LTX-Credence Corporation F4Q09 (Qtr End 7/31/09) Earnings Call Transcript

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LTX-Credence Corporation (LTXC) F4Q09 (Qtr End 7/31/09) Earnings Call September 3, 2009 10:30 PM ET


David Tacelli - President and CEO

Mark Gallenberger - VP and CFO


Vernon Essi -Needham & Company

Patrick Ho - Stifel Nicolaus

Mike Crawford - B. Riley & Company

David Dooley - Steelhead Securities

Peter Wright - GC Research


Welcome to the LTX-Credence Corporation’s fourth quarter and fiscal year end analyst conference call. (Operator Instructions) Speakers for today’s call will be David Tacelli, Chief Executive Officer and President, and Mark Gallenberger, Vice President and Chief Financial Officer. At this time I would like to turn the conference over to Mr. Mark Gallenberger.

Mark Gallenberger

Welcome to LTX-Credence Corporation’s fourth quarter and fiscal year 2009 conference call for the period ended July 31, 2009. Joining me on today’s call is David Tacelli, CEO and President.

After my introductory comments Dave will discuss the company’s performance for the fourth quarter and discuss the business outlook. Then I will provide further detail on the company's financial performance during the fourth quarter of fiscal year 2009 as well as provide guidance for first quarter of fiscal year 2010. We will take your questions after our prepared remarks.

A replay of this call will be made available through October 2, by dialing 888-286-8010, and the pass code is 53284880, or you can visit our website at As a reminder the only authorized spokespeople for the company are David Tacelli, Richard Yergainian, and myself.

Now for our Safe Harbor statement. During the course of this conference call we may make projections or other forward-looking statements regarding LTX-Credence's business outlook, its merger integration plans or the future financial performance of the company.

We wish to caution you that these statements, such as projected revenues, net loss, loss per share, operating expenses, gross margin, cash flow, non-GAAP measures and breakeven targets are only predictions and that actual events or results may differ materially.

The guidance provided during this call represents the company's estimates as of this day and the company assumes no obligation to update this guidance. Please refer to our Safe Harbor statement in our earnings release for more information on important factors that could cause actual results to differ. Now on to the call, Dave?

David Tacelli

Thank you, Mark and good morning everyone. Just about a year ago, we were closing the deal to merge with Credence and there was concern about whether we would successfully integrate the two companies. At the same time, we had just started to experience the worst business conditions in the ATE industry over the last 15 years.

As we sit here today, I can confidently tell you that the integration effort of combining LTX and Credence far exceeded our most optimistic goals and we have seen a rebound from the dismal business conditions we experienced during the middle two quarters of our fiscal year. As our guidance indicates, we expect business expanding again in our first fiscal quarter and while cautious, we expect this trend to continue.

Before providing some details of explaining why we view the integration as being so successful, it's important to take a step back and review the merger rationale.

First, we needed to expand our customer base and rapidly grow the business in China and Taiwan region.

Second, we saw an opportunity to expand the product portfolio, combining the best technology from LTX and Credence to more effectively address the target market segments we see as the growth engine for the ATE industry.

Finally, we believe that by combining the two companies there were significant synergies as we streamline our processes, outsourced all manufacturing and combine the R&D efforts while focusing on the high growth markets inside the SOC space.

So this is the rationale. As a backdrop, how did we do? As of today, we have the largest customer sales, service and support presence in the fast growing China-Taiwan market through our partner Spirox.

The total number of customer-facing people we have in the region exceeds 100 with the majority in the application engineering and field service part of the business. This breadth of talent gives the new LTX-Credence an ability to take on a variety of new projects and enhances our position in the region as well as getting our customers into production more rapidly.

From a customer diversity standpoint, over the last decade LTX had one customer that dominated our revenue profile. While we are making progress to diversify our customer portfolio, the changes to grow the customer base are slow to materialize in the ATE industry.

From the Credence side, they relied on a small number of key accounts with a customer list completely different than LTX. Both companies looked at this merger as an opportunity to grow the customer installed base in a more meaningful way on a much faster timetable.

As a result, during the last fiscal year we had three customers greater than 10%, with no single customer contributing more than 14% of revenue. Because of this merger, the new LTX-Credence now has a good distribution of key customers in all the target markets we're focused on. We believe our existing customers can drive our business to meet our cross-cycle revenue targets and provide the company with consistent P&L profitability.

In addition to this, we have a significant presence with all the key OSAT manufacturers in Taiwan, China, Singapore, Malaysia, Korea and the Philippines. The combination of our IDM presence as well as our installed base in the OSAT community gives us substantial base to grow our business. In addition to maintaining the customers we had before the merger. We now have aggressively put into motion several new initiatives that will grow our share at new accounts and in some new markets.

The combination of our low-cost architecture and leading edge analog technology is providing us with opportunities that weren't available to either LTX or Credence individually.

As you have seen from our recent customer press releases, we continue to win new pieces of business at a variety of accounts from around the world. These press releases are only a small portion of the new activity we have under way.

Together, these are visible signs that we have achieved a better balance of customer diversity and new customer growth that will lead to a faster return to higher revenue levels as the overall economy recovers.

On the engineering front, while digital technology is an important element in the process of device testing, it is the integration of critical elements of analog instrumentation that drives significant value for our customers. In the past, you have heard me talk about key market segments of RF wireless, power management, high-speed interfaces, complex converters and a variety of other consumer-oriented device markets as areas of focus for the company.

With the combination of LTX and Credence, we are now the industry cost leader for these market segments, providing the right technology at the lowest cost of test for our customers. We expect these markets to grow faster than the overall industry for two reasons.

First, there will be no slowdown in the electronic content that continues to be added to consumer products, driving up the quantity of devices. Second, companies will continue to combine pieces of technology into single chip or single package applications, because, this is the best way for them to drive down the cost of their products. LTX-Credence is in prime position to capture this growth.

Overall, our product road map is driven by a focus on what our customers need, to run high volume production operations and our engineers are focused on developing instruments and systems that achieve the required performance, but at the same time keeping the cost of the solution as a priority.

For example, our Diamond ASL and X-series products are air cooled which provides a lower cost infrastructure compared to liquid cooled systems and as we add new instruments with higher performance capabilities, we maintain our development focus on the cost of test profile our customers need, with the right technology for the markets we serve.

How did we demonstrate this activity to our customers? The following are several examples of how we delivered on the commitments we made. First, we've taken the high-speed I/O technology from our liquid-cooled sapphire tester and repackaged it for use in air-cooled X-series product. This reduces our customer's cost while maintaining the performance they need for this class of devices.

Second, we have incorporated several instruments from our X-series into the ASL product line, extending the capability of the product, and taking advantage of the nearly 4,000 ASLs installed around the world. This will provide our customers with longer useful life on their equipment and a lower overall cost of test.

Third, we have capitalized on the size and performance of our Diamond product and are preparing to launch a brand new product focused on high volume, mixed pin count devices that's requires extremely high parallelism, in excess of a 100 devices tested in strip form at once. This capability allows our customers to expand the use of parallel test beyond what was feasible with conventional test platforms.

Finally, we've targeted a next generation product that will reuse the technology from several of our products and target the complex SOC communications market.

We will be the clear cost leader in this highly competitive market because of the air-cooled architecture we have of our products and the analog technology we bring. The bottom line is, we have a strong portfolio of products with a string of new capabilities scheduled to be introduced to the market starting with two new product introductions in the next 90 days.

In addition to the growth in our customer base and the combination of critical pieces of technology, we were also able to reengineer the entire business model of the company. We originally estimated that by streamlining the processes, consolidating the product road map, reusing IP and outsourcing all manufacturing, we could achieve $25 million to $35 million in annual cost synergies.

As the merger process started to take shape, we quickly discovered there were significantly more savings that could be achieved by focusing on the high growth SOC markets, changing our organization to match the market focus, and eliminating redundant or non-value added processes from the two companies. As a result of this work, we have reduced our annual operating expenses by over $112 million, with 95% of those savings being permanent reductions to the operation.

Because of these reductions, we have reduced the quarterly EBITDA breakeven from $88 million to under $39 million. This isn't a plan of things to come. These reductions have already been implemented and the savings are already reflected in the current quarter. We have also taken the same approach to make sure our balance sheet is as strong as our operating model.

At the same time of the merger, LTX had a $20 million term loan outstanding and Credence had a $122 million of convertible debt due in May of 2010. Since the merger was completed we repurchased about 70% of the convertible debt at a discount and we extended the maturity on most of the remaining amount to May of 2011.

We also secured a $40 million revolving line of credit from Silicon Valley Bank late in February, which we used to finance a portion of the convertible debt repurchase. The end result is we remain in a net positive cash position with no major debt payments due until February of 2011. With our revenue guidance for Q1, we will start generating positive EBITDA and thereby work to continuously strengthen our balance sheet.

With all that said, we are complete with the merger and with all the restructurings behind us, we continue to drive for additional efficiencies in our operation and we will work to wrap up the final pieces of our facilities moves in the next two to three months.

Our employees now see a stable work environment and the entire focus of the company, from the sales executives to the design engineers, is on growing the business.

In summary, all the goals we articulated to the investment community at the time of the merger have either been met or exceeded by a large amount.

As we start our new fiscal year with the right product strategy, a streamlined operation that has significant profit leverage, and a broad list of customers in the markets we serve, our top priority is on accelerating the revenue growth of the company. We will continue to work with existing customers to capture more of their business and we will continue to win new customers in specific market segment we're focused on.

I don't think, I could just hand the call over to Mark to discuss the financial performance of the quarter and the fiscal year without providing some commentary on our outlook moving forward.

We believe that our business has clearly moved off the bottom and we expect this growth trend to continue in our first fiscal quarter. This will also be a quarter in which we return to generating positive EBITDA.

Looking out a bit further, we remain cautiously optimistic that the improving business environment will continue. Utilization at some of our key customers has now reached levels over 90% and with this indicator we expect many of our customers' sales forecasts to firm up.

With that as a backdrop, there is the potential for additional growth over the next several quarters. We continue to take a conservative approach to future quarters because the end market growth to this point has been driven by Asia, with Europe and the US still mired in somewhat sluggish business conditions.

If European and US consumers begin to increase their spending, we will see consistent growth for the next several quarters. As always, we will continue to run the company very conservatively from an operating expense perspective, but we will be very aggressive in opportunities to expand our business.

In conclusion, we have spent the last year focused on accomplishing the task of integrating LTX and Credence, and we have successfully concluded that effort. We are driven to help our customers achieve a competitive advantage by delivering technology specifically designed to provide the lowest cost of test. By achieving this goal, we have positioned the company for significant growth through the next business cycle.

I'd now like to turn the call over to Mark for his detailed comments on the quarter. Mark?

Mark Gallenberger

Thanks, Dave. Revenue for the quarter was $35.2 million, up 43% from the prior quarter. Gross margin improved to 43% up from 28% last quarter, due to higher revenue absorption of fixed costs and more favorable product mix.

R&D spending declined sequentially from $16.6 million to $12.4 million this quarter. SG&A also declined sequentially from $11.1 million to $10.1 million this quarter. Amortization of purchased intangibles related to the Credence merger was $4.1 million for the quarter.

Net loss for the quarter was $9.6 million, or $0.08 loss per share on a GAAP basis. Excluding the net gain on liquidation of a subsidiary, and other merger related charges totaling $3.5 million and excluding the amortization of purchase intangibles of $4.1 million, the net loss for the quarter was $9 million, or $0.07 loss per share.

Excluding the one-time items, the EBITDA for the quarter was negative $2.7 million, which puts our quarterly EBITDA breakeven at approximately $39 million, achieving our target for the fiscal year. The EBITDA calculation excludes amortization of purchased intangibles of $4.1 million, depreciation expense of $4.1 million, stock-based comp expense of $600,000, net other income of $1.3 million, and $63,000 in income tax benefit.

Next, I'll provide a breakdown for revenue for the quarter. 57% of revenue came from IDMs, while 43% came from subcontract test and fabless companies. 67% of revenue was for products, while 33% was for service. Post merger, our revenue diversity has significantly improved with three customers contributing between 10% and 14% of revenue for the fiscal year. We also had three other customers just slightly below the 10% threshold.

Now on to the balance sheet. We ended the quarter with gross cash of approximately $96 million, and net cash of approximately $10 million. For the quarter, net cash decreased approximately $14.7 million, slightly higher than originally planned due to working capital changes. We finished the quarter with trade accounts receivable of $23.6 million. As a result, DSO decreased to 61 days, versus 69 days in the prior quarter.

Inventory was $35.3 million this quarter, which is down about $3 million from the prior quarter. Net capital expenditures were $500,000 for the quarter, as we continue to keep any and all expenditures to a minimum. Depreciation expense was $4.1 million. We ended the quarter with accounts payable of $18.6 million and stockholders equity of a $106 million.

Guidance for Q1 2010, fiscal 2010 is as follows. We expect revenue to be in the range of $40 million to $42 million, which is a sequential increase of 14% to 19%. Non-GAAP net loss per share is projected to be in the range of $0.05 to $0.03, assuming 128 million shares outstanding. The non-GAAP net loss guidance does not include amortization of purchased intangibles of $2.7 million. Given this revenue range, we expect to achieve positive EBITDA for the quarter.

In summary, we completed the first year of the merger between LTX and Credence significantly ahead of our original plan to reduce expenses and improve the breakeven. We originally expected $25 million in annual cost savings and exceeded $112 million in annualized cost savings.

As a result, our EBITDA improved from $88 million per quarter to approximately $39 million. Our business model has moved off the bottom and is expected to continue to grow in our first fiscal quarter, a quarter in which we expect to return to generating positive EBITDA. Now, the focus is continuing to drive the top line growth which will also drive strong profit leverage under the new improved business model.

This concludes our prepared remarks and at this time we will take your questions.

Question-and-Answer Session


(Operator instructions).Your first question comes from the line of Vernon Essi from Needham & Company.

Vernon Essi -Needham & Company

Thank you very much. Glad to see you guys coming off the bottom here. Just a couple of sort of macro questions Dave. Overall if you look at sort of your account base and who you are targeting in through the China-Taiwan region, can you give us an understanding of where you see the demand coming from or potential demand coming from first rather than further out.

In other words, where does there seem to be most activity in terms of customers engaging in discussions along the lines of potential purchase orders?

David Tacelli

Vern, you are focusing on the target markets; correct?

Vernon Essi -Needham & Company


David Tacelli

Yes. The two major areas of strength right now across the board, basic analog, so a lot of different devices going into the consumer market.

The other area of strength is I'll call it consumer digital, so flat panel displays, DVDs, and extreme amount of support from products in that market and it's a wide variety of customers and that's mainly driven, again, going into the China market, but it could be driven from Europe or the US companies.

Vernon Essi -Needham & Company

Congrats on the order from Ralink and just on an ongoing basis, is this sort of how we're going to learn about your orders. Will most of them be announced or is it just catch as catch can? I'm just trying to understand how we'll know whether things are picking up or not?

David Tacelli

Well, the challenge on press releases is as you know and everyone in the industry knows it's very, very difficult to get customers in most cases to do press releases for a variety of reasons. What we will do is where we can, and we pursue press releases in almost every single situation, we will release them.

The other way that you'll start to learn about them, as you see the revenue growth, , and we may not talk about the specific customer, but we'll talk about the markets in which we've had the revenue growth, but we try to launch press releases in every single situation. It's just not possible based on the customer’s ability to let those or approve those.

Vernon Essi -Needham & Company

Then just moving on to the financial front, Mark. A couple of housekeeping points here. On the depreciation side, it's been trending down over the last couple of quarters. Should we expect that to continue in our models going forward, that trend line?

Mark Gallenberger

Yes. That trend line should continue. There won’t be any significant step function downs, but you will see it start to go south of the $4 million run rate that we’ve had over the last several quarters and start to approach the $3 million run rate.

As you can see, based upon what we've been spending for capital expenditures over the last several quarters, that's going to continue to drive it down even further. I don't believe $500,000 in quarterly capital expenditures is a sustainable run rate, but it's certainly not going to be $3 million to $4 million per quarter either.

Vernon Essi -Needham & Company


Mark Gallenberger

I typically see probably normalized cross cycle capital expenditures in the range of 3% to possibly 4%. So, right now we are running below that run rate.

Vernon Essi -Needham & Company

I think you had said this in your prepared comments, I just want to double-check. Goodwill on next quarter, you said it was about $2.7 million, amortization….?

Mark Gallenberger

Yes, the amortization of purchased intangibles, that is a significant drop-off. We were running in the $4.5 million and $4.1 million range for this last quarter and, that is dropping off in this fiscal. For fiscal 2010, you should be looking at $2.7 million on a quarterly basis for each quarter for fiscal 2010.

Vernon Essi -Needham & Company

Then finally, just on the OpEx side of things, I mean, obviously we can try and triangulate where that range is and again, it looks like a nice sort of maybe flattish move to possibly down. Is this sort of reaching, I don't know if the right word to use, is terminal floor on OpEx expenses for now or should we be expecting more improvements?

David Tacelli

You will see, this is more or less the business model that we've been working so hard to get to. So this is pretty close to where it's going to be. Now, the next significant savings, which will occur at the end of this calendar year, will be the right-sizing of our Hillsboro facility and if you recall, in prior calls we've been talking about that.

We haven't specifically talked about what that savings will be, but now we're comfortable with quantifying that for you. That net-net savings will be approximately $3 million per year, which will start to kick in, in January of 2010.

So, if you want to start modeling it in our fiscal Q3, which begins February, that's probably a safe assumption and that will naturally take down our EBITDA breakeven another $1.5 million per quarter. So being at $39 million today, we could see it getting close to $37 million on a quarterly basis.

That by the way, the Hillsboro facility, that $3 million in savings, a good chunk of that, greater than 50%, will be benefiting the gross margin line.


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

Patrick Ho - Stifel Nicolaus

Thanks a lot. Dave, just give a little color, I think when you talked about the target market strength, do you see any additional markets coming on-board in the October quarter or is it just a continuation of the two that you mentioned in terms of basic analog and consumer digital?

David Tacelli

Patrick, we've also seen some strength as evidenced by our press release in the RF wireless market. I'm not going to say that that's broad-based across a lot of different customers.

I think a lot of that has to do with several wins that's we've had, Ralink being one of them, but outside of that, I don't see a broad-based recovery in a lot of the other markets that we serve. I'm seeing continued buying but not a broad-based recovery.

Patrick Ho - Stifel Nicolaus

Just related to that, when you say no broad-based recovery, at least in your conversations with your customers, I guess what is it going to take, especially now that I guess in the industry we hear utilization rates are going up with the subcontractors, even IBMs are feeling better, what is it going to take for them to spur new capacity orders?

David Tacelli

I think the way I look at the global economy today, as the US and European economies as I've stated started to firm up a little bit, and I think that will start to happen as we get into calendar 2010, that's what I mean by broad-based.

You're seeing a lot of the demand right now, a lot of the strength in a variety of markets as I mentioned, mainly driven out of China, and I think US and Europe will start to broaden that strength as we go into 2010. That's what I mean by broad-based.

Patrick Ho - Stifel Nicolaus

Mark one question for you. In terms of the cash burn and what do you it will be in the October quarter?

Mark Gallenberger

The October quarter, we are forecasting positive EBITDA, so from a cash P&L perspective, I'm not expecting any burn off the P&L. As the revenue's ramping though, I do expect the working capital to be under some pressure in the quarter, so I do expect our net cash to decline. It will be in the single digits, though. The plan is to have it probably in the $5 million, $6 million, $7 million type of range and that's going to be really just driven off timing and working capital changes as opposed to actual cash burn.

Patrick Ho - Stifel, Nicolaus

Then final question from me, just related a little bit in terms about the cash and the AR. Given that we're still in a probably challenging environment for a lot of your customers, have they come to you guys in terms of delayed payments or deferred payments or things like that where it will take a little bit longer to I guess collect on some of the receivables that you've already placed on your books?

David Tacelli

Patrick, what I'm going to do here is I'll take half of this question and then I'll let Mark probably get into the other half. The first half that I see is, one of the leading indicators of the economy or coming off the bottom as we have called it, but we look at is customer's paying faster and that’s demonstrated by our DSO. If you look at our DSO, it's actually declined from 69 to 61.

I think that the situation that you are talking about was far more prevalent a quarter or two ago where customers were pushing for extended terms or pushing for creative payment terms. I don’t know Mark if you want to add anything beyond that.

Mark Gallenberger

No. I think the DSOs will remain and check by given the growth and the revenue it’s going to be difficult to make receivables a source of cash. It’s just kind of the dollar amounts is going to naturally grow quarter-over-quarter.

So, that’s what I see but I don’t see it growing we are extending payment terms I see it just naturally growing as a result of the top-line growing. So, if any thing, I think payment terms and the performance of our customers to pay is actually improving incrementally over the last couple of quarters.


Your next question comes from the line of Mike Crawford from B. Riley & Company.

Mike Crawford - B. Riley & Company

Dave, I think in the past you've tried to give an indication of tester utilization by market segment, maybe some feedback that you're getting from Spirox or elsewhere, but could you break that down for us maybe by consumer digital, RF, analog, automotive?

David Tacelli

I'll do my best to give you a flavor for utilization. Let me break it down this way. If I look at a couple of our top customers, which is the easiest for us to gauge, at our top customers we're seeing utilization that's in excess of 90% to 95% and the reason we can come out and say that is, we know all the testers, we know what they're running and we have a very, very good look at their overall profile.

As you start to get into some of the OSAT situations, my experience and based on what we're shipping, the utilization on a lot of the consumer digital products, so utilization on things like Diamond, is very high. I would say in excess of 90%.

Utilization on the X-series product is mixed. You have some X-series product that's out there in the automotive market that's probably in the 65% range. You have X-series product that's out there in the RF market supporting a lot of OSATs, that's probably in the 75 to 85% range.

Then on ASLs which is predominantly an analog-based tester, again, very, very high at a lot of the subcontractor, that's what's causing a lot of the growth going on right now in our business along with Diamond and some X-series, but, I would say ASL utilization is probably in excess of 85% to 90%, and again, predominantly on the analog side.

Mike Crawford - B. Riley & Company

The other kind of macro question is do you think there's still any kind of good rule of thumb in terms of percent of semiconductor industry spend to go to a test equipment?

David Tacelli

What I've seen over the last three years is, I've seen a decline, what you're talking about is the buy rate, right? The buy rate of capital versus IC spend, and I've seen that decline mainly driven by the decline in the digital price into the market.

So you look back several years, the way a lot of the competitors, myself included, priced products is, we priced it on a per digital channel basis or per digital pin and I've seen that decline.

What I haven't seen decline is the price of what I'll call analog solutions or instrumentation, but the problem you have there is the ASPs for those products are less.

So by default, you had a decline in the overall buy rate from a macro standpoint, but number of units has remained pretty constant if not and some markets gone up and that was one of the key reasons why back in 2005, LTX as an independent company shows to focus on a lot of the analog instrument markets, and now as a combined company we've gone after a lot of the consumer or analog markets, because we feel that the ASPs have stayed more stable. You're adding more differentiation.

Then to try and look at just overall buy rate doesn’t hold the same value it used to five or seven years ago. It's more market focused, value focused and instrument focused and we've seen pretty stable ASPs across the lot of the markets we served.

Mark Gallenberger

I think I'd just add one another thing is if you do look at that buy rate, it has trended down and if you look at the overall trend line, it looks like for calendar year 2009, the industry is going to be well below the overall trend line. So that would imply that going into 2010, then you would see buy rates probably increasing year-over-year.

Mike Crawford - B. Riley & Company

Then a final question, Mark, relates to the other accrued expenses that are I guess a net $41 million right now. With the restructuring activities primarily done, the work you have to do, can you provide a little bit more color on those liabilities, when they go off the balance sheet?

Mark Gallenberger

Yes. In that line item, it's a pretty large number, as you can see, but there's a ton of different categories that make up that line.

In terms of what you're referring to with respect to restructuring charges, severance and facilities, there is still about $4 million that's in current that will get bled off over the next 12 months and below, down in other long-term liabilities, there's about another $4 million that will get bled off over the next seven years and that’s all related to charges that we've taken on facilities that we still have not been able to actually vacate.

So, those are what's remaining in terms of the restructuring charges in short term as well as long term.


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

David Dooley - Steelhead Securities

Congratulations on getting back to EBITDA breakeven. Couple of questions from me, you mentioned that you have several 10% customers. Will you be disclosing who those are in your queue and can you share those names with us?

David Tacelli

Yes, we would be filing our 10-K around the middle of October and as we historically do we announce which customers are greater than 10% for the fiscal year and so for the fiscal year and we had Spirox at 14%, TI and AMD right around 10% to 11%.

David Dooley - Steelhead Securities

Then going forward would you expect a majority of your growth to come from new customers or from current customers?

David Tacelli

Dave, I would expect in the next 12 months the majority of the growth is going to come from existing customers, but with one caveat, new groups inside those customers. So, areas where we have not participated in the past.

David Dooley - Steelhead Securities

So an example of that might be one of your largest customers winning some analog business?

David Tacelli

That's a good example.

David Dooley - Steelhead Securities

I know you guys don't disclose what orders are but can you talk a little bit about quantitatively the direction of orders, book-to-bill, anything like that to help support your revenue guidance?

Mark Gallenberger

Sure. Let me give you a little bit of color on what this industry has turned into, which is basically book, ship or turns business.

In our fiscal Q3 and Q4, we had turns business and relative to our Q1, what we expect for turns business, the actual turns business is going down sequentially from the last two quarters and so that should kind of give you some qualitative color, Dave, on our ability to meet that $40 million to $42 million revenue guidance.

David Dooley – Steelhead Securities

So, what level of turns where you’re experiencing let's say throughout this last calendar year on a quarterly basis?

Mark Gallenberger

We haven't really gone there in terms of actually disclosing the actual numbers, but what I can tell you is in Q1, it's probably about 10 to 15 points lower than it has been over the last couple of quarters.

David Dooley – Steelhead Securities

Dave, you've talked about some scenarios, where you might see some continued growth going forward. I was kind of wondering, what the key data points are to see continued growth beyond this October quarter?

David Tacelli

For us, if you look at the growth that's come this quarter and going out into Q1, one of the key things that we haven't talked about is that growth has not come from the top group of customers that we relied on 12 to 18 months ago yet.

So, I think one area of growth is those customers, the utilization starts to hit higher points and I've talked about that. We will see some buying from those customers in general.

The second area of acceleration, which I've talked about is, I think there will be some rebound as we get into 2010, more in the European and US markets.

So, we'll see some growth from customers that haven't been purchasing that have been large customers, because I think they just need to, based on their forecast firming up and their utilization, and a second wave based on the economy and I'm not betting on the economy yet. I'm more betting on the large customers that have not been purchasing.

David Dooley – Steelhead Securities

So kind of seems like a bunch of large customers returning, utilization rates kind of at many customers being pretty good, the buy rate being low this year, anticipated to be higher next year. Is that clearly the signs are that overall test spending next year will be more than it was in the current year?

David Tacelli

Yes. Dave, I think you hit on the right points. I mean, that's what we tried to outline here to say there is an inflection point now that we see that will continue to drive some increased growth and that's great.

The one thing that we're going to do here is we're going to be very aggressive to attack that growth and take every opportunity possible, now with the size company we have, with the breadth of resources in the company and specifically in the China-Taiwan region, we're going to move from what I'd call a defensive posture where we protected our accounts, controlled expenses to a very aggressive posture, and used the resources that we have available to expand into new customers and new markets.

Based on the indications that I have, some of the accounts that I know that we've already won, that we haven't talked about and some of the accounts that I think we will win, I'm pretty confident that we'll continue to see that growth into the future.

David Dooley – Steelhead Securities

One final thing from me is you mentioned your relationship with Spirox and I think you have more than 100 people, sales reps to support in the field now throughout Asia with that relationship.

Help us understand, frame it for us, before you merged with Credence and you picked up Spirox, what kind of level, what kind of headcount did you have in that marketplace?

David Tacelli

LTX had between LTX had between China and Taiwan about 17 people.

David Dooley – Steelhead Securities

17, so you've gone from 17 to over 100.

David Tacelli

17 over 100. The biggest challenge we faced as an individual company as LTX, is the projects that you could take on, getting new customers, new projects whether they were brand new accounts, whether they were supporting existing accounts, whether they were transfer of products from the US or Europe to the China Taiwan market.

Now you can attack projects where you're doing conversions from very expensive platforms to more low cost platforms. You can attack projects where you're going into a customer and you're looking at three or four different device applications versus just doing one application. So you can speed up the growth. The other thing is the customers look at your breadth in the region and they're much more comfortable in giving you those opportunities because you can support them.

So working with Spirox and the entire team there has been phenomenal for us, because now we've given them more arrows to shoot. Right, we've given them the X-Series product for high performance, SOC, and RF, which they did not have before, coupled with all the other products that they did have.

So there's been a renewed effort on in the last 12 months on making sure that we extend the life with instruments we had in the X-Series into the ASL which has also given Spirox additional, I'll call ammunition to go and attack certain markets or customers. So it's been very, very good.


(Operator instructions). Next question comes from the line of Peter Wright from GC Research. Please proceed.

Peter Wright - GC Research

The first question I have is I guess on size. I guess you're showing that size doesn't matters to the third largest guy in the space is the cost and profit leader. My first question is; do you think that this is sustainable and what is your view on the continued need of consolidation in this space?

David Tacelli

Well let me address that size doesn’t matter. If I look at all my competition, I love the fact that where they try to attack me on, is the size of the company. They never attack me on the technology that we bring; they never attack me on cost of test, because they can't.

So they try and attack me as the small guy in the space, the guy that won't be here long term. Well that’s not going to be the case.

We've structured the business model to the point where we have the best profit leverage in this space. We are going to have industry leading gross margins in addition to provide end customers with the lowest cost of test that it comes from capital cost that comes from productivity.

Some of the new products were bringing to market where we are going to give customers a paradigm shift in how they can test devices getting upwards of 100 plus sites in strip form.

So I look at the size that I have as an advantage. The partnership that I have with Spirox gives me flexibility. The partnership that I have with my outsource contractors gives me the ultimate manufacturing, flexibility in cycle time.

I am not trying to be everything to everybody. I am not trying to be everything in every market and the markets I have picked and the customers I choose, I can now apply the right amount of resources whether its R&D resources or whether it's application resources. So, in my opinion I love the fact that they look at size as a problem because that’s the only thing that they can point to.

Peter Wright - GC Research

I guess on the R&D side is what I'm looking at. If I look at your current run rate versus kind of an average run rate that you had had just on the LTX side of the business, it's about 17% less.

Is there any risk that you see, if capital wasn't an issue? Would you be investing more today on the development of products or is the market one, which is just leaner and supportive of smaller guys remaining more profitable on a cross cycle basis?

David Tacelli

Peter. I don't want to sound like, to give you a very cavalier answer, but, what I would say is it’s absolutely not an issue and I would not invest one dollar more. The only way, I would look at adding additional dollars to R&D is, if I wanted to go after a brand new market segment. The way we sized the business and the way we structured the R&D group has been focused on a functional nature.

What I mean by that, in the past, if you looked at how some of the organizations were structured in engineering and I'll call it more of the Credence side, they were product line focused. So, you had a structure that was very layer intensive, mechanical, hardware, software, just go right down the line for every single product.

What the groups here have done is they have now structured, where there's a mechanical group that services the products. They've also looked at how they reuse IP.

So, some of the things that I pointed out, where we're taking some of the high speed IO infrastructure that existed in the Sapphire product, which is very, very good technology, repackaging it in an air-cooled environment for X series. I didn't have to go reinvent that. I just had to work to repackage it and I can go right down the line with all of those different areas.

Now, if I wanted to enter memory test, which I absolutely do not, then I would add engineering. If I wanted to go after a whole different let’s say extremely high speed digital, which I do not. I probably add more engineering, but with the market segment I want in those target markets with those target customers, I don't need to add anybody.

Peter Wright - GC Research

Fantastic. That's helpful.

David Tacelli

So, I feel that we've got the right structure. The other interesting thing that we have and I'll bring up now is, we have a significant presence of engineering talent in Armenia. That's not something that we started in the last year. That's something that's been ongoing for the last eight to ten years and it's now starting to bear a lot of dividends.

So a good portion of our engineering pool managed out of here, but exists in Armenia for hardware and software.

One of the things that the engineering management here is focused on is how to advance that even further because in order to compete in this space 12 months, 24 months, 36 months down the line, we're going to have to do a combination of both.

We're going to have to have key architects that exist here and we're going to have to have a lot of the work, instrumentation and software being driven out of low cost regions like Armenia.

We're not looking to advance into high cost regions, we're looking to advance in low cost regions, utilizing the architects on the R&D side where we have them either here, Hillsboro or Boston.

Peter Wright - GC Research

Fantastic. The other question I had was on kind of mix, historical LTX and historical Credence, LTX is fairly clean and if I go three year, five year, seven year, whatever, it's about a $40 million average run rate for that business. Credence is a little tougher to do that analysis because it's now the whole company that is residing inside of you now. What do you think the mix of product is for you guys in the next cycle, LTX versus Credence?

David Tacelli

That's interesting. Here's why it's interesting but difficult to answer, Peter. If I'm selling, let's say over the next 12 months, I take a power instrument that was inside an X-Series and I applied inside an ASL, what sale do you consider that?

I think one of the things that, if you look today, if I looked straight today, I have three major products contributing to revenue, right; my ASL, my Diamond, and my X-Series.

Now, I do continue to support, manufacture and deliver Sapphire but let's take those three products. They're all contributing about the same amount of dollars.

Long-term, you're going to have so much technology that gets mixed and matched, I don't even consider it X Series anymore. I won't consider ASL or Diamond. I just consider products from LTXC. So it's really hard because we're mixing and matching and reusing so much technology cross products.

Now, the long-term goal would be for our customers and for us that whatever they buy today, they apply, they can plug in and use in the future, but you down the line you end up with a lower number of platforms but everything that's built today can be built, we can use them in the future.

One of the things that you really want to focus on is when you look at all those products, where we think the cross-cycle revenue can be, and we mentioned it in the words of the script, that cross-cycle revenue, which really takes into account, let's say the next high and the next low, we think is about 70 plus million a quarter. That's what we think the products we have, with the customers we have, what the customers will gain can drive the company.

Peter Wright - GC Research

$70 million minus your $40 million breakeven, what is the incremental op on that?

David Tacelli

The way… I will let Mike talk about that.

Mark Gallenberger

What you would typically see is, all of the products that we're selling right now, all carry very, very attractive variable margins and the drop-through rates are pretty significant as you can see in just this last quarter alone.

So if you want to do some math on the current breakeven levels of $39 million and pick a number whether its 60, 65, 70, 75, the drop-through rates we would expect to see in the 50% to 60% range. Some cases might even be higher than that, but going all the way down to the bottom line its probably going to be in that 50% to 55% range. Going down to the gross margin its probably 55% to 60%. So its very, very strong leverage.

Peter Wright - GC Research

You guys have the best sequential growth of kind of peer group. How long do you think it takes you guys as the leader in the space to get to normal, that 70 number?

Mark Gallenberger

Well that’s the challenge, right? If I have that crystal ball I'd probably be in another line of work.

Peter Wright - GC Research

Last question is, you did comment that your turns you are expecting to be down. I should not read into that that bookings are going to be down, is that or should I be?

Mark Gallenberger

No, I would not read into that. I think if you look at the guidance we've given, we've given a really tight range on guidance and what that should signal is turns are down, we have commitments from customers, we're shipping the product.

We're going to continue to book orders in a short lead time frame, a short lead time cycle. So, I think really the conclusion with my comment about the book ship business for Q1 is, the real message was we don't need much book ship business to meet the guidance. That's the take-away.


Your next question is a follow-up from the line of Vernon Essi from Needham & Company.

Vernon Essi - Needham & Company

Thank you. Just a small question here on the mix between product and services and this is a sort of a moving target at times, but any thoughts as to how we should think about that playing out into the next couple of quarters?

Mark Gallenberger

Yes. Vern, I would say that we've achieved more or less the steady state. I think, if you did the math, it's come in right around $11.5 million to $12 million per quarter per service and I think that's a safe assumption for a go forward rate, at least for the next couple of quarters.


Your next question is a follow-up from the line of Patrick Ho from Stifel Nicolaus.

Patrick Ho - Stifel Nicolaus

Just one housekeeping, Mark. What do you think the tax expense or the tax benefit, you'll be expecting in October?

Mark Gallenberger

There would not be anything in October or anything planned.


At this time, there are no further questions in queue. I would now like to turn the call back over to Mr. Mark Gallenberger for closing remarks.

Mark Gallenberger

We want to thank you very much for participating on the call today and, look forward to seeing you over the next several months. Have a good day.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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