable that we've got a good quality product and it's available and so forth so they will discontinue these contracts. But it's going to be a slow ramp and we know that..

Pat, you mentioned something about your partners.

Could you just go into a little more detail how that relationship works?.

Sure. So we have a lot of service partners that we work with, different -- everything from OEM multivendor to independent service, asset managers, etc. And I think they've all been excited about the prospect of having this tube and have been asking for it. Then they're also wondering what we're going to do next.

So part of our strategy is to remind them that we need their support on the launch of this tube. So they all have varying degrees of install base of systems that can use this tube, but they have different service strategy.

So some of those partners are already servicing a good number of these scanners, even in advance of the tube and others have so far chosen to commit most of it back and the subcontract back to the OEMs. So we now need them to turn around and make good on what they've said they're going to do in order for us to fund the future.

So that's sort of the message I'd take is I'd put my arm around our partners and remind them now that we've got the tube, we need them to begin servicing progressively more and more of these scanners..

So is that -- are you looking for some sort of a contractual obligation or is this sort of just a handshake thing where they say, yes, you build that tube, we'll buy more of them?.

Yes, no, they've encouraged us. I don't know that any of them have, that we've contracted in advance of having the tube for it. But a lot of them I expect will come under some kind of a P3 whether it's a P3 Advantage or a P3 Protect. But it's more just a spirit that they're all interested in, hey that's great.

What's coming next? And we tell them we need you to help us be successful with this product so we can fund what's next..

Real quick, last one, how long do you think it will be to get certified in China, the EU and Brazil?.

So I think EU and Brazil are both phase that can be accomplished within the scope of this fiscal year, although EU is -- they've had a very strong demand of people that are trying to get certified under the regulations that are sunsetting this year. We still expect that'll happen within the course of this fiscal -- China will likely take longer.

My experience is that from the beginning through registration can take probably typical is 18 months. And it can be shorter. It can also be longer..

Any reason you weren't working on this earlier?.

You can't….

Do you have to have?.

You can't begin until you're in production of the final product. So we had to get our release for production and then we could begin registration for China..

The next question comes from the line of Howard Boris [ph]..

Most of my questions have been asked.

But just on a global basis, looking prior to the first sale of the CT tube, as you see it today, are you comfortable with your expectations and are they being fulfilled?.

Yes, we think we're right on line. We knew it would, as I mentioned before, it would be a slow ramp and there's a lot enthusiasm, a lot of excitement out there, but the first thing the customers will tell you, well as soon as we get these off of contract, we'll buy from you.

But right now, we've got 6 months to go or we've got 1 year to go or some of them have got 2.5 years to go. You know a lot of those contracts are originally three-year contracts. So it's just working through that period of time and I'm sure in all fairness to the customers, they're sitting there saying okay, you released it for sale.

We want to see if you're going to get two-year life, three-year life, you know -- some people that are more conservative than others. So we knew it was going to be a slow ramp and that gives us time.

We're building tubes for stock right now and we've set up as Pat mentioned, we've set up locations around the country so that we can have emergency stock available in one day or less for customers. So we're doing that. And we started to work on the next generation of CT tubes cause we know it takes more than one model to be a successful company..

So when I look at your inventory, how many are you building in anticipation? Can I get a sort of a general or specific answer to that one?.

Well, right now we're building all we can. That doesn't mean we're working 3 shifts but we're no limitation. We're just going ahead and building again. We're just happy to be able to have stock. You know our history. We've been working away at this for 4 years here shortly in August..

Two more questions.

One, can you better quantify the tariffs? Are you passing them on to your clients? Are you absorbing? What basically is the scene here?.

Well, we're doing a little of both. But for the most part, we're passing it along. And the difficulty you have and I really give the team credit, we got notice like the first of July. And that tariff was implemented on the sixth. And like we were set to go on the sixth. We were adding it to invoices on the sixth. And that is an incredible effort.

We had 1,000 part numbers that were affected by this tariff, which is ridiculous because a third of those 1,000 part numbers are only made in China. They haven't been made in the United States for 25 years. So who are we protecting? But anyway, we are -- we're passing the majority of it through.

But the difficulty, of course, is the tariff has to do with cost. So it isn't a percentage, a fixed percentage of our sale price. It's a varied percentage on every invoice because every product has a different cost and a different margin. So it's more an administrative hassle than anything else. The answer is we're passing the majority of it through..

So when I look at the last year, year over year and Q over Q in terms of gross margins increasing and S&GA, if you will, decreasing, can I look for this fiscal year to be similar?.

Well, yes. You know the question is, how are we going to match the kinds of percentage increases that we did the last year? And I can't tell you that we're going to do that. We'd love to but a lot of it has to do with the semi wafer fab business and things like that that are really not within our control..

I wasn't asking for the -- I'm sorry, I wasn't asking for the rate, but in other words can one assume on an annual basis that your gross margins should increase this year as opposed to last year?.

I think they'll be probably flat. You know if we really get traction on selling the tubes that will help a lot because if we sell more tubes, we're going to sell more medical parts and those are high margin items. But other than that, I would say the margins are going to probably be flat..

There are no further questions in queue. I would now like to turn the call back over to Ed Richardson..

Okay. Well, thank you again for joining us and for your ongoing interest in Richardson Electronics. You're welcome to call us if you have any other questions that we weren't able to handle on the call. We look forward to discussing our fiscal 2019 first quarter with you in October. Thank you very much..

Ladies and gentlemen, you may now disconnect. Have a great day..