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Edited Transcript of KTEC earnings conference call or presentation 16-Nov-17 10:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Key Technology Inc Earnings Call

WALLA WALLA Nov 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Key Technology Inc earnings conference call or presentation Thursday, November 16, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ginger Petty

* Jeffrey T. Siegal

Key Technology, Inc. - CFO and SVP

* John J. Ehren

Key Technology, Inc. - CEO, President and Director

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Conference Call Participants

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* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Key Technology's Fiscal 2017 Fourth Quarter Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ginger Petty. Ma'am, you may begin.

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Ginger Petty, [2]

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Thank you, Tekia. Good afternoon, and thank you for joining us for the Key Technology's Fiscal 2017 Fourth Quarter Conference Call. Hosting the call today will be Jack Ehren, President and Chief Executive Officer; and Jeff Siegal, Senior Vice President and Chief Financial Officer. Today's call is being recorded and will be available for replay on the Investor Relations homepage of our website at www.key.net.

Before we begin, I would like to remind you that comments made in today's call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations or beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These and other cautionary statements are listed in today's release. For a more detailed discussion, please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission in December 2016.

And now I'd like to turn the call over to Jack Ehren, President and Chief Executive Officer, for a discussion of the company's results.

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [3]

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Thank you, Ginger. Good afternoon. For the last few years at Key Technology, we have been driving foundational changes related to reshaping our culture, our approach to technology leadership, our global customer relationships and our overall ways of doing business. Key has advanced our global momentum by transforming our behaviors, investing in our partnerships and closely defining and executing on our strategy. Our overarching objective has been to position Key Technology for sustainable long-term growth and profitability and to create long-term shareholder value.

Our record annual orders of $142 million, record net sales of $140 million and our solid increase in gross margins and net earnings in fiscal year 2017 compared to the prior fiscal year all demonstrate that we are continuing to make strong progress in the execution of our long-term strategy and our commitment to generating attractive returns for our shareholders.

Annual operating income for fiscal year 2017 was $7.2 million higher than the operating income for fiscal year 2016. Our gross margins, operating income and net earnings have all continued to demonstrate consistent and steady progress over the last 2 years. With our record orders of 142 million, annual orders have increased almost 30 million from fiscal year 2015 to 2017. For 9 of our last 10 quarters, we have delivered year-over-year quarterly orders growth. An important component of our overall strategy is to grow our EMEIA business, and our ongoing investments in this region are generating real returns. EMEIA annual orders have continued to achieve significant record levels. Four of the last 5 EMEIA order quarters were the largest 4 EMEIA order quarters ever, and EMEIA orders in euros have almost doubled over the last 3 years.

North America was our largest order-contributing region in the fourth quarter and annually for fiscal year 2017, and we achieved our highest annual North American order level in 4 years. In the fourth quarter, orders in North America included a significant order associated with a new plant expansion by a major global potato processor. The major portion of this order was for Key's new VERYX optical sorting platform. Additional significant orders for this same project are anticipated to be received in the first quarter of fiscal year 2018. These orders are for Key's complete integrated solutions, including our engineering, design and layout process systems and optical sorting solutions including VERYX and ADR. Also subsequent to year-end, we received a significant order from a major vegetable processor in North America for our new VERYX systems in multiple plants.

Our Intercon region also had an important contribution to our total orders in fiscal year 2017 with orders in this region increasing 17% over the prior fiscal year.

Our fiscal year 2017 ending backlog of approximately $44 million is our largest year-end backlog ever. Our average quarterly ending backlog for fiscal year 2017 was $49 million compared to just $37 million and $30 million for fiscal years 2016 and '15, respectively. Our fourth quarter net sales of $40.5 million was the third largest net sales quarter ever and up 33% over the net sales in the prior year's quarter. Net sales for the last 6 months of $85.2 million was our largest net sales for any 6-month period in our company's history. With our record fiscal year 2017 annual net sales of $140 million, net sales have increased at a 17% compounded annual growth rate from fiscal year 2015 to 2017. Our ability to now manufacture and run demonstrations and application tests for our optical end process systems solutions in both North America and EMEIA is enabling us to leverage effectively our global infrastructure to timely produce higher volumes of orders and to be more responsive to our customers on a regional basis. Our manufacturing and customer innovation and solution centers in both Europe and North America and our strong global service, technical expertise and industry experience are enabling Key to execute on our strategy to optimally partner with our global customer base by providing strategically located regional manufacturing, sales and technical support.

Our new VERYX platform is steadily becoming a more significant portion of our overall automated inspection systems orders and net sales, with significant strategic wins in all our core markets in fiscal year 2017. We continue to see significant opportunities for VERYX in all of our core markets globally as we demonstrate the unique positive impact VERYX has on our customers' operations and profitability. VERYX is redefining digital sorting and establishing a new level of performance with functionality never before available in the industry.

Our passion for understanding the needs of our customers and our vision to develop sorting and process solutions with unique differentiated value underscores our deep commitment to partnering with our customers to help optimize their operations and to build their overall returns. We remain confident that we will continue to drive up margins and profitability in the future as we release more capacities, features and capabilities of the VERYX platform, achieve further geographic expansion, penetrate more applications and insertion points, fully capitalize our integrated solution offerings and continue to optimize the efficiencies of our operations. We anticipate that our new platforms and solutions will enable us to drive continued revenue growth streams in 2 ways: by strengthening our position in existing market insertion points that will increase our core market share penetration in all geographic regions; and by penetrating new market insertion points with customers in our core and high-potential adjacent market applications. By addressing these insertion points with new industry-leading platforms, continuing our investment in disruptive and fully integrated solutions and scaling our overall cost structure, we believe we are positioning Key well for stronger operating margins and profitable growth in the future and increased returns for our customers and shareholders.

Our entire company is energized by the increasing global momentum we are achieving as we execute on our vision and our strategy. We continue to be focused and dedicated in our transformational journey to drive technology leadership and continue developing strong customer partnerships, which will help them achieve their overall goals and objectives and enable Key to generate attractive returns for our company and our shareholders.

I will now turn the call over to Jeff Siegal for a discussion of our financial results.

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Jeffrey T. Siegal, Key Technology, Inc. - CFO and SVP [4]

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Thank you, Jack. First, I will discuss the fourth quarter results for fiscal 2017. Fourth quarter net sales were $40.5 million compared with $30.5 million reported in the same quarter a year ago. Sales of automated inspection systems in the fourth quarter totaled $16.7 million compared with $11.3 million in the same period a year ago, a 46% increase. Fourth quarter net sales of process systems were $15 million compared with $11.2 million in 2016, a 34% increase. The increase in automated inspection systems is primarily related to increased volumes of VERYX and ADR products. The increase in process systems was due primarily to shipments of several large integrated systems projects during the fourth quarter.

Parts and service net sales were $8.9 million in the fourth quarter of 2017 as compared to $8 million in 2016. Gross profit for the fourth quarter was $13.1 million compared with $9.9 million for the fourth quarter of fiscal 2016. As a percent of sales, margins of 32.4% decreased slightly from the 32.6% reported for the same quarter a year ago.

Operating expenses of $11 million for the fourth quarter were 27.2% of net sales compared with $8.8 million or 29% of net sales for the same quarter last year. Operating expenses for the 3-month period ended September 30, 2017, were impacted compared to the same period in the prior year, primarily by higher sales and marketing costs associated with the higher sales levels and higher personnel costs, including incentive compensation.

Net earnings for the fourth quarter of fiscal 2017 were $1.2 million or $0.18 per diluted share compared with net earnings of $500,000 or $0.08 per diluted share in the same period last year.

I will now discuss our fourth quarter 2017 orders and backlog. During the fourth quarter of fiscal 2017, we recorded new orders of $32.1 million. Last year's fourth quarter new orders totaled $36.5 million. Our backlog at the end of the fourth quarter was $43.9 million. This compares with $40.4 million at the end of the fourth quarter last year. The backlog mix at the end of the fourth quarter was 49% automated inspection systems, 45% process systems and 6% parts and service.

Sales in fiscal 2017 were $139.9 million compared to $120 million in the prior year. Net sales of automated inspection systems were $52 million for fiscal 2017 as compared to $38.6 million for fiscal 2016, which represents a $13.4 million increase or 35%. Fiscal 2017 sales of process systems were $57.1 million compared with $52.3 million, a 9% increase. These increases were primarily due to strength in the potato market and, to a lesser extent, in the processed fruit and vegetable market. From a geographic perspective, the increase was primarily in the EMEIA region, where we again achieved record annual sales. Parts and service net sales in fiscal 2017 were $30.8 million as compared to $29.1 million in fiscal 2016.

Orders for fiscal 2017 were $142.3 million as compared to $128.7 million in the prior year. The increases were primarily due to strength in the potato and processed fruit and vegetable markets. Orders increased in all of our geographic regions, however, the increases were primarily in the EMEIA and North American geographies.

Gross profit increased to $47.2 million for fiscal 2017 compared to $36 million in fiscal 2016. Gross margins were 33.7% in fiscal 2017 compared to 30% in fiscal 2016. The increase in gross margin was due primarily to better product mix and increased efficiencies due to the higher manufacturing volumes.

Operating expenses of $40.1 million for fiscal 2017 increased as compared to $36.2 million for fiscal 2016. The increase in operating expenses was primarily due to higher sales and marketing cost associated with the higher sales levels and higher personnel costs, including incentive compensation. The net earnings in fiscal 2017 were $4 million or $0.63 per diluted share compared to a net loss of $700,000 or $0.11 per diluted share in fiscal 2016.

Our balance sheet remains strong with working capital of approximately $39.9 million. Cash at the end of the year was $9.3 million compared with $10.5 million at September 30, 2016.

Net sales for the first quarter of fiscal 2018 are expected to increase moderately as compared to the first quarter of fiscal 2017. Gross margins are expected to increase slightly in the first quarter of fiscal 2018 as compared to the fourth quarter of fiscal 2017. Operating expenses for the first quarter of fiscal 2018 are anticipated to increase slightly as compared to the first quarter of fiscal 2017.

I will now turn the call back over to Jack.

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [5]

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Thank you, Jeff. We will now turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [2]

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First question. Just wondering, relative to your expectations at the end of July, I mean, clearly, revenues -- I think you were talking about, back then, revenues being up modestly year-over-year, and you obviously registered the strongest revenue growth, I think, at any quarter this year. So maybe you could start there. What may have changed, Jack or Jeff, just as you went through the quarter in terms of your initial expectations?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [3]

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It definitely ended up a bit higher than where we had anticipated, and it really had to do with the timing of major projects that we had in both regions as far as customers wanting to get products and us working to get their products for them.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [4]

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So is this business that may have been pulled in a little bit from Q1?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [5]

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That's a fair statement, yes.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [6]

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Okay. And same question, just with respect to gross margins, a little bit lower than I was expecting. Was that mainly a mix issue tied to some of these larger deals?

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Jeffrey T. Siegal, Key Technology, Inc. - CFO and SVP [7]

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No, I think most of it, Jim, were related to employee-related costs and then customer support costs, which were a little bit higher than expected. And then those employee-related costs included some incentive compensation as well.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [8]

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Okay. And with respect to the orders that you had in the quarter, I just want to make sure I'm clear on this. The large North American potato processor, that was the $8 million of orders that you talked about in the last conference call, is that right?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [9]

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No, that would not be correct. This would be a new order, for a new plant expansion. And so the first portion of the order was received in the fourth quarter. The majority of that was for the new VERYX platform and ADRs. We expect here shortly to receive significant additional orders associated with that same plant expansion.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [10]

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Okay. I may still be somewhat confused on this. I know that, that $8 million wasn't part of the last quarter. But I thought you talked about it subsequent to the end of fiscal Q3 that you received this $8 million of orders. Just to be clear, was there another tranche of these orders, similar size?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [11]

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Yes. So this was another new order of significant magnitude, yes.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [12]

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Okay. Okay. And you're expecting some additional follow-on?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [13]

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Yes.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [14]

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Okay. Maybe Jack, can we talk a little bit about this? Is this all new capacity that you're seeing? And not a blanket statement, just in terms of all your orders. But I'm trying to get a sense as to what you're seeing in the market, whether it's new capacity or potentially some upgrades of existing capacity. Is that playing into this at all?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [15]

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I would say that yes, it's a combination of both. We are definitely seeing increase in capacities and upgrades of existing facilities. The increase in capacities is most significant in the potato market, but it's -- the potato market has been strong, but we're also seeing a pickup, as we've talked about, in processed fruits and vegetables as well.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [16]

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And just on that topic, you alluded to, I think, a fairly sizable order in that market. Can you -- is there some way of quantifying that? Is it similar -- smaller than the orders you've been seeing in the potato market? Is that fair to say or not?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [17]

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The order that we received from the major vegetable processor would be a smaller magnitude than some of the larger potatoes but still a very significant order for us, yes.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [18]

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Okay. And last question from me and I'll just -- I'll jump back in the queue. How would you characterize the competitive environment? You guys have been showing strong bookings growth, strong revenue growth probably nicely in excess of what the industry is growing at. And I'm just wondering if there's been any competitive response that you're seeing out there from your major competitors.

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [19]

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The competitive environment still remains very intense and very competitive. And as we said, we're very focused on understanding our customers' operations and their businesses and how to take our new solutions and provide unique value to them. So no question, competition remains very, very strong. But we continue to focus on our customer relationships globally and understanding their operations to bring differentiated value.

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Operator [20]

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(Operator Instructions) And we do have a follow-up question from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Jack, I wanted to go back to the comments you're making about new products. And I know you can't be all that specific just given the fact that your competition is probably listening in on this. But I just wonder, can you -- are there any broad comments that you can make about either moves into adjacent markets or just some other applications around VERYX and the timing and significance that you might anticipate over the course of fiscal '18?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [22]

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So the VERYX platform is definitely becoming a more significant portion of our automated inspection business and overall business. We definitely have designed the VERYX platform for what we call manufacturability, serviceability, cost, modularity and configurability to enable us to be flexible by taking VERYX into, again, new adjacencies but also new insertion points in our core markets. So currently, we have significant opportunity for us to go after in our core markets, and that's where we have been focused with our penetration. But there definitely are adjacencies that we are looking at that we believe the way we have designed and engineered the VERYX platform will enable us to effectively capture some of these other adjacencies as well. But again, the VERYX platform has been very flexible in capacities and features that are enabling us to be more effective even in our core markets on a geographic basis.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [23]

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And then with respect to timing on some of the new initiatives that you have, is this something you could see contributing to revenues in fiscal '18 in the second half of the year? Or is this looking further out?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [24]

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We continue to see significant opportunities for us, most significantly in our core markets with our VERYX platform. And we expect VERYX to continue to be an increasingly more significant portion of our AIS business and overall business. But we do definitely see significant opportunities for VERYX in all of our core markets, in our funnel of opportunities.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [25]

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Okay. Any change in headcount given what you're seeing in the market?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [26]

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In our headcount, we feel that we'll be able to leverage our current infrastructure very effectively, I think, in the last 2 quarters, demonstrating that we're able to produce $85 million in our global operations. The fact that the VERYX platform is effectively manufactured in both Europe and North America are all contributing factors to enable us to be responsive to our customers and to be able to handle increasing volumes. But we believe as we continue to grow the business, we'll be able to leverage the infrastructure and grow without significant additions to our operating expenses.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [27]

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The bookings were down year-over-year, but you're facing a fairly difficult comparison, as I recall, that was a record Q4 bookings quarter last year. So...

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [28]

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In Europe, last year in the fourth quarter was the largest quarter that we ever had in Europe, and it included multiple major projects. So that was an extremely large quarter for us in Europe. But we feel good with the orders that we did receive in the quarter and the funnel of opportunities and -- which I've mentioned some things that we expect to happen or have happened already in the first quarter.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [29]

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Right. And just on that note, a lot of it -- it sounds like a fair amount of that activity is in North America. How is your pipeline looking in the EMEIA region?

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [30]

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Significant potential yet in the EMEIA region and some very important opportunities that we're working in that region as well.

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Operator [31]

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I'm showing no further questions in queue at this time. I would like to turn the conference back over to Jack Ehren for closing remarks.

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John J. Ehren, Key Technology, Inc. - CEO, President and Director [32]

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I would just like to thank everybody for your continued support in Key Technology, and we look forward to talking with you again next quarter. Thank you.

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Operator [33]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.