Verigy Ltd. F2Q09 (Qtr End 04/30/09) Earnings Call Transcript

Verigy Ltd. (VRGY)

Q2 2009 Earnings Call

May 21, 2009 4:30 pm ET

Executives

Keith Barnes – President & CEO

Bob Nikl – CFO

Judy Davies – VP IR

Analysts

Satya Kumar – Credit Suisse

Raj Seth – Cowen & Company

Jim Covello – Goldman Sachs

CJ Muse – Barclays Capital

Patrick Ho – Stifel Nicolaus

Gary Hsueh – Oppenheimer

David Dooley – Steelhead Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter 2009 Verigy Ltd. earnings conference call. (Operator instructions) I would now like to turn the presentation over to Judy Davies, Vice President, Investor Relations and Marketing Communications.

Judy Davies

Good afternoon everyone. Welcome to our financial teleconference Verigy second quarter of fiscal year 2009, which ended April 30. I am Judy Davies and I am joined by Keith Barnes, our Chairman, CEO and President, and Bob Nikl, our CFO.

Our Q2 financial press release was sent out today over the Business Wire and it is posted on the company’s website. For any reason should you not be able to locate the press release, or require assistance in finding the information, please contact me directly at 408-864-7549.

A replay of this call will be available via telephone and webcast from May 21 through June4. You may access the call by going to the Investor Relations section of the Verigy’s website.

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 loss, loss per share, and gross margin. You will find reconciliation to the most directly comparable GAAP financial measures on our website.

At the conclusion of our 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 website at www.verigy.com. Thank you all again and now it is my pleasure to turn the call over to Keith Barnes.

Keith Barnes

Thank you Judy, good afternoon everyone and thank you for joining us today. In my prepared remarks I will present our Q2 financial highlights, provide an update on our business, the business climate, and the progress we’ve made on our restructuring plans.

I will then turn the call over to Bob Nikl, who will provide additional details on our Q2 results and Q3 outlook.

Despite the challenging industry environment we began to see some firming of the business in the quarter. Total revenue for Q2 was $71 million, an increase of 4% from last quarter and in line with the expectations we provided in our last call.

Orders booked in the quarter were $83 million which was more then twice the level booked in Q1. This resulted in a book to bill of 1.17 and represented the highest book to bill ratio among our semiconductor test peers for their most recently reported quarter.

As you may recall last quarter we reported that [dye bank] and inventory levels had reached new lows. During Q2 we began to see some increase in demand to replenish inventories and some incremental technology purchases.

While its too early to predict the recovery with any certainly we believe that the worst is now behind us. The new order activity for the 93K was driven by RF baseband, computer chips, and high end digital consumer devices used in cell phones and PCs.

As a result sales of our SoC products were $38 million, an improvement of 58% from Q1 and represented approximately 53% of our total quarterly revenue. Some of the major outsource assembly and test customers have started to see better then expected demand activity in the cell phone market, stemming from China’s adoption of 3G technology.

According to a market research firm, sales of handsets in China grew nearly 12% sequentially to over 13 million units in March. And in the CDMA market segments sales have jumped to over 110% to nearly three million units.

For the highly integrated RF market, semiconductor manufacturers are producing complex, integrated baseband devices that incorporate multiple RF frequencies used in Smart Phones. Prior to the introduction of our Port Scale RF product in June of 2006, these devices could only be tested by multiple steps or multiple insertions.

Today, we believe that we have the largest installed base of RF systems testing this type of device in a single insertion. For calendar 2008 our market share for highly integrated RF segment was 44% and 35% for the overall RF market.

These share gains validate the strong adoption of Port Scale RF for the 18 months since its introduction. The PC market seems to be coming back to life. It appears that PC sales may have bottomed out during the first quarter of the year and may be recovering in Q2.

Last month Intel reported that its second quarter processor and semiconductor sales were better then expected and that the decline in PC sales had bottomed out. One of the largest Taiwanese OSATs reported that they believe the PC market will have the strongest momentum in the second calendar quarter followed by communications and consumer segments.

This OSAT is expecting to see more then 40% revenue growth in Q2 driven by demand for PC applications. Verigy is also benefiting from the improving PC market. In Q2 we received a significant multiple system order to test PC graphic devices.

During the quarter we also received a multiple system order from a large Japanese IDM customer as well as orders from several Korean design houses to test HD TV and Blue Ray devices. We believe consumers will continue to drive growth in the high end digital consumer market as HD TVs and Blue Ray disc players become more affordable.

Now I’d like to shift the discussion to product innovation, while the environment in the semiconductor industry continues to be challenging Verigy remains focused on product innovation. Last quarter we told you that we planned to introduce a new product that would expand our SoC served available market by up to 20%.

This product is on track and in Q2 we shipped the first system. Within two hours after its arrival the customer had the system up and running. The simplicity of the product makes it easy to install and easy to use.

We believe the capabilities of this product are very competitive and will appeal to a broad customer base in the target market that until now we have not addressed. This new product will be show cased at the upcoming Semicon West Trade Show in San Francisco, July 14 through the 16.

We do not intend to make any additional comments about the product on today’s call. Now shifting to memory, we often get questions from our investors about different types of DRAM testing and the requirements for testing those memories.

I’d like to spend just a little bit of time today to address those questions. DRAM testing consists of two to three different types of tests. For lower performance DRAM memories, those defined as less then 800 megabits per second, there are two types of tests; a wafer sort and final test.

During wafer sort, these lower performance DRAM memories are first tested on the wafer in tact before they are singulated into individual devices. This is a key target market for our V6000 Platform. At this test insertion the DRAM memories are checked for bad bits and are repaired if possible.

The second type of test is final test. This occurs after the devices have been singulated and packaged. In this step the interface circuitry in the bits within the device are tested again. For the higher performance DRAM memories, which we refer to as high speed memories, these are separated into types of test, wafer sort, core final test, and half speed final test.

The first two steps are essentially the same as they are for the lower speed devices. The third test is unique to higher performance DRAM devices such as XER, GDDR, DDR3, or requires test equipment with a minimum of performance level of one gigabit per second to as high as 6.8 gigabits per second.

In this half speed final test market Verigy leads the industry in both performance and systems installations. The growing high speed requirement for DRAM interface tests are beyond the speed range of most existing testers being used by customers today.

This is a key target market for the 93L HSM platform. We believe the trigger point for additional HSM tester purchases is the transition of lower speed DDR3 devices to higher speed DDR3 devices. Lower speed DDR3 devices are in the range of 1.0 to 1.3 gigs and the higher speed DDR3 devices are in excess of 1.3 gigs.

The majority of the parts on the market today are 1.3 gig and below. Customers and market research firms are expecting volume transitions to higher speed DDR3 devices to begin [break in audio] around the first quarter of 2010.

Given the downturn in the memory market we believe there will be very few purchases made this year and the ATE capital equipment market size for high speed interface testing will be less then $50 million.

Should the DDR3 transition to greater then 1.3 gig occur in 2010 we would expect the market size to grow to $100 million for 2010, and reach around $200 million by 2012. We believe we are well positioned to capture a substantial portion of the market when this happens.

Now I’d like to do a brief update on our flash and DRAM memory business, as expected the memory market was tough throughout the industry and for Verigy product sales declined to a low of $4 million. To put this into perspective the total test sales for the entire industry in calendar Q1 were only $16 million.

On a positive note during Q2 we received our first V6000 acceptance for high volume manufacturing. You may recall in previous quarters we had shipped multiple engineering systems. During the quarter the V6000 earned Frost and Sullivan’s 2009 North American Product Innovation of the Year Award.

The V6000 was recognized for its ability to test DRAM, NAND, NOR, and MCP devices on the same system. This is consistent with our scalable platform strategy and provides a flexible solution for our customers.

Now I’d like to discuss another award that we received as a company. VLSI Research ranked Verigy at the top of its 2009 10 Best list for test equipment suppliers and by a wide margin. This is the fourth consecutive year that we have achieved a top 10 ranking in this category and the first time that we’ve ranked as number one.

This award is the result of customer input from around the world. Customers rank the companies in 13 areas of accomplishment including, cost of ownership, uptime, software, built to quality, usable throughput, results quality, product performance, process support, field engineering support, spares support, support after sales, technical leadership, and commitment.

Verigy received the highest ranking of all test suppliers in 11 of the 13 categories. We also placed on VLSI’s 2009 10 Best awards list for large suppliers of chip making equipment. For this category Verigy placed fourth of all semiconductor capital equipment suppliers and ranked highest among all the back end companies.

Now I’d like to discuss our manufacturing outsource strategy, in April we entered into an expanded global manufacturing partnership with [Jaybul]. [Jaybul] already has a substantial amount of Verigy’s business today and they’ve been providing printed circuit and high level assemblies to us for years.

This new agreement expands [Jaybul’s] role to include final assembly and test for the majority of our products. This will be key to our achieving our manufacturing cost and responsiveness objectives. Also they already have a substantial portion of our bill of materials and expanding [Jaybul’s] role to include system integration test will eliminate one level of mark up in the supply chain.

Further we’re targeting to have 85% of product manufacturing and repair conducted by [Jaybul]. By vertically integrating with [Jaybul] we will have a single point of material planning and procurement for our products which will allow us to optimize inventory, maximize resources, simply logistics, and shorten lead times.

Lastly with [Jaybul] we expect to obtain better material pricing and lower manufacturing overhead which are key to improving gross margins. The transition to [Jaybul] is already begun and we expect to be substantially complete by the end of this calendar year.

Before I turn the call over to Bob I would like to summarize by saying Verigy has a strong balance sheet and staying power. We have a great product innovation and we have the operational excellence to get through this downturn.

Our management team and employees around the world have been doing a great job demonstrating their ability to remain focused on our priorities. We believe Verigy will emerge from this downturn as one of the healthier and more competitive companies in the semiconductor industry.

And with that I’d like to hand the call over to Bob.

Bob Nikl

Thanks Keith and good afternoon everyone. My comments today will focus on our second quarter financial highlights which benefited from our cost reduction and restructuring activities, our progress in achieving a lower cash usage rate and new break even target, and some color on our outlook for next quarter.

Please note that our GAAP financial results continue to include restructuring charges, as well as a one time tax adjustment this quarter related to acquired IP. Following the low revenue and order levels of Q1, we saw encouraging signs in demand for our products in Q2.

Revenue was in line with our expectations, orders were better then expected, and backlog shippable within the next six months improved over 20% to approximately $84 million. Hardware system sales were 59% of total revenue this quarter compared to 49% last quarter. For the SoC business sales of $38 million represented an increase of 58% sequentially and benefited from both technology as well as some capacity buys.

Memory sales while only $4 million did benefit from partial collection for the systems that were debooked last quarter. You may recall that the non payment for these systems resulted in a loss of revenue recognition as well as having to write off the related material cost.

We expect to continue to receive payments for these systems throughout the balance of the year. Turns business this quarter was 75% compared to 31% last quarter. Services and support revenue of $29 million represented 41% of total revenue compared to 51% last quarter, and the revenue split by products and services was 59% and 41% respectively compared to 49% and 51% last quarter.

And we had two greater then 10% revenue customers this quarter. Regionally our revenue mix was as follows; Americas 18%, Asia Pac 78%, and Europe 4%. Orders of $83 million more then doubled from Q1 resulting in a book to bill ratio of 1.17 while cancellations and debookings were minimal at roughly $1 million.

Systems orders and upgrades were 73% and 27% of total product orders respectively. Regionally our quarterly orders were as follows; Americas 15%, Asia Pac 78%, and Europe 7%. Orders from our IDM and fabless customers were 40% of the total, while the remaining 60% came from OSATs.

This compares to 59% and 41% respectively last quarter. We saw very good growth in the OSAT channel this quarter. Gross margin was 31% versus 13% last quarter and on a non-GAAP basis after excluding the impact of restructuring charges was 34%, an increase of 18 points from last quarter.

This sequential improvement benefited from the memory system collections that I mentioned earlier, lower charges for excess and obsolete inventory, and significantly improved period costs which continue to benefit from our cost reduction initiatives.

I’d like to point out that consistent with my comments last quarter, there is no remaining P&L exposure with regard to the debooked memory systems. As we collect the outstanding amounts for the systems previously shipped, we will be able to recognize revenue as well as favorable profit flow through.

Our R&D spending totaled $20 million or 28% of revenue which was $5 million lower then the prior quarter and $6 million lower then the comparable year ago period. SG&A was $28 million or approximately 39% of revenue, a decrease of $3 million from the prior quarter and $9 million lower then last year.

After excluding the effect of restructuring and other non recurring items, total operating expenses declined approximately $5 million this quarter. Since we began our cost reduction actions at the beginning of the fourth quarter of last year, we have reduced our total quarterly operating expenses by approximately 30% or $20 million and we estimate that our break even goals for operating expense are ahead of schedule.

Net other income was approximately $1 million while our income tax provision which included the one time tax charge previously mentioned was $3 million. Our net loss for the quarter was $30 million or $0.52 per share and after excluding the impact of the charges discussed earlier, our non-GAAP net loss was $25 million or $0.44 per share compared to $0.70 last quarter.

Regular full time employee headcount at quarter end was approximately 1,460, a reduction of roughly 100 from last quarter. Our total headcount reduction since beginning our resizing program including temps and contractors is about 260 and our permanent cost reduction plans remain on track and we expect to be completed by the end of fiscal Q1.

Now I’d like to provide some balance sheet highlights, we ended the quarter with $318 million of cash and marketable securities, a decrease of $38 million from last quarter. Free cash flow was a negative $38 million compared to a negative $49 million last quarter. This improvement reflected the significant reduction in our operating loss this quarter partially offset by an increase in working capital.

We did not repurchase any shares during the quarter. Ending accounts receivable of $44 million were up $12 million and DSO increased to 56 days compared to 42 days last quarter. The DSO increase was entirely due to the back end loading of our revenue in the month of April when nearly 60% of revenue was recognized.

I want to emphasize that our receivables quality and collection profile remains best in class with over 99% of our accounts receivable current. Inventory declined by $8 million to $61 million while depreciation and amortization expense in the quarter was approximately $4 million and CapEx spending was $1 million.

For our Q3 financial outlook, we are expecting revenue to increase in the range of 10% to 25%, gross margins to improve two to five points, and operating expenses to remain relatively unchanged. We would expect a relatively small increase in SG&A should we realize the higher end of our revenue range.

We also expect $4.3 million to $4.7 million of share based compensation expense and you should assume weighted average shares outstanding for the third quarter of approximately $58.6 million. In summary our restructuring plans are on track, we are encouraged by some signs of life in the sector especially in the downstream and continue to believe that Verigy has the best solutions offerings, the best operating model, and the best people to continue to meet the needs of our customers.

And before we open the call for questions, I’d like to turn the call back to Keith.

Keith Barnes

Thanks Bob, the market situation has been very challenging over the past few quarters and the worldwide economic crisis has turned out to be more challenging then anyone could have ever imagined. Its no surprise that companies and employees have had to make numerous sacrifices during the downturn and Verigy is no different.

I’d like to personally thank all of our employees worldwide for their sacrifices that they’ve had to make over the past few quarters. Their continued focus, dedication and creativity has made it possible for us to widen the gap with our competition to gain [inaudible] of our new products and to penetrate new customer accounts.

Also I’d like to thank our shareholders, our customers, and our partners for their continued confidence in our company, in our products and in our future. With that we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Satya Kumar – Credit Suisse

Satya Kumar – Credit Suisse

The strength in your revenue guidance basically from your SoC product line, can you talk a little bit more about the particular end market looks like, it looks like it’s a PC and the RF products that you mentioned but can you give a little more clarity on how you see the strength going into fiscal 3Q also.

Keith Barnes

Those are the two primary areas that we’re seeing strength, obviously PC and cell phones. I guess last quarter we had talked a little bit about Netbooks and that we thought PCs were possibly going to be firming up. As it turns out we’ve seen that and we’ve seen that occur with our OSAT customers inventory increases and also new technologies which are being driven into the OSATs.

As you may have seen or heard in our call, there’s about a 19 percentage change from IDM to OSAT volume in the quarter so it’s a little bit of capacity increase to replenish inventory and also new technologies moving into the sector.

Satya Kumar – Credit Suisse

Okay and then going forward for services looks like you would expect services also to record similar to in line with your guidance.

Keith Barnes

From a service standpoint, service has been holding up pretty well. That’s a component of the install base out there and also new product sales so you would expect a little bit of a dip as new product sales have diminished over the last quarter or two and then for it to pick back up when sales start to renew.

But service has done reasonably well. Most of our contracts are booked out over a year period so the dip hasn’t been very pronounced and we expect service to be kind of in the same rough range over the next quarter.

Operator

Your next question comes from the line of Raj Seth – Cowen & Company

Raj Seth – Cowen & Company

Just a couple of quick ones, can you talk a little bit or remind us what your break even is in the context of the trajectory that you are on, do you feel like you need to do anything to that break even level. I seem to remember it was somewhat over, maybe it was $110 million. Let’s suppose that it sort of flattens out here for a quarter or two and maybe that’s not what you’re suggesting, but what is it that would cause you to revisit in the context of continued uncertainty that the break even level that you’ve set currently.

Keith Barnes

As you go through these plans you sometimes have to make modifications. We’ve already made one set of modifications to get down to the 110 plan or to move along that vector. We feel pretty good about that vector. We expect to get our costs in line with that $110 million break even plan roughly Q1 of 2010.

And if the market cooperates we would like to see the revenue and the cost allow us to get to that break even point but this is not guidance, its not a guarantee. We’re just moving in that direction and we’re seeing more positive signs this quarter then we had in the past. So we still have a few quarters ahead of us to continue getting cost out.

I think we’re going to be able to do that and if the market continues to come back to any kind of a normal point, that will be helpful as well.

Raj Seth – Cowen & Company

And this last quarter when you entered the quarter you had suggested that you were anticipating and it sounds like you got much better turns business, in the quarter that you’re guiding are you similarly assuming a better turns business or you’re going to take somewhat more off of the backlog and the bookings.

Bob Nikl

It would be a little bit more of the latter. Obviously 75% turns in the quarter is something that we’ve not really seen before. Back of the envelope my expectation for Q3 is that turns would be somewhere around 60%.

Operator

Your next question comes from the line of Jim Covello – Goldman Sachs

Jim Covello – Goldman Sachs

Just a couple quick ones, utilization rates at the OSAT if I’m not mistaken, I didn’t hear that.

Keith Barnes

The utilization rates have obviously gone up, I can give you some numbers here.

Bob Nikl

Mid 50’s to low 60’s depending upon whom you’re looking at.

Jim Covello – Goldman Sachs

And that was coming from as low as the teens and the 20’s.

Keith Barnes

No it was down in the 40’s and its back up in the 50’s.

Jim Covello – Goldman Sachs

And that’s, I would have thought with the increase in utilization at TSM and that flowing through that would be higher, but maybe there’s a little bit of a lag effect there.

Keith Barnes

First of all I think what you’re seeing is some of the RF products that we’ve been selling to people are new to some of the OSATs, or let’s say they’re increasing their fleet. And then there’s some new technologies which have been deployed as well. And those technologies are requiring additional purchases at the OSATs.

So if that continues and the order rates are as we were talking about for at least the one or two OSATs that we mentioned if that continues in the next quarter or two I would expect utilization rates to continue going up and in those new technology areas like RF and high speed consumer mix signal devices or PC and graphics devices, that they’ll need systems for that as well.

Jim Covello – Goldman Sachs

And then you give a very helpful and detailed discussion of the DRAM market, could you give a little bit of color on the flash market and some of the similar dynamics around that.

Keith Barnes

I would say that in the flash marketplace from a testing standpoint its very much the same. There’s wafer sorts and there’s final test of those devices and of course MCPs. We deal with all three of those and I’d say that the kind of work that’s done there in terms of wafer sort is very much the same, and final test is very much the same and I’d say that the big difference is there’s not the redundancy repair element that you see in DRAM where a bad circuit is found and its repaired.

Operator

Your next question comes from the line of CJ Muse – Barclays Capital

CJ Muse – Barclays Capital

First question in terms of your gross margin and OpEx guidance is that off of pro forma or GAAP.

Bob Nikl

It would be the non-GAAP.

CJ Muse – Barclays Capital

Okay so just to confirm, so OpEx roughly flat at 48.4, maybe a little higher, if you get to the high end of the revenue range.

Bob Nikl

That’s correct. I tend to look at it as 49 to 50.

CJ Muse – Barclays Capital

Okay and then again for the gross margin, so up two to five so 36 to 39%.

Bob Nikl

Correct.

CJ Muse – Barclays Capital

And then moving on to the OSAT side, nice pick up in business there for you. I guess can you talk about a couple of things, one can you compare and contrast technology versus capacity buys there and then it sounds like listening to their calls that they’re still holding pretty tight on CapEx so are you seeing them starting to loosen up the purse strings or are they buying on consignment.

Keith Barnes

No, the first place that they start to loosen up their purse strings is when they’re forced to buy. And when they’re forced to buy its usually as a result of one of the fabless companies saying, here’s our new technology and you’ve got to have this kind of capability to test it.

Those are the first things that we’ve seen. Secondarily I think they were, when the dye banks and inventories came down substantially in the quarter I think that they weren’t prepared for some of the snap back and a couple of these folks on the foundry side pulled back their workforces earlier then they had anticipated and in the OSATs to test the parts got a flurry of orders as well.

So I think they were caught off guard and some of the systems that they were transitioning to newer technologies just weren’t ready yet so they had to buy product. So I think it’s a good sign in general. I just want to remind everybody that this is coming off of a very, very low period so this is no where near what we’ve seen in the past.

Its just better then it was last quarter, and hopefully will continue.

CJ Muse – Barclays Capital

On the technology side for the OSATs was that mostly RF or broader based.

Keith Barnes

It was RF and it was PC chips for graphics primarily.

CJ Muse – Barclays Capital

On the cost cutting side, I think you said in your prepared remarks that your headcount was down, if my math is right, down about 190 people from the 1,650 at fiscal year end whereas in previous discussions you’ve talked about a 300 person headcount reduction, so I guess the question is is that math right. Should we expect further cuts and if so, how does that translate into cost down efforts in the next couple of quarters.

Bob Nikl

A couple of things, we did talk about both regular full time heads as well as temps and contractors. Net net by the time we’re finished we would say that total reduction is going to be somewhere in the neighborhood of 300 people of which 20% of the headcount reductions, or a 20% headcount reduction for regular full time employees.

With regard as to how much additional cost comes out, what I’m trying to do is give as much guidance as I can with respect to next quarter without getting into the [grimble] because we are transitioning for more of the temporary cost reduction profile to permanent as more and more of those people actually leave the business.

So incrementally as I said I think we’re ahead of schedule for the cost reduction on the OpEx side, the balance of improvement now will be coming out of cost of sales and part of that is obviously intertwined with the [Jaybul] transition.

Operator

Your next question comes from the line of Patrick Ho – Stifel Nicolaus

Patrick Ho – Stifel Nicolaus

Nice work on the cost cutting fronts this quarter, two housekeeping questions, first in terms of what are you looking for on the tax provision for 3Q and in terms of the interest income line for 10-Q, was there any items in there aside from the interest income because your cash did decline but it didn’t decline that much.

Bob Nikl

So two things there, for tax purposes I would say I would be looking at to model provisions somewhere around $2 million next quarter. Interest income is a little bit more problematic to talk about in this quarter. We have had the impact of much lower yields obviously but there was also a little bit higher then previous quarter foreign exchange loss with regard to currency movements and I just can’t predict that but I would say interest income should continue to run at roughly a rate of $1 million or so a quarter.

Patrick Ho – Stifel Nicolaus

In terms of the business trend as we look forward into 3Q and beyond, you mentioned some of the I guess marketplaces and the applications that saw better then expected strength in 2Q, are they expected to continue and do you see any other types of applications being added on as you look into 3Q. Do you see additional markets being added on for this quarter.

Keith Barnes

First of all I think that for the next quarter we should still see strength in the RF side. We also expect to continue seeing strength for the PC chip devices and I think that on the memory side its very hard to tell so most of the strength is going to be coming from the digital consumer side and maybe some additional business in the HD TV and Blue Ray side.

Patrick Ho – Stifel Nicolaus

In terms of cash burn as we look forward, now that you’ve got a lot of these cost cuts out of the way do you have any I guess guidance on that or should we just assume it will be a lot less or a little bit less then what you experienced this past quarter.

Keith Barnes

Cash usage in Q3 should be roughly in the $25 million range.

Operator

Your next question comes from the line of Gary Hsueh – Oppenheimer

Gary Hsueh – Oppenheimer

I look at the recovery of the OSATs the utilization rate has gone up quite a bit in the last couple of months, we had a quick check in Asia and found out that the rush orders has been dying down and also the inventory rebuilt has been slowed. In that case utilization rates recovery might be slowed down. So what’s your view on the utilization rate looking forward and what do you think the impact of that on your revenue forecast.

Keith Barnes

This comes as no surprise given the fact that some of the foundries had essentially laid off their workforce and shut down wafer starts. You would have expected rush orders for devices and with the inventories being pulled down and the dye banks being depleted, this snap back would be, we would expect it to be hot and heavy for a while and then slow to a little bit slower pace of increase.

So it was dragged down too far, its come back hard and its probably going to slow down because the ultimate demand is not what it was a year or two ago. Its just better then it was last quarter. So this comes as no surprise but having said that, we would expect that the utilization rates will continue to slightly go up over the next few quarters and that the recovery will be slow and you won’t see any big spikes.

Gary Hsueh – Oppenheimer

Regarding the gross margin we saw some of the upgrade revenues coming out of Port Scale RF and I assume those will have a positive contribution to the gross margin and looking forward are those going to continue and continue to contribute to the gross margin.

Keith Barnes

Yes, I think that there are, we have many systems in our fleet out there which have not been upgraded to Port Scale RF yet and RF continues to be a very strong area for many areas of the world even though China is doing particularly well right now.

So we would expect the existing fleet to be upgraded which means that those higher gross margin RF upgrades will be blending into our revenue and then new systems will be sold as well.

Gary Hsueh – Oppenheimer

In terms of your memory revenues this quarter, $4 million, you mentioned that part of the $4 million is coming out of the debooked systems from one of the [inaudible] customers. Could you give us an idea how much is from that debooking accounts for the $4 million.

Bob Nikl

No I think when we’re talking about a total number of only $4 million for memory trying to parse it wouldn’t be very informational.

Gary Hsueh – Oppenheimer

Last quarter you mentioned that total debooking was about $10 million so you expect you will continue to get some of the revenues back from the $10 million debooking, is that correct.

Bob Nikl

That’s correct, that’s our expectation.

Gary Hsueh – Oppenheimer

Your backlog for the quarter, can you give out that number.

Bob Nikl

Yes, I indicated it was $84 million.

Operator

Your next question comes from the line of David Dooley – Steelhead Securities

David Dooley – Steelhead Securities

Congratulations on the recovery of your business and back to guidance that gets people excited again. I was wondering you mentioned you had two 10% customers during the quarter, can you tell us who those customers were or what segments or if they were OSATs or IDMs.

Keith Barnes

No, it will come out in the Q.

David Dooley – Steelhead Securities

Okay and would one of them be one of these customers you referred to that gave you a large order during the quarter either in the GPU device or the Japanese customer.

Keith Barnes

Again, it will come out in the Q. I guess you can draw your own correlation.

David Dooley – Steelhead Securities

Okay, as far as the revenue guidance for the quarter could you talk about what the differential is between the low end of the guide and the high end of the guide and I imagine that’s systems kind of fluctuating but just talk about what, the guidance range is pretty wide, why you have that guidance range and what some of the factors are to hit the high end or the low end.

Keith Barnes

As you may imagine the way we take at guidance is we look into the forecast that the customer team provides to us and the current forecast that we have is reasonably wide and therefore we’re picking a wider range because although we would like to be optimistic and hit the high end of the range there’s a lot of curve balls being thrown these days and everything from a customers who have been holding off for a long time to customers who are making their decisions at the end of a quarter come into play.

So as a result to be prudent we’ve given a wider range.

David Dooley – Steelhead Securities

You mentioned the guidance statements of one of the OSATs in Taiwan up 40%, and the biggest driver of their business is their PC business and I guess I’d probably argue at this point that that OSAT is going to be up more then 40% and the big driver is PCs. And correct me if I’m wrong but versus you or [Teradyne] you have more relative exposure to the PC kind of food chain, don’t you.

Keith Barnes

I don’t know exactly how either one of us would break it out. I’ll just say that we have a pretty good exposure ourselves. We have strong relationships with the OSATs throughout Asia and particularly in Taiwan. We’ve seen a lot of activity in the last quarter on Netbooks and now PCs are coming back strongly and its playing in our favor.

So I don’t want to juxtapose us versus the competition on this but I’ll just say we’ve got good relationships there.

David Dooley – Steelhead Securities

You gave us a really good idea as to what you thought the size of the high speed memory market was, that you’re going to take the 93K into, but you have this other product that’s kind of addressing the jelly bean DRAM business and I was wondering if you might highlight what you thought the opportunity was for that, I guess you called it the V6000.

Keith Barnes

Its an interesting question because obviously the expectations for the memory marketplace have changed in the last couple of quarters and in the last year. So I guess it depends on how you break it down. If you take a look at what flash IC systems are expected to do this year, VLSI’s numbers are as low as $155 million this year in flash going up to maybe $400 million next year and $500 million the year after that.

So 2010 looks like its going to be stronger for flash then it was this year and in ahead of where 2008 was. Now I don’t know if they’re right or not because last quarter was only $16 million sales for the entire industry so, the memory industry anyway, and so that means that this year is going to be pretty back end loaded.

So if you take a look at DRAM from let’s say 2008 was around $300 million dropping to $218 and expected to jump back up to $543 million and if that occurs then you’ve got two areas that are seeing some relative strength and then the customers have, as you can see been holding off. The buy rate has been below one for several quarters now.

So one would expect that there’s a little bit of pent up demand plus you’ve got technology change occurring in the foundries.

David Dooley – Steelhead Securities

So in other words it kind of sounds like you, I think you are articulating it was like a 2010 event for your high speed memory business, but it sounds like there’s some opportunity in 2009 for the other segments of the both the DRAM and the flash business as you indicated its back end weighted spending, and there’s opportunities to gain share.

Keith Barnes

Yes that’s what the industry forecasts indicate, but the first quarter was pretty grim so we’re hoping that the back end is going to be stronger. We’re hoping 2010 is going to be stronger. But at the moment given the worldwide economic situation I don’t think you get very many points if you’re an optimist these days.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Judy Davies

Thank you everyone for joining us this afternoon. We will be on the road over the next several weeks and hope to meet with you in person. We are scheduled to participate at the Cowen and Company 37^th Annual TMT Conference on Wednesday, May 27 in New York City.

Also please mark your calendar for Verigy’s analyst event scheduled for Wednesday, July 15 in San Francisco. Please note that this event occurs in conjunction with the Semicon West Trade Show. An invitation to our analyst event will be emailed to you within the next couple of weeks.

If you are interested in scheduling a one on one meeting with Keith, Bob or myself during the week of Semicon, please contact me at 408-864-7549. Thanks again.

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