Verigy, Ltd. F1Q09 (Qtr End 01/31/09) Earnings Call Transcript

Executives

Judy Davies – VP, IR & Marketing Communications

Keith Barnes – Chairman, CEO & President

Bob Nikl – CFO

Analysts

Jim Covello – Goldman Sachs

Patrick Ho – Stifel Nicolaus

Raj Seth – Cowen & Company

Jenny Fung – JPMorgan

Gary Hsueh – Oppenheimer & Company

CJ Muse – Barclays Capital

Biswa Milip [ph] – Credit Suisse

Verigy, Ltd. (VRGY) F1Q09 (Qtr End 01/31/09) Earnings Call Transcript February 19, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2009 Verigy Limited Earnings Conference Call. My name is Ann and I will be your conference coordinator for today's call. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the presentation.

I would now like to turn the presentation over to Judy Davies, Vice President of Investor Relations and Marketing Communications. Please proceed.

Judy Davies

Thank you, Ann, and good afternoon everyone. Welcome to our earnings call for our first quarter and fiscal year 2009, which ended January 31st. I am Judy Davies and I am joined by Keith Barnes, our Chairman, CEO and President, and Bob Nikl, our CFO.

Our first quarter fiscal year 2009 financial press release was sent out today over the Business Wire and is available on Verigy's Web site. Should you not be able to locate this press release, please contact me at 408-864-7549. A replay of this call will be available via telephone and webcast from February the 19th through March 5th. You may access the call by going to the Investor Relations section of the Verigy Web site.

We will be making forward-looking statements today, that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that may cause results to differ materially from those in the forward-looking statements are discussed in our most recent SEC filling. These forward-looking statements, including guidance, provided during today's call are only valid as of this date and Verigy undertakes no obligation to update the forward-looking statements.

In addition, during this call we will discuss non-GAAP financial measures including non-GAAP net income and earnings per share. You will find reconciliation to the most directly comparable GAAP financial measures on our Web site. At the conclusion of the prepared remarks, we will open up the call for questions. As a reminder, this conference call is being recorded and will be available for replay in the Investor Relations section of our Web site at www.verigy.com.

Now I will turn the call over to Keith.

Keith Barnes

Thanks, Judy. Good afternoon, everyone and thank you for joining us today. Our fiscal Q1 was the most challenging quarter for us since 2001. We started off the quarter with the lowest revenue guidance we have ever given as a standalone public company. November got off to a slow start. December saw lengthy customer shut downs and continued slowing week by week as the economy worsened. Almost every day in January was peppered with continuing bad economic news and customer contractions as well.

The grim economic trend of recent months has had semiconductor manufacturers rethinking their spending needs and their use of cash. Many of them have announced restructuring activities and significant cuts to their 2009 CapEx budgets. Some especially in the memory space are in the throws of consolidation and some may face a worse fate. We are monitoring this situation closely.

As for Verigy, although we have seen a tough quarter, we have a strong balance sheet, great products, employees and customers. We will survive and we believe that we will thrive when conditions stabilize. As you have seen in our press release we reported revenue of $68 million and a loss of $1.09 per share.

Next to winning business, our primary priority for the first quarter was implementing a number of previously announced cost savings and restructuring plans with a goal of lowering our costs by $12 million to $15 million per quarter.

In Q1, we made good progress towards that goal by lowering our total cost by $12 million. We believe the worldwide economic recession will continue to negatively affect the semiconductor industry with no near-term recovery in sight. In response to this we are planning to further lower our quarterly costs to bring our breakeven target down to $110 million from the $125 million level announced in November. Our plans to achieve the further cost savings include additional cuts in the regular and contracted personnel, shortened work time and temporary salary reductions.

Once fully implemented, we expect the combined effect of the earlier plan and the additional actions we are now taking will yield annual cost savings of approximately $90 million to $100 million. We think that our new breakeven level will position us well for when the market stabilizes and begins to recover.

In our November earnings call, we warned of a weaker Q1, even though in previous years the January quarter had been a relatively good quarter for Verigy. However, we did not anticipate the additional multi weak shutdowns our customers implemented throughout the quarter. Many semiconductor manufacturers extended normal holiday shutdown period to include the week's leading up to and following the Thanksgiving and Christmas holidays. Some customers extended the Christmas shutdown in to January, while Asia-based manufacturers closed in observance of an earlier than usual Chinese New Years.

These dynamics contributed to the short fall in our revenues and earnings for the quarter which were below the low end of our guidance range. Orders fell sharply to $38 million and representing the lowest order quarter since Q1 of 2001 and resulting in a book-to-bill of 0.56. Utilization rates on the 93K at OSAT's were also affected, dropping to a low 52% for our quarter.

Lastly, the memory market has been an extraneous with too many competitors too much capacity and almost no one making any money. I cannot recall the last time the semiconductor industry was faced with challenges as far reaching, as those that we are faced with today. In view of these challenges we are preparing for a continued tough environment and we are prioritizing in three areas.

First our cost structure, which I have already covered. Second, our resources which we are evaluating various ways to streamline our organizational structure and maximize the use of resources throughout the world. Lastly, our new product introductions, we're continuing to drive product innovation in both SOC and memory.

New products that are scheduled for introduction later this year will expand our served available SOC market by up to 20%. We expect to more than double, our memory served developer market with the 6000 flash and DRAM tester which we introduced last quarter. For 2008, our overall ATE market share grew 3 percentage points year-over-year to 20%. By segment, our SOC market share climbed to 23% from 18% in 2007 and our memory market share was 10% down from 17% last year.

We believe Verigy is well positioned to gain additional market share when the industry recovers. Our projections on the timing of the market recovery range from difficult to impossible. One thing is clear, no one really knows, but there are some signs of life. Some market research firms are forecasting the beginnings of a very slow recovery in the second half of 2009. Die banks [ph] and inventory levels have been reaching new lows and in some areas there are reports of rush IC orders.

Recently, industry publications disclosed the TSMC had recalled fro [ph] lowed employees to support the rush orders that it have received from a few customers and that both TSMC and UMC are expected to phase out their unpaid lead programs by March, after a recent increase in orders. Also it's been reported that Nokia certified chip suppliers that it would increase orders in March.

We continue to work closely with our customers to help them assess their future test requirements. We believe understanding our customers' needs will allow us to prioritize and execute our R&D programs inline with their needs, as demand for their products recovers.

One customer area that we been following is the cell phone market. In recent weeks we have heard that some semiconductor manufacturers are seeing demand, beginning to build for low-end cell phones and smart phones. While this demand might not drive up the total cell phone market, there are several opportunities for Port Scale RF, our product to capture shares especially where multiple RF signals are being integrated into newer 3G and 3.5G phones.

Another area that has some activity is the mobile PC market. This year's cash strapped customers are expected to opt for scale down notebook PCs know as Netbooks. Netbooks offer internet access and other basic functions and sell for $400 or less. The success of the Netbook is expected to change the dynamic of the mobile PC market.

Previously, Taiwanese based manufacturers did not have a dominant position in PC shipments; however, this is changing with the introduction of the Netbook. These manufacturers are driving a high percentage of local content. According to the data released this morning, shipments of Netbooks are expected to double this year, even as the market for PCs overall shrinks as much as 14%. We believe we are well positioned to gain share in this new market. So there are a bright spot or two out there, but it's too early to tell whether these are temporary blips or the beginning of a slow recovery.

People are often asking about the timing of the DDR3 RAM. While some of our competitors are only now promoting their high speed memory solution, we entered the market in 2005 with a 93K HSM. Customers have been using this system for engineering development of DDR3 devices since 2006 and we believe it has a significant lead over the competition.

Our 93K HSMs are installed at 11 memory manufacturers including nine of the ten top DRAM suppliers. More than half of our installed systems are being used in manufacturing test of DDR3 and XDR devices. So, in customers DRAM are ready to go.

Another area we have been watching closely is the overall memory market, including wafer sort. Some memory manufacturers are facing severe financial difficulties, while others are consolidating to survive the downturn.

When struggling manufacturers consolidate or go out of business, it benefits the surviving suppliers in the industry. For example, when Qimonda declared bankruptcy, DRAM prices increased which benefited the remaining DRAM suppliers. iSuppli is forecasting NAND bits – NAND flash bits to grow 65% and DRAM bits to grow 37% in 2009 compared to last year.

As we've said before, unit and bit growth are the main drivers for test capacity. One benefit of introducing a new product in a downturn is that customers often use the time to evaluate their testing strategies and suppliers and are open to evaluating alternatives. We are seeing this happen with our new 6000 flash and DRAM tester. In addition to being selected by Nemonix we have received orders for the V6000 engineering systems from other top tier memory manufacturers. We are currently engaged in valuations at top DRAM manufacturers for DDR3 wafer sort.

With our 6000 system, we believe we can capture share in flash memory driven by the emerging SSDs solid state disk drive demand. More top semiconductor manufacturers have all announced that SSD drives will be the focus of their ongoing development activities.

Gordon Moore was quoted saying, there have been few times in history of computing when the new technology becomes completely pivotal to changing the PC platform and the user experience. Solid state drives have this capability. This is unmatched by any other technology I can identify.

Before I turn the call over to Bob Nikl, I would like to summarize by saying that in this economic environment, our philosophy is simple. It's about the staying power, product innovation and operational excellence. We will persevere by structuring the company to be in the best financial and operational shape possible. We've already made good progress in our cost saving and restructuring plans while preserving our focus on continued product innovation.

We have some exciting products lined up for this year and we believe Verigy will emerge from this downturn, well positioned to continue to increase market share. And with that I'll turn the call over to Bob Nikl.

Bob Nikl

Thanks, Keith, and good afternoon, everyone. In today's call I will provide a brief recap of our financial results for the first quarter and further explain the non-operating charges that were booked. I also want to discuss our cost saving and restructuring plans in more detail as well as share our progress to-date. This quarter we have again presented our income statement in both the GAAP and non-GAAP format.

The GAAP numbers include restructuring charges for the first phase of our reduced breakeven plans which we discussed last quarter, further impairment of our auction rate securities, the write-off of a cost method investment and some non-operating charges. Obviously, our results reflect the extraordinary follow-ups in demand in both the SSC and memory markets. The weak business conditions that we experienced in late October, continued through November and further worsened in December and January consistent with other companies on our industry.

As a result, total revenue for Q1 was $68 million, well below the guidance range that we provided in November and down 55% from last quarter. As we said in our recent pre-announcement, our revenues were also negatively impacted by a significant memory customer’s inability to pay for several systems shipped to them last year. This accounted for approximately $10 million of the revenue shortfall.

Regionally, our revenue mix for the quarter was as follows: Americas 25%, Asia-Pacific 69% and Europe 6%. Product revenue dropped shortly, reflecting the continued worsening of the semiconductor industry. For SSC business, sales of $24 million represented a decrease of 76% sequentially and a decrease of 80% from last year’s comparable quarter. The last time we saw SSC revenue this low was the first quarter of fiscal 2003 and memory remained depressed at $9 million.

Systems represented only 49% of total revenue this quarter compared to 72% in the previous period and reflects the fact that system sales now are almost entirely engineering and technology related with little capacity purchasing taking place. However, considering the low system utilization rates and multi-week shutdowns at customer sites, our services and support business held up reasonably well with this quarter revenue of $35 million compared to $42 million last quarter. Services and support revenue represented 51% of total revenue compared to 28% last quarter.

Turning now to order activity, while some customers with orders in backlog requested pushups, we only received $1 million in actual order cancellations. And we expect these pushups to reenter our backlog when the industry begins to recover. Regionally, our quarterly orders were as follows: Americas 35%, Asia-Pacific 61% and Europe 4%.

For the quarter, orders from our IDM and Fabless customers were 59% of the total, with the remaining 41% from OSATs. This compares to 71% and 29% respectively last quarter.

During our earnings call last November, we indicated that we were going to implement a number of cost savings measures with the goal of reducing our quarterly operating costs to achieve a $125 million breakeven level. We have already made substantial progress in a relatively short period of time. This quarter reduced our operating costs by approximately $12 million, including a $10 million sequential reduction in operating expenses as well as $2 million in cost of sales overhead. These savings came from a combination of lower sales commission and variable compensation, shutdowns and increased time off and the elimination of contract and permanent workers.

Since market conditions have continued to deteriorate, we have expanded our cost reduction plans. Our target is to exit the calendar year with annualized cost savings of approximately $90 million to $100 million when compared to fiscal 2008. These additional actions are estimated to further reduce our breakeven level to approximately $110 million.

We estimate that upon completion of all of our initiatives, approximately 60% of our total savings will come from permanent reductions, including an aggregate reduction in work force of approximately 300 employees. This is an addition to significant reductions in the numbers of temporary and contract employees, which were always part of our flexible cost model.

During the quarter, we further impaired the carrying value of our auction rate securities portfolio by another $8 million, due to external evaluation reports that reflect the continuing turmoil in the financial and credit markets. Our long term marketable securities portfolio is now carried at $56 million. In addition, due to the continuing deterioration of the memory market, we were compelled to take another $6 million impairment of our cost based investment in a venture back technology company. We have now written this investment down to zero.

Separately, we also wrote off approximately $3 million of purchased intellectual property. As a result, our net loss totaled $64 million or $1.09 per share. And after excluding the impact of the charges discussed earlier, our non-GAAP net loss was $41 million or $0.70 per share.

Now I would like to quickly review our balance sheet. Ending cash and marketable securities were $356 million, a decrease of $55 million from last quarter. Our free cash flow was a negative $49 million and we repurchased approximately 200,000 shares during the quarter for less than $2 million.

Given current market conditions, we have put our share repurchase program on hold. Our accounts receivable declined $42 million from year end to $32 million, due to both the rapid decline in revenues and the write-off of the memory system shipments discussed earlier.

DSO was 42 days compared to 44 days at year end. Inventory declined by $9 million from year end to $69 million and reflects an increase in reserve provisions to better reflect softening demand.

In the quarter, depreciation and amortization expense was $4 million and expenditures for CapEx was $2 million. We do not anticipate significant changes in these quarterly amounts going forward.

Our regular full-time employee headcount was approximately 1,550, a reduction of 70 from year end. Our total reduction in the quarter including temps and contractors was 132.

In addition to existing temporary measures, we are continuing to implement permanent cost reduction actions as quickly as local requirements permit. All aspects of a spender been reviewed and we believe that we demonstrated our ability to aggressively flex our cost levels down in the current quarter.

Given the uncertainty and demand and lack of visibility, we are not in a position to provide revenue or earnings guidance for our second quarter. However, our current assessment suggests revenue will be plus or minus 10% from the level recorded in Q1.

We expect to incur additional restructuring charges in the second quarter for both our original plan as well as our additional breakeven actions, but cannot provide an estimate of these costs at this time. We will also have between $4.3 million to $4.7 million of share based compensation expense and we estimate weighted average shares outstanding for the second quarter to be approximately $58.4 million.

In summary, as Keith stated earlier, our philosophy is simple. It's about staying power, product innovation and operational excellence. Eventually, as the industry returned to some normalcy, customers will return to investing in new capital equipment. And when it does, Verigy will be financially sound and technologically competitive to capture additional market share. This concludes my prepared remarks. And with that, we will now open the call for your questions. Ann?

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Jim Covello. Please proceed.

Jim Covello – Goldman Sachs

Great. Good afternoon guys. Thank you very much for taking the question. Couple of things. I know it's hard to give guidance as you said, Bob, and start to project some of the expenses, but can you give us some best thought on what a steady state cash burn, on a quarterly basis is going to look like down at this level?

Bob Nikl

Yes, very hard to project, particularly in the near-term, Jim, if for no other reason due to the uncertainty around some of the ultimate cost of the restructuring actions, but I would continue to view our situation as being one where we are able to flex the costs out quickly. At least we think more quickly than most due to the flexibility in the model. But we've already achieved an awful lot of the original goal of 12 to 15. So, just trying to project forward to next quarter, I wouldn’t contemplate a comparable amount of reduction. It will be ongoing and incremental. But ultimately cash burn in my mind by the time we get to the end of the year, should start to look like breakeven the same way operating profit would be at the 1/10 level.

Jim Covello – Goldman Sachs

Okay, that’s helpful.

Bob Nikl

It's really going to be a function of what sort of demand we see on the top line.

Jim Covello – Goldman Sachs

Sure. Okay, if I could ask you couple of quick follow-ups. Relative to the non-payment from the customer, have you changed the terms now on what you’re shipping to customers that might not have a good balance, you’re requiring any kind of prepayments or anything along those lines?

Bob Nikl

No, Jim. I would say this particular instance was a rather unique circumstance accommodation, if you will, for longer payment terms, but it was clearly an exception to our normal process. And I think you see that reflected in the fact that, as bad as things are DSO was still only 42 days.

Jim Covello – Goldman Sachs

Okay. And then relative to the thoughts about the revenues as we look into the next quarter orders, I think you said 38 million and revenues kind of flat plus or minus 10%, if I heard that right, that that would require some sort of turns business if you will, do you have any kind of real confidence on that?

Bob Nikl

You are absolutely right. It requires a lot of turns business because backlogs being what they are, I would suggest that it’s got to be business that turns in the current quarters. So, I think like a lot of folks in our space we've got a lot of opportunities identified and we're working in as hard as we can right now.

Jim Covello – Goldman Sachs

Okay and then final question for me. I heard everything you said about the memory space and the fact that you guys have been there for a long time, which is most certainly true. Do you feel like, Ceradyne in particular is kind of making any traction with their new offering, notwithstanding the fact that you've been in the market a long time and you have good relationships with the existing customer base as well?

Keith Barnes

Well Jim, we usually don’t comment on competitors. But given that your question is pretty specific, I think the answer to your question is, no, we don’t see any sales on the new high speed memory product from them. I know they have been talking about it for at least a year now. So, the answer is no.

Jim Covello – Goldman Sachs

Okay. Thank you very much. Good luck.

Bob Nikl

Thanks, Jim.

Operator

And the next question comes from the line of Patrick Ho. Please proceed.

Patrick Ho – Stifel Nicolaus

Thank you for taking my question. Just to confirm, what was the backlog number again?

Bob Nikl

We didn’t provide a backlog number, but it's roughly $70 million.

Patrick Ho – Stifel Nicolaus

And I know you mentioned the cost cutting measures that should be mitigating the cash burn but can you maybe provide a little bit of color on what could be some key drivers for the cash burn in the second quarter?

Bob Nikl

Well again, I guess, I would put it into a couple of parts. One obviously is to the extent that we're successful in getting the revenue to remain flattish. That’s going to be a big help because our operating costs will continue to go down. The variable right now is some of the cash costs with regard to the restructuring. The other difficult part of the equation in the near term will be to the extent that the revenue plays out the way we'd like to see it I think we would be somewhat back-end loaded. So, unusual as it may sound we probably would have some working capital investments. Needless to say, there are a lot of puzzle pieces right now and it would be a fool’s error in to try to project next quarter's cash burn at this point in time.

Patrick Ho – Stifel Nicolaus

Okay. Fair enough. And I guess my last question would be where do you think inventory management will look like, the next quarter?

Bob Nikl

I am sorry. I don’t quite understand the question. What do I think inventory will look like, you mean?

Patrick Ho – Stifel Nicolaus

How do you think inventory management will look like for the next quarter?

Bob Nikl

I would expect inventories to go down but I wouldn’t try to project by how much as part of this call.

Patrick Ho – Stifel Nicolaus

Okay. Great. Thank you.

Bob Nikl

Thank you.

Operator

And the next question comes from the line of Raj Seth with Cowen & Company. Please proceed.

Raj Seth – Cowen & Company

Hi, thanks. Bob, just, I wanted to follow up a little bit on the first question in your commentary on cost reductions to make sure I understand. You are taking breakeven by the end of the year to $110 million. At that revenue level and I know gross margin is incredibly dependent on mix, but what assumption are you making for gross margin on that $110 million drive the view to that breakeven?

Bob Nikl

Yes, sure, that’s fair question. So approximately 45%, Raj. So the $110 million model is very comparable to the original $100 million breakeven that the company went public with. The only real change is the 123R component, which we now comprehend, which, the good news is arguably non-cash. So when I look out to $110 million, what I am essentially looking at is $50 million of gross profit dollars offset by about $50 million of OpEx, and let's call it $20 million and $30 million for R&D and SG&A respectively.

Raj Seth – Cowen & Company

Okay. Well you answered my second part of the question which was where OpEx likely goes by the end of the year and I think you just said 50 million right?

Bob Nikl

Right. I mean to use that for comparison to what we were calling our baseline back to Q3 of '08 was roughly $68 million. So, we are looking at a 25% to 30% overall reduction in OpEx, by the time the plans finished up.

Raj Seth – Cowen and Company

And with these kinds of reductions and I assume that there was probably some natural, there were some R&D programs that were finishing up that help enable some of the reductions in R&D. If you are sort of how much room do you have to cut further before you really ended the bone of this company or are you already there?

Keith Barnes

Yes, Raj this is Keith. So, there is a number of factors to discuss on this point. First of all, we were at the tail end of the development for our new memory platform and so there was inability to start drawing down resources on the memory side. Secondarily, we have gone, I think, pretty thoughtfully through each of the projects and programs in the R&D portion of the company to make sure that we are still on the line with our customers road maps and although in some areas we have slowed a couple of the programs down most of them are still on track. Certainly those that will have the largest impact in 2009 we think are still on track to come out of it as we had expected. So we have made these cuts with those things in mind and we feel like we have taken it down to a level now where we are not going into the bone or muscle, but we are taking a lot of cost out.

Raj Seth – Cowen and Company

Sure. And then final one – thank you for that Keith. Bob, just so unclear with regard to taxes you would expect even if you are running big losses here to run about a couple of million a quarter in taxes is that the way to think of that?

Bob Nikl

Yes, Raj fair enough, so this quarter you probably saw the press release we had a book tax provision of roughly $1 million. I would say from modeling purposes it's at these levels it would be $1 million to $2 million of tax provision.

Raj Seth – Cowen and Company

Right. Thank you very much. Appreciate it.

Bob Nikl

Thanks, Raj.

Operator

And the next question comes from the line of Jenny Fung with JPMorgan. Please proceed.

Jenny Fung – JPMorgan

Hi, good afternoon. Do you still feel your memory tester revenues will be up in 2009?

Keith Barnes

Well, it’s a very good question. We think that can't go much lower, so given all the new products that we're bringing out and the evaluations that we've been doing, we are certainly hoping that they increase in 2009. Now, as we said in prior calls and also in this call, one of the things that will help to stabilize the market are some of the consolidations that we already see going on. You probably all have been watching some of the activities that have been occurring in Taiwan to go through consolidation and in other places, plus there are some companies which are no longer around as competitors. So I think as the market starts to stabilize and the bid counts continue to go up the need for newer technologies will be there. So we are hoping that it starts to pick up sometime in '09 but I wouldn’t count on it in the first couple of quarters.

Jenny Fung – JPMorgan

Okay, that’s helpful. And then just, why did you lose market share in memory in 2008? Can you talk about what happened there?

Keith Barnes

Yes, sure. I think it's just a simple math issue, the customers we had, their revenues dropped off, it wasn’t that the competitors took business from us in accounts, it's that our customer based was particularly weak and that was the simple math.

Jenny Fung – JPMorgan

Okay, yes that’s what I thought. Is there any ideas on where do you think market share, your market share to go in '09?

Bob Nikl

Well it’s a good question. We certainly have made a lot of progress with customers on evaluations. So if their business picks up, we think ours could as well. That’s about as much as I'd like to say. At this point we've been so surprised by the downward trend in the memory marketplace to kind of predict where it's going other than reading what's happening with these manufacturers, consolidating and so forth is one part of it. And I think that, I would just say I think it can't go down much further than this, I think it's going to go back in the other direction, the question is when do that start and I think it's going to be more in the second half of the year.

Jenny Fung – JPMorgan

Got you. And then longest line have you penetrated new accounts or you're just waiting for the business from your existing customers to come back?

Keith Barnes

Oh both. In fact in our prepared remarks we talked about penetrating several new accounts with engineering systems this year, so they are doing the design in of our products into their space by doing the first parts on our engineering systems and then as their business picks up we would hope and expect that they will start buying full production systems after that.

Jenny Fung – JPMorgan

Do you have any sense of (inaudible) in those new accounts like what that could be?

Keith Barnes

Well, as we said we're increasing our served developer market pretty substantially with the DRAM Wafer Sort area is all new to us, so its probably too ex [ph] the served available market that we have before. So there is a big potential there. I think there will be a pent up demand. The question is when will that pent up demand need to be served? There's just a lot of shaking out going on right now in the market place.

Jenny Fung – JPMorgan

Okay, great. Thank you very much.

Bob Nikl

Thank you, Jenny.

Operator

And the next question comes from the line Gary Hsueh with Oppenheimer & Company. Please proceed.

Gary Hsueh – Oppenheimer & Company

Hi. Thanks for taking my question. Keith I don’t know you very well. Maybe I should get to know you better but I could have sworn when you started talking about the handset inventory, replenishment situation as you are getting a little bit more bullish. What sort of kind of drove this revenue guidance plus or minus 10%? I mean help me bracket the minus 10 and the plus 10 within the context of your comments.

Keith Barnes

Well certainly first of all, Gary, I'd love to get to know you better, but if you spend less time with our competitors and more with us, we'll be happy. With respect to the plus or minus 10%, it’s a guess based on the available data we have today. I think that’s about as much as anybody can stay into today's climate. We are working on a number of things. A lot of this is turns business as Bob said earlier. But there are some of the customers out there are seeing rush order demand for ICs because inventories were brought down and die banks were brought down, so there is some encouraging sign. The question is we can't piece enough of (inaudible) signs together to say that it’s a trend. So it could be a blip, it could be more than that. We are not sure, so we’re being cautious on our guidance.

Gary Hsueh – Oppenheimer & Company

So the plus or minus 10% is it necessarily a band, I mean the 10% is within the realm of possibility given some of the uptick in improvement you are seeing, but the uncertainty and how forecast always integrate in this environment. That kind drives down to the minus 10% side, is that – but that's going to be accurate?

Keith Barnes

Let me go a little further. First of all, I don’t think anybody would have predicted the precipitous drop in the market in our product area, in semiconductor test in back end that it would be as band as it has been. I don’t think anybody projected that. So, we're all feeling little bit stung by reality of how quickly things degraded in the last couple of months and so we've been very cautious about going forward. As you probably know, we've introduced a lot of products in the last year, we have very good customers, we have good traction in many of the accounts we're in but those things has to turn into orders and so we're just being cautious. Could it possibly be high end of this plus or minus 10%? Sure. Could it be lower then that? Well, we don’t know and we're trying to stick within. I wouldn’t even call it guidance, but a range that seems reasonable given all the things that we've integrated over the last couple of months.

Bob Nikl

One other thing though to mention regarding your question on range, we said earlier that we had written off $10 million worth of system shipments, right. That doesn’t mean we've given up on trying to cover – recover that. So, at this point in time to the extent that we received moneys in settlement of that, that would also create rev rec for us. And that’s a fairly large chunk of money. So, it's not something I'm counting on but it in part accounts for the wider quarter if you will.

Gary Hsueh – Oppenheimer & Company

Okay. Perfect. That’s really helpful. And then I think obviously we all understand the exposure on the Port Scale RF test side to handset and cell phone market potentially rebuilding inventory, but could you remind me again what your exposure on the V5500, V6000 potentially could be in terms of the MCP manufactures?

Keith Barnes

Exposure in what way, Gary?

Gary Hsueh – Oppenheimer & Company

In terms of testing MCP dye.

Keith Barnes

Well, certainly the 5400, 5500 does MCP and to the extent if that picks up and the capacity out there in test houses is absorbed. We might see business there but we're not counting on it right now.

Gary Hsueh – Oppenheimer & Company

Okay, so the primary levered, it's basically that the Port Scale RF tester?

Keith Barnes

Port Scale RF consumer mix signal version of our 93K, some V6000 sales to new customers. There might be some MCP, but I would say that, that something they were not counting on a great deal of, also they spent parts we think are going to be important going forward.

Gary Hsueh – Oppenheimer & Company

Right.

Keith Barnes

And of course the graphics processor chips still are an important part of our business.

Gary Hsueh – Oppenheimer & Company

Okay. Great. And just a few more questions, if you could. You explained how service and spares held up pretty well in the quarter, but you talk a lot about shutdown date. So it's kind of intuitive why service and spares or support would have held up so well. Could you explain a little bit deeper why that is?

Bob Nikl

Well, first of all customers have very large portion of their systems on service contracts and those get renewed on an annual basis. So, one would expect that many of those would just get renewed as a national course of thing. There had been kind of a slowing of customers, having systems cover that weren’t on service contract and so there were still some time and materials that came through in the quarter for systems that were not on under contract. But we did have a reduction in service from quarter-to-quarter as well.

Keith Barnes

Yes, Gary, we are not as lumpy when it comes to those contracts. I mean some companies have a big renewal spike at the end of the year, ours isn't quite that lumpy. So as Keith said, a lot of it was just regular service contract revenue based.

Gary Hsueh – Oppenheimer & Company

Okay.

Bob Nikl

Some of our competitors also time their service contracts to renew at a certain time during the year. We don’t have that same phenomenal.

Gary Hsueh – Oppenheimer & Company

I got it. Yours are more staggered. And just last question, just wanted to double check. Do you have any remaining exposure to that one memory customer that tripped up revenue or shipment recognition in the fiscal first quarter remaining on your inventory line?

Bob Nikl

No. Nothing of significance, Gary.

Gary Hsueh – Oppenheimer & Company

Okay. Perfect. Thank you. Thank you, you guys.

Operator

(Operator instructions) And the next question comes from the line of CJ Muse with Barclays Capital. Please proceed.