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Executives

David G. Tacelli – President, Chief Executive Officer & Director

Mark J. Gallenberger – Chief Financial Officer, Vice President & Treasurer

Analyst

Vernon Essi, Jr. – Needham & Company, Inc.

Brett Piira – B. Riley & Company

Patrick Ho – Stifel, Nicolaus & Company

David Duley – Steelhead Securities

Christian Schwab – Craig-Hallum Capital Group

Thomas Diffely – D. A. Davidson & Co.

LTX Credence Corporation (LTX) F2Q14 Results Earnings Conference Call February 27, 2014 11:00 AM ET

Operator

Welcome to the LTX Credence Corporation second quarter analyst conference call. During the presentation all participants will be in a listen-only mode. After the presentation we’ll conduct a question and answer session. (Operator Instructions) At the request of LTX Credence this conference is being recorded. Speakers on 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 call over to Mr. Mark Gallenberger.

Mark J. Gallenberger

Welcome to LTX Credence Corporations second quarter fiscal year 2014 conference call for the period ended January 31, 2014. Joining me on today’s call is Dave Tacelli, CEO and President. After my introductory comments Dave will discuss the company’s performance for the second quarter and discuss the business outlook. Then I will provide further detail on the company’s financial performance during the second quarter as well as provide guidance for the third quarter fiscal year 2014. We will take your questions after our prepared remarks.

A replay of this call will be made available through March 1st by dialing 855-859-2056 and the passcode is 89569828, or you can visit our website at www.LTXC.com. As a reminder, the only authorized spokespeople for the company are Dave Tacelli, Richard Yerganian and myself. Now for our Safe Harbor Statement.

During the course of this conference call we will make forward-looking statements regarding LTX Credence’s business outlook or the future financial performance of the company. We wish to caution you that these statements such as projected revenues, net income or loss, earnings or loss per share, operating expenses, gross margin, cash flow, non-GAAP measures, and breakeven targets are managements’ current predictions and that these statements are subject to known and unknown risk and uncertainties that could cause actual results or events to differ materially from those stated or implied.

The statements provided during this call represent the company’s estimates as of this day and the company assumes no obligation to update them after this call. 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, onto the call.

David G. Tacelli

What I’m going to do on today’s call is I’m going to walk through three pieces we see today. First, is the strategic vision what we believe this means for the company and how it directs our actions, goals, and objectives. Talk a little bit about industry trends we currently see and some corporate highlights against those trends. I’ll then spend a little bit of time talking about the product portfolio. We spent a lot of time with investors looking at the two major pieces of our business being capital and recurring revenue and I want to do a little bit of work today defining those pieces and then take a little bit more time and talk about one of the new businesses we have today, the contactor business and give you an overview. Finally, I’ll turn it over to Mark to talk about second quarter financial review as well as third quarter guidance.

When you look at the strategic vision for the company the first thing in putting our company together with Everett Charles, Multitest and ATG L&M, what we saw was an increase in addressable market. As we were just LTX Credence standalone that addressable market was about $2.5 billion for all of test and with these new acquisitions we’ve now grown that addressable market to over $5 billion for the company.

Inside of that we’re looking to consolidate our share inside the semiconductor test market and how we can grow not only each one of the businesses but also inside the test cell as we define it. We’re looking to diversify into vertical markets and you’ll hear in future calls a lot more description on things we’re doing in PCB and PCBA testing and you’ll find, as we go through this, that we’re a leader in those markets and we’re leveraging on that leadership position. We’ve got a very strong brand.

I mentioned ATG L&M which is in the PCB test area, Everett Charles, LTX Credence who most of you know, and Multitest across a wide range of products. The thing that you will see from the company is that we will continue to develop leading edge products for all markets we serve. It’s not just enough to build a test cell concept or an entire test cell for a customer, you have to deliver leading edge products in each one of those areas so we will continue to work on developments and test, in handling, and contactor technology, board technology, as well as PCB and PCBA testing.

We talk a lot about delivering test cells for targeted markets. The thing that you’ll hear not only today but you’ll hear in the future as we already have active projects underway with several customers and I would expect that those projects would start to come to fruition sometime in this next 12 month period. Again, one of the key visions was to build a company that had a solid foundation and acquiring these two businesses we now have put ourselves in position to have a strong financial foundation with over $200 million of recurring revenues on an annual basis.

So, what are some of the things that are going on in the industry today? Well, we’ve talked for a couple of quarters now about mobility and automotive and those markets kind of leading the recovery and they’re leading it across a wide range of IC types so power amplifier, power management, micro controller, low-end analog, data converter, so a lot of segments are now starting to show real strong growth and real strong signs of life verses what’s happened in the past. Again, as we’ve talked about, 2013 we’re coming off a very low year where the entire industry was 20% below the trend line and now we’re starting to see a bounce back in sales. We’re starting to see strong growth and we believe, along with industry experts, that 2014 the growth is expected for our business or in the semiconductor test business somewhere between 10% to 15%.

In addition to that we’re starting to see the handler market pickup as well and again, we expect that the handler market along with the tester market will be in synch as they’ve always been in the past. In addition to those two pieces of business I talked about our leading position in the PCB board test, that continues to show strong growth capacity utilization is very high and demand looks very, very strong for the product for the next couple of quarters.

On the corporate side, as we’ve identified to everyone and you saw the 8K release that we’ve already outlined a restructuring plan and already taken actions. That restructuring plan and synergy plan totals approximately $16 million of which will be realized in total in the next four quarters and again, this quarter we’ve already started to experience some of those reductions in savings.

Operating performance for the quarter was better than expected. It comes from a lot of different areas. I think most importantly, because of the blend of products we saw some mixed benefits as it relates to the different products we serve and we think we have real strong business momentum heading into the third fiscal quarter and as I’ve identified in the press release, with the test business leading the way it is showing the best bounce back in the last couple of years.

Now, let’s spend a couple of minutes talking about the products of the company and then dive into one of the new products connectors to give the investor a flavor for one of these new businesses that we’re very excited about. As we defined the business, we broke it into two areas the first is the capital equipment section of our business. This is broken out in three different pieces so most of you know the OPX semiconductor test piece across a wide variety of products so you have the Diamond Series which includes Diamond and Diamondx series in ASL servicing one of the top five markets that we focus on with Diamondx is mainly targeted at the ASSP and high end microcontroller space. X series covers a wide range of analog RF capability mix signal and ASL is really targeted at a low-end analog and some of the power markets.

Some of the products you may not know in the Multitest handler group. Multitest is a leader in gravity test. Gravity has been a mainstay in the handler business for a long time. A lot of that is focused in the automotive space. Multitest is also a leader in strip testing and as some customers have gone to high degrees of parallelism in strip, Multitest has captured that business and also in the pick and place area where Multitest has had a good position with some of the new products they’ve launched and will launch over the next year, we’re hoping to gain a lot of traction in the pick and place area.

Products you may not know a lot about in the PCB testing for ATG L&M, ATG is a leader in flying probe test and what flying probe is used for is testing bare PCB boards in what I call lower quantities so we have quantities that are sub 2,000 boards at a time, a lot of companies are using flying probe tests. When you go to really high volume PCBs you go to something like a universal grid tester that there’s a lot more complexity with that, there’s some other fixturing involved. But those are two different products inside the capital equipment portfolio for ATG L&M.

Recurring revenue, let’s talk about the five elements here because it’s not just service when you think of recurring in the new company. The first is Multitest contactors and we’re going to spend a little bit of time over the next few slides talking about what contactors are, how they’re targeted at specific markets, types of markets that we’re going after, and our leadership position. But that’s part of the recurring revenue because these are not only wear factors but also as customers are changing device types they’re changing contactors. So every time a customer launches a new PA or a customer launches a new power circuit they’re buying additional contactors.

The second is interface boards. When you think of handling equipment and you think of testing equipment the contactors actually sit on the interface board of the call device under test so we have today our own fab in Santa Clara. We’re making some of the most complex boards for the semiconductor industry covering a wide variety of customers and some of the biggest names in the industry today.

One of the other interesting pieces of business we have now is Everett Charles Pogo Pins and you can see that pictured on the right. That’s for a wide variety of markets outside of semiconductor as well. So we’re actually servicing markets in the industrial space so it’s giving us a little bit more diversity, a little bit more smoothness in revenue when we look at that piece of business.

Another business is the ICT and fixture business from Everett Charles. Again, a leader in the market because we are the only global supplier today to the manufacturers requiring this type of product. Most of the competition we face is very what I’ll call small or geographic targeted so when a company wants copy exactly across multiple different businesses and geographies we are the only supplier of that today and we’re looking for big things in the fixture business over the next couple of years.

The last piece, which is the piece everyone probably associates with recurring revenue is what we call repair maintenance labor services across all of our capital products. All three of the major capital lines have service revenue and that’s again, a major component as we go forward of the five what I’ll call recurring product revenue lines.

Before we get into products, how did we do this quarter? In the capital equipment segment semiconductor test business is now really poised for the strongest quarter it’s had in two years. As I’ve talked about, microcontrollers, PA, power and auto, low-end analogy it’s showing growth across all these different segments and we’re pretty excited not only about the overall growth of the industry, we’re very excited about Diamondx and what it’s brought to our business because it is giving us an additional accelerator as we move forward.

Wafer level chip scale package, you’re going to hear a lot about this term over the next few years. This is really taking test down to the die level as customers are facing more and more challenges with yield loss and wanting to test. Not being able to test fully at wafer but wanting to test at the die level. You’re going to hear more and more about companies moving in this direction and we believe through Multitest we’ve got a unique solution, in-carrier solution that allows us to improve the yield and improve the cost performance of some of these real high volume devices.

We have started to see a rebound in the handler capacity and that’s again driven by the automotive market so again, a lot of good opportunity across similar customers and different customers but again, another nice bump in our business with the handlers growing because of the automotive gains. Flying probe, again I talked about ATG L&M continues to gain strength. We have the number one flying probe tester in the market. We’re going to continue to expand on that and look to grow that business in all regions of the world. We think we have a lot of opportunity in China and Taiwan and we’re going to try to exploit that.

Again, we’ve announced and we think it’s exciting for the business is actually putting all of the semiconductor test products so the testers, handlers, interface boards, contactors related to semiconductor test or SSC test are now under our distribution partner, selling partner, R&D partner in Taiwan and China Spirox. We believe that over the next 12 months this is going to have an additional benefit to the business. We’ll be able to sell more test cell solutions, couple some cross selling activities with customers that are currently Multitest or Everett Charles today with customers that are LTX Credence.

On the recurring revenue side, we continue to see improving business and that’s showing up in the fixture services business and one of the activities that we’ve taken is looking at different geographies around the world, what resources we can add to those geographies to enhance this business. We believe there’s a lot of opportunity to be gained in North America and Europe and we already have a very good presence over in Asia.

On the test cell side, we’re not just talking about activity, we have several engagements underway for the test cell and it’s across multiple products. So we have it in multiple market segments with multiple products from us and that’s a combination of handlers, and contactors, and boards. In some cases it’s the entire solution which includes the tester as well. So, a lot of good momentum in the recurring revenue and capital segment.

Now what I’m going to do is dive into a little more detail on one of the core businesses that we acquired and I think it’s important for investors to really get a good handle on these businesses so as we go through conference calls or in other investor meetings, we’re going to be taking different pieces of our new portfolio and chatting with investors about it just to see the opportunity and the growth potential that we have in front of us.

So, the contactor business, what is that? Well there’s a wide variety of applications that it covers. We identify a few here, we talk about RF, we talk about high power, the key to note is we have in some cases, and we pick RF as an example, over 50,000 contactors in the world. This is one of the areas that we’re a leader in. It’s not the only area but I just wanted to point out with so much talk about mobility and conductivity, the types of technology that we have and our ability to drive this market with the technologies is going to give us good growth.

We have certain technology in pin style. Quad Tech is a brand name of one of the pins that goes into the contactors and the interesting thing is we’re utilizing Everett Charles and their pin technology, so we’re leveraging the pin technology from Everett Charles inside the contactor group to give us a competitive advantage.

So what does the contact market look like? Well, go all the way back to 2004 and with the exception of 2009 it’s been on a pretty good growth path. You may ask why is that? Well, contactors are tied to unit volumes so as unit volumes increase the contactors increase. As unit volumes change, meaning that a manufacturer decides to go from one device to a next generation device, those contactors change and it’s a pretty sizeable market. If you look around the world it’s over $500,000,000 in 2014.

We like this because there’s good growth in the market, it’s market focused and we like companies that are market focused and we’ll talk about that in a second. The other thing is it gives us an opportunity to share technology, enhance our business inside the test cell so where we’re developing applications with some leading edge products we’re also using our contacts of technology to help us test those parts.

An interesting chart here, it almost looks like we were defining the market segments for LTX Credence. The growth markets, stable markets, you’ve got four major markets here where the contactors and the contactor business is very strong. Number one, in the digital ASSP market, so it’s a large growth market, high volume, the interesting part here is couple this with some of the handling technology we have and also the test technology with Diamondx, we bring a pretty powerful solution to that market.

You can walk through and see some of the other markets as well like the automotive analog mixed signal, right? The power market, very good customer overlap. Something that is very interesting is in the sensor market, this is a market where the contactor technology and the handling technology in Multitest has been one of the leaders in the industry and we hope to innovate over time and provide an entire test cell into the sensor market.

Look at some of the applications, they are the applications that lead the buying today, lead the consumer spending today. A good example, and I’ll point to a couple is first on the automotive radar. We’re talking about speeds of 40 gigahertz here. We already have developments under way with customers with complete test cells that are approaching 77 gigahertz so really high speeds, high frequencies. We have the contactor technology along with the other pieces inside the test cell to provide a really solid solution leading edge across multiple pieces. You see alternative energy, the other important pieces is high volume applications, we have not only technology that’s able to do this but also tremendous, tremendous production capability where high volumes massive number insertions where from a customer standpoint making sure that those contactors can stand up under the wear and tear of millions of insertions is very, very important.

On the digital ASSP side, what you now get into is massive digital pin counts. You can see here, pin counts that approach more than 3,000 pins per second. So not only with the contactor technology but also having the capability to handle it, interface board, and having the right tester involved gives us a competitive advantage.

Where does this lead us? You look at the contactor business, you look at its share of the overall Multitest revenue, the contactor business is one of the top 10 test socket contactor suppliers in the world and we rank extremely high in any satisfaction survey as related to contactors. What does this mean? Well, this really gives us a tremendous platform for growth. If you look at some of the other players in the space, they’re very good but they’re very I’ll call geographic centric. We’ll look to expand our presence, look to expand our capability not only through the test cell through our expanded relationship with Spirox, and our continued development on leading edge contactors.

With that overview, I’d now like to turn the call over to Mark. Mark is going to review the financial performance in the quarter and an outlook for guidance in Q3.

Mark J. Gallenberger

If we just jump to the next slide, what I’m going to do this quarter is go into a high level overview of the results for the quarter. Then, I’ll get into the review of the third quarter guidance and then I’m going to drill into a little bit more detail because it’s the first quarter in which we were combined with Multitest and ECT so there were a lot of ins and outs as it relates to purchase price accounting, transaction related expenses and so forth and I felt it was important to provide you a lot more detail and information this quarter as it relates to the transaction.

If we start at a high level, as you can see the street guidance that we gave we broke it down for you in terms of LTX Credence standalone and ECT and Multitest. If you look at our actual results for the quarter LTX Credence came in within the revenue range at $28.4 million. Gross margins were at about what we had guided to which was 49% and the non-GAAP net loss for the quarter was $0.18 which is within the guidance range that we provided.

The EBITDA for the quarter for LTX Credence standalone was -$5 million and now when you combine that with two months of ETC and Multitest, we were able to add to the EBITDA. They contributed $3.1 million so for the combined company it was -$1.9 million EBITDA for the quarter. If you look at the non-GAAP net loss for the quarter it was $0.13. ETC and Multitest had contributed $0.05 to the business and so they were basically accretive to our core LTX Credence business by $0.05.

One thing that was a fair deviation from the guidance we had given was the gross margin. As you can see we had guided to about 27% and the results for ETC and Multitest businesses were around 35%. As Dave had alluded to earlier, that was really driven primarily by a different mix profile than what we had modeled originally for the quarter. If you look at the combined actual results for revenue which was $68.4 million we had about 45% of that amount coming from capital equipment purchases and the balance of 55% is what we would put into the recurring or consumable bucket and we’ll continue to provide that level of granularity going forward as it relates to the revenue breakdown.

The overall gross margin for the quarter was 40.9%. We do exclude from that number the inventory step up which is tied to the purchase price accounting effect so that number does exclude a little over $1 million of inventory step up. If we jump to the next slide which is the Q3 guidance, you can see a pretty significant increase in the core LTX Credence business. We’re guiding up about 20% from last year’s results and significant quarter-over-quarter.

In terms of the ETC Multitest business we’re seeing that to be approximately flat not only quarter-over-quarter but also year-over-year. We provided you the last year’s result for ETC Multitest towards the bottom of this page and you can see the revenue for ETC Multitest for their calendar quarter last year was $59.3 million. So the guidance that we’re giving is approximately flat from their actual last year’s results. However, we are seeing a little bit better gross margin from that business, 29% or 28.7% to be exact from last quarter we’re guiding that to be about 32% and we’re guiding for the combined business to be breakeven on a non-GAAP net income basis to $0.06. Half of that would be contributed by LTX Credence and the other half is coming from the new businesses of ETC and Multitest.

In terms of the revenue guidance of $100 to $105, because the growth is coming from the capital equipment businesses, the split right now between capital and recurring is about 50/50 so we see that shift from last quarter’s results. In terms of the pro forma EBITDA for the quarter, we’re guiding to about $6.8 million combined with about $4.5 million coming from the core LTX business and the balance coming from ETC and Multitest. One of the things that you can see as a result of the growth in the capital equipment business, is that the leverage is still there. So we still have significant leverage built into the capital equipment business, in particular in the LTX Credence business and you can see it in our actual guidance for the quarter.

Moving onto the GAAP to non-GAAP reconciliation for the quarter, this is in the press release but I wanted to go through it in a little bit of detail just to make sure that everyone understood what the numbers were for. If we start with the GAAP net loss for the quarter which was approximately $4.2 million we would be taking out the amortization of purchase intangible assets. This includes the legacy Credence deal as well as the new amortization schedule for Multitest and ETC.

The next line is the inventory step up related to purchase price accounting. As other companies that complete a transaction, we have to go through this exercise and value the assets. We increased the value of the inventory that was acquired and as a result will be amortizing that over the next 12 months so for the quarter that was approximately $1.1 million so we would remove that from the GAAP net income or from the GAAP net loss. The other thing that we had taken out for non-GAAP purposes was any acquisition related expenses that we incurred in the quarter that we would not expect to occur in the future and that amounted to approximately $400,000.

The next line is the gain on bargain purchase and this is where, when we did the appraisal of the purchase of ETC and Multitest we had an appraisal and the evaluation actually came in above the purchase price which tends to be somewhat unusual and not very frequent in most deals. But in this case it did occur and so there was a gain that we recognized in the quarter which we removed from our GAAP results. As a result to this you will not see any change to our goodwill on our balance sheet. So the existing goodwill is all tied to the legacy Credence acquisition that we did over five years ago.

Then the last piece that really moved was the restructuring charges which we had talked about and which we started to implement those plans in January of this year and that amounted to approximately $2.2 million. With all that said, we had gone from a GAAP net loss of $0.09 to basically a non-GAAP net loss of $0.13 and that compares quite favorably to the guidance we had given which was a loss of $0.15 to $0.21.

The next slide here talks about some of the cash movement that occurred within the quarter and I wanted to put it into two significant buckets one being transaction related and the other one being more of the operating related. As you can see we started the quarter with $118 million of cash. We had a purchase price of $93.5 million, the term loan that we took on was for the amount of $50 million. We also issued a promissory note to Dover Corporation in the amount of $20 million.

We also acquired excess cash from the Dover assets on the day of the transaction and the deal that was struck with Dover was to be a cashless or cash free debt free deal but with any asset purchase you will be acquiring some cash in the deal so some of this cash will be payable back to Dover as well as some other bonuses that were acquired for, for the Multitest [inaudible] individuals which will also get paid out in Q3. We also had some deal related cash expenditures as well as debt issuance cost of $1.8 million. So total for the quarter in terms of transaction related changes in cash was about $20 million.

Now, if you look towards the bottom you can see more of the core operating related cash ins and outs. As we had talked about earlier, the EBITDA for LTX Credence was -5. EBITDA for Multitest ETC was $3.1. Working capital, there were a lot of ins and outs, a lot of ups and downs in terms of AR inventories, AP and so forth but when you put it all together working capital really did not change much at all, it was only about $200,000. Cash capital expenditures in the quarter was about $500,000 and we did start to pay down the term loan per the amortization schedule and that was $600,000 for the quarter and the interest that we paid on that debt was $200,000 for the quarter.

So total operating changes into cash for the quarter was about $3 million, down that is. Although the debt repayment or the [SPD] interest paid is not really operating related cash, I put that in there just to kind of complete the picture for you as it relates to the cash ins and outs. So all-in-all ending cash came in at approximately $95 million.

Moving onto the balance sheet, what you can see here with the balance sheet is you can see where LTX Credence was at the end of Q1 and where the combined company is at the end of Q2. I gave you a split on the percent columns just to show where the cash basically came from whether it came from LTX or whether it came from Multitest ETC. I won’t cover the cash, we already covered that in detail. Accounts receivables LTX Credence standalone it was down about $1.4 million quarter-over-quarter and about 60% of the AR is coming from ETC and Multitest. Inventories for LTX core business was approximately flat quarter-over-quarter and then the other assets was also approximately flat for the core LTX business.

Moving down to the current liabilities you can see the current portion of long term debt that would be due over the next 12 months. LTX Credence accounts payable, they were down significantly quarter-over-quarter. They went from $16 million down to just under $10 million so there was a big use of cash there and you can see the split between LTX and Multitest is pretty close to the AR balances in terms of the split which I would expect to see.

In terms of other accrued expenses, LTX core business went up about $1.5 million quarter-over-quarter and deferred revenues went up approximately $1 million on the LTX core business. So all-in-all it gives you a little understanding as to what the new balance sheet looks like and how much is being contributed by Multitest and ETC.

Restructuring summary, this information has already been filed as an 8K that we did about a month ago or about three weeks ago. We started to implement the restructuring plans in January. Total gross headcount impacted is approximately 240 people or approximately 11% of our headcount and the gross annual cost savings is expected to be about $16.8 million with a net savings of $15.7 million. The reason why we’ve got a net number in there is that we do plan on doing some add backs in terms of headcount to put people in the right locations geographically as well as investing in some of the businesses such as the test cell integration group.

You can see in more detail how these savings are going to be realized over the next several quarters. The current quarter that we’re in we expect to realize approximately $2.7 million of gross savings. That’s not a net number, that’s the gross amount, or about $10.8 million on an annualized basis. So you can see based upon the target that we gave to you last quarter which was a $15 million annual synergy savings, we are well ahead of achieving that plan.

Now moving onto business model assumptions going forward, for modeling purposes I thought it would be helpful for you, especially the analysts on the street to help with your models going forward, the old column was LTX Credence previous to the acquisitions and the new column is the go forward business combined with Multitest and ETC. We do not have any inventory step up related to purchase price accounting. Going forward we will have that and that’s going to be approximately $1.6 million per quarter and that will be, like I said before, in place for 12 months and that will go away after the 12 month period.

The new engineering run rate, we’re expecting that to be approximately $17 million. Now I would expect that to also decline as we articulated in the previous slide with the restructuring plan. So that would be the current run rate but that would also decline a bit over time. The new SG&A run rate is about $22 million, that also would decline but on the flip side that may also go up over time depending on where the revenue is because that line item would be most tide to revenue and profitability because we have sales commission internal and external to distributors as well as profit sharing plans. That line item will be more sensitive to revenue ups and downs as well as profits or no profits.

The new amortization schedule is going to be about $600,000. Previous to the acquisition it was about $200,000 for LTX standalone so that’s going to increase to $600,000. The new depreciation will be about $2.2 million. The $2.2 million is already buried into the engineering an SG&A, I just wanted to highlight that as a separate line item but that is already factored into the engineering and SG&A estimates. The same goes for stock based compensation expense, those are also inside the engineering SG&A lines but for modeling purposes you may want to at least understand how much our run rate will be. That $1.8 million is I think we will ramp up to that number over the next 12 months. For this quarter that we’re currently in I would expect that to be about $1.4 million.

Then you also have the interest expense that is related to the debt issuance and I’m estimating that to be about $900,000 and for taxes we’re estimating that at the current profit levels to be about $400,000. In summary, this business model performance slide you’ve seen this in the past, there’s been no changes to these numbers. We wanted to just put this in here for your reference and to basically show that we are well on our way to achieving this business model performance with the actions that we’ve taken so far.

That concludes our prepared remarks and at this point we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Vernon Essi, Jr. – Needham & Company, Inc.

Vernon Essi, Jr. – Needham & Company, Inc.

I was wondering as you kind of dig into some of the most recent slides in the deck there where you’re talking about your op ex, just to be clear here we should anticipate what looks like to be about $1.3 million or $1.5 million delta from the April to July quarter in the op ex line of improvement and then sort of those line items will naturally progress, certainly on the SG&A line with revenue. Is that sort of the way to look at that or is there more to that equation?

David G. Tacelli

No, I think you got that right. That’s a good way to look at it. Now of course, numbers will fluctuate up and down and it’s always difficult to say exactly what the numbers will be but in terms of the sensitivity as it relates to where the revenue levels or the profit levels are, the SG&A lines will be more sensitive to those model assumptions verses engineering.

Vernon Essi, Jr. – Needham & Company, Inc.

One quick housekeeping question, I apologize I’m remote here, but in your prepared remarks I think you went over what was recurring in the January quarter versus the expectations for April. Can you just go over those statistics quickly?

Mark J. Gallenberger

Yes. For the January quarter end we had about 55% in the recurring bucket and 45% for capital. Going forward that’s how we’re going to be looking at this business because one of the benefits with the acquisitions is having a much higher base of recurring revenue. Now with the strength in the semi test business that we have modeled and guided to for the April quarter, that 55/45 split is moving more towards a 50/50 split and that is to be expected as you start to see capital equipment purchases ramping up. Once again, that’s one of the benefits of this larger portfolio of products that we’re able to sell now is during strong side you get the leverage on the capital equipment purchases and then you get a little bit more stability on the weaker periods with the recurring revenue strengths.

Vernon Essi, Jr. – Needham & Company, Inc.

On the DSO side we had an uptick there, was there any specific reason? The way I’m doing my calculation it was up materially sequentially, nothing too alarming but what was the dynamic there?

Mark J. Gallenberger

There’s nothing to be alarmed at with that at all. It’s really a function of now that we’ve got different lines of businesses there are different customer profiles and different behaviors as it relates to payments. That’s all that is, it’s just going to be a new paradigm shift for us. But I look at the aging and I look at the AR that’s over 90 days, there’s no red flags whatsoever.

Vernon Essi, Jr. – Needham & Company, Inc.

So we shouldn’t anticipate that you’re going to have a cash [reversion], actually just from this point forward it is going to behave differently than it has because of the new businesses so it’s going to have a much longer cycle?

Mark J. Gallenberger

I would say that’s the case, yes.

Vernon Essi, Jr. – Needham & Company, Inc.

Just specifically and maybe just help us to understand it seems like a lot of good things are going on in terms of order rates and strengths. How would you prioritize the end markets to what you’re seeing? I mean, you’ve always mentioned automotive, mobility, RFPAs and what not but which ones particularly are really moving the needle in this transition right now?

David G. Tacelli

I think you hit the top two and in addition to that I would say I would add micro controllers. Micro controllers related to the mobility space.

Vernon Essi, Jr. – Needham & Company, Inc.

But we’re not going to get more granularity than that in terms of it seems to be broad across all three of those areas pretty much?

David G. Tacelli

The one piece of color I can add is we’ve talked about areas in ASSP for Diamondx and we’ve seen a strong uptick in not only the customers for Diamondx, we’ve won three new customers in the current quarter. The great part is they were in three different geographies one in North America, one in Europe, and one in Taiwan and across three different market segments or three different device types inside ASSP. That was also encouraging. The other piece was we saw strength in the growth of those customers who have already moved into production on Diamondx adding significant capacity and it gives us I don’t want to say warm feelings when we look the next quarter or so but we think they’re going to continue to add.

Vernon Essi, Jr. – Needham & Company, Inc.

Just my last point here, you brought up a customer in Taiwan there, would you corroborate on the device? I’ve been hearing all this activity going on in the Chinese handset area, you would say you’re definitively seeing a lot of activity in that space as it relates to your business there?

David G. Tacelli

Yes, I would corroborate that.

Operator

Your next question comes from Brett Piira – B. Riley & Company.

Brett Piira – B. Riley & Company

Just maybe first to start off, we saw a recent announcement with some consolidation there with RFMD and Triquint, do you guys see any near term or longer term impact for your business there?

David G. Tacelli

At this point they’re still trying to go through the process. I’m sure they’re going to get to a point where they do finally close the transaction. I would say over the next six to nine months we don’t see any change at all in our business. We would like to think because we’ve been a supplier across multiple products inside Triquint that would give us some opportunity with the new company once that transaction is closed.

Brett Piira – B. Riley & Company

Can you point to what happened that ETC and Multitest really came below expectations? What surprised you there?

David G. Tacelli

I don’t think anything surprised us. I think we set a guidance number, we were pretty close to the guidance number when we established it. We looked at a two month window and I don’t think there was any one thing to point to across any one of those products. I think when I look back at their 12/31 quarter results it was about $59 million and if you compare that to the $40 million which was only two months on a quarterly run rate they were about flat year-over-year. So there was really no issues when I look at the year-over-year results and I think we may have just been probably a little bit more aggressive in the guidance for those businesses than we probably should have been and so I think part of it is a learning exercise for us as well.

Operator

Your next question comes from Patrick Ho – Stifel, Nicolaus & Company.

Patrick Ho – Stifel, Nicolaus & Company

Maybe going to the PCB side first for a second, is there a level of seasonality in that business as well similar to what you get on the semi test side of things?

David G. Tacelli

In our exposure over the last three quarters, two quarters really learning about the business and a quarter now being in the business, we haven’t seen it. I think it operates on a whole different pattern compared to the semiconductor cycle that we see for capital equipment on test and handling.

Patrick Ho – Stifel, Nicolaus & Company

You guys performed really well in the gross margin side particularly on the ETC Multitest side of things and you mentioned that was due to mix. How big of an impact is mix in terms of that segment’s business? Do you get some of that – I don’t want to say dramatic swing, but you really outperformed this quarter, what can we expect in terms of kind of quarter-by-quarter changes on the gross margin side in those business?

Mark J. Gallenberger

I wouldn’t expect wild swings like that going forward. I think there were just a couple of deals as well as just the mix within this quarter was a bit unusual when I look at some of the historical performance. I wouldn’t expect to have those types of huge variations. Of course, there will always be some variations but not for this magnitude and so that’s why you can see based upon the Q3 guidance that we gave, even though with the revenues being flat quarter-over-quarter we took about three points out of that margin and that’s because we’re looking at more the historical and we’re saying, “What’s a more normalized level?” That’s why I don’t think you’re going to be seeing those types of surprises if you will, at least not to that magnitude.

Patrick Ho – Stifel, Nicolaus & Company

A final question in terms of the restructuring, it looks like you get a kind of a big step up in terms of going from your fiscal third quarter to the fourth quarter. Maybe not in specifics but how much of it do you see coming out of the cost of goods side versus on the expense side as you made that big step up from Q3 to Q4?

Mark J. Gallenberger

It’s still going to be mostly below the line meaning down in op ex.

Operator

Your next question comes from David Duley – Steelhead Securities.

David Duley – Steelhead Securities

[Inaudible] test is up rather dramatically sequentially, we haven’t seen that type of sequential increase in multiple years. Did stuff flow from last quarter into this quarter, or why are we seeing such a dramatic increase? Then the second question is usually the handler business goes hand-in-hand with the tester business but you’re guiding your handler business flat with the test business being up so much so I’d like some commentary there as well?

David G. Tacelli

I think it’s two factors contributing to the growth in the tester business. I think we see, similar to what some of our competitors have identified in the industry, there is general growth for certain market segments. We’ve identified a couple of those market segments as mobility. Mobility for us means PAs and some power devices. We’ve also mentioned automotive and that covers a wide range of analog components, power devices, and certain types of microcontrollers. We’ve also mentioned the microcontroller’s space which is really targeted at mostly. So I think the general trend in those businesses seems to be up.

We’re also seeing now kind of the culmination of what we’ve been talking about for over 18 months which is additional share gains, additional customer wins, customers moving into volume production on Diamondx so I think you’ve got an accelerating effect for our business. We’re seeing the general uptick and I think that’s adding to it. On the handler side, I think a lot of the business for Multitest, and I don’t want to say dominate, but a lot of the business they are tied to automotive and they’re starting to see gains there.

But again, if you look at a profile of a handler and tester cycles, they do go in synch but the handler cycle does somewhat trail the tester cycle. Part of that could be some of the testers are being purchased early for wafer [sort] and then you follow that on with final test where the handlers are purchased. We don’t see anything out of the ordinary and we would expect the handler business to follow but it could just follow at a little bit slower pace at least initially.

David Duley – Steelhead Securities

Just a couple of other questions. The relationship with Spirox, I don’t believe they currently rep a handler line or contactors and so this looks like a pretty big geographic expansion opportunity for you. Can you talk about what percentage of revenues of those businesses come from Taiwan and China and do you have a goal set for what you could see let’s say in a couple of years?

David G. Tacelli

The way I’d describe it without getting into the specifics of kind of what piece of what business comes from those areas, I’ll talk a little bit about Spirox’s expertise. Spirox has got a wider knowledge base than just testers. They have rep’d a handler company in the past, they also have rep’d a contactor company in the past so they have understanding of those businesses they also have partnered with probe companies, not probe card but the actual probers in the past as well. Spirox does a lot of work today with device simulation all the way from design all the way through final test so I consider them to be highly qualified when looking at that entire food channel also all the elements inside test.

They have got a great knowledge of the space. We think it gives us a competitive advantage because also when they’re selling to companies today, they’re selling now test cell solutions and then I call that phase I where you go in and you’re not only buying a handler you’re buying a tester, you’re buying a package with certain kinds of contactor technology. Phase II will be as we develop and work with them on developing some really innovative solutions for the test cell, I think that will enhance our business even further.

With all that said, I’m looking for really good expansion in the China and Taiwan region. I don’t want to put a number on it but I want it to be and I expect it to be significant as we exit ’14 calendar year and go into ’15.

David Duley – Steelhead Securities

Can you give us an idea how big that business is now in Taiwan and China? Is it zero?

David G. Tacelli

Yes, we’re not going to get that specific for that business but in terms of Multitest presence for the handler group I would say they’re behind the competition in those regions and that’s why we think it’s strategically important to align with Spirox because they can really help us expand that business into a region where a lot of the growth is.

David Duley – Steelhead Securities

[Inaudible] you showed this chart about the contactors being a $555 million market. Can you give us an idea about what your market share is currently there? Then, did you have any 10% customers during the quarter?

David G. Tacelli

We had one 10% customer. As far as our percentage market share we are in the top 10. If you look at the Multitest piece of the business, Multitest and ETC we identified that total without getting specific, I would say the revenue is significant for the contactor business. I don’t want to get more specific than that on any one piece of that pie. But we did give a pie chart that kind of talks about total Multitest and how the contactor was a significant piece of that but I don’t want to go any further.

Operator

Your next question comes from Christian Schwab – Craig-Hallum Capital Group.

Christian Schwab – Craig-Hallum Capital Group

Can you quantify for us Diamondx sales year-over-year quarter-over-quarter so we can judge some success in that product launch?

Mark J. Gallenberger

We had originally set out a goal to exit I think it was fiscal 2013 at a certain percentage of product sales and we’re now kind of on that run rate. I think we talked about not wanting to split Diamondx out but because we put so much attention on it I would say we’re right now in the 20% product revenue rate for Diamondx.

Christian Schwab – Craig-Hallum Capital Group

If we look at your business over many periods, when we’ve seen a couple year softness/digestion if you will of purchasing and then we begin to see inflection point of change kind of similar to the magnitude that we’re experiencing now it has historically led to a multiyear recovery, or a multiyear period of strength. Do you think we could potentially be on the cusp of that?

David G. Tacelli

What’s the right way to be conservative? Our business has changed so much, as you know, over the past few years. We’ve been reluctant to kind of snap a chalk line more than 90 days out. With the level of strength we’re seeing we do see strength that does go out a little bit farther right now. We’re not giving guidance to that but we do see the strength that is continuing. I think a lot of that comes from being under the trend line for so long, which you pointed out. I think a good portion of that for us comes from the introduction of new products. I think there’s a portion of that that will help us in the back half of the year as it relates to integrating some neat concepts in the test cell.

With all that being said, this industry is too tough to predict to say it’s multiyear. We’d like to see it be multiyear, it has the feeling that it’s going to be sustainable for a period of time but I don’t want to bet on multiyear at this point.

Operator

Your next question comes from Thomas Diffely – D. A. Davidson & Co.

Thomas Diffely – D. A. Davidson & Co.

I guess a similar question, when you look at business this time of year how do you try and figure out what part of the business is a seasonal balance off a low trough fourth calendar quarter and how much of it really is a cycle recovery?

David G. Tacelli

The dynamic that is different this time around that I haven’t seen in a long time is when you’re in the January period for us, usually it’s a wait and see mode until after Chinese New Year. Once Chinese New Year comes, that late January early February time period people get back and then spend a few weeks trying to figure out what inventory levels are, how things are going to be and we started seeing this bump earlier than Chinese New York so that was an interesting dynamic change for us.

I don’t know how to correlate that into the balance of the fiscal year and the balance of the calendar year. I do know the interesting part is it is across multiple segments which is very good for us. I think in the past two years any time we’ve seen an uptick it’s been very market focused. We’re seeing it across multiple markets now and I can’t stress enough we’re also seeing the benefit of the new products taking hold. I think those two things and the interesting dynamic that it happened a little bit earlier than we would have anticipated really gives us a level of enthusiasm as we go through the next several quarters.

Thomas Diffely – D. A. Davidson & Co.

When you look at the head count reduction that you’ve made, is there any way to access the potential impact on maybe a slight reduction in your available market? Did you exit any particular underperforming segments or do you think you have the tool set that could go back to the previous market sizes?

Mark J. Gallenberger

That’s a good question and we took many of these actions driven by the deal itself and so we didn’t divest from any specific product lines or markets. That’s not what really drove the restructuring. The restructuring was really driven by the integration of these businesses. That was the primary driver for that.

Thomas Diffely – D. A. Davidson & Co.

One more question, on the tax side taxes are de minimis right now, with the acquisition is that going to remain the case for the next several years?

Mark J. Gallenberger

I think it will be just because we got the large NOL balances and this deal did not impact the availability of those NOLs and so you’re going to have the ability to use those NOLs at least primarily here in the US not only for LTX profits but also for the new co or for the combined company. So I think for your modeling purposes we won’t be big payers of cash taxes until we start consuming those NOLs. Now on the flipside outside the US we do have significant presence and so there will be a partially offsetting effect where we’re going to be paying more cash taxes in foreign jurisdictions.

Thomas Diffely – D. A. Davidson & Co.

Finally, when you look at the semi test market, have you seen anything new coming out of Japan from your competition there as far as new products? Mainly directed to the mid to low end of the market?

David G. Tacelli

I have not at this point. I think they’re working constantly on developing new instrumentation for the products they have whether they come out of one of their acquisitions or they come out of their organic product. I haven’t seen anything new. If it’s being defined as new it’s probably something being repackaged from existing instrumentation.

Operator

Mr. Gallenberger I’m not showing any further questions at this time. Please proceed with any further remarks.

Mark J. Gallenberger

I want to thank everybody for taking the time. I apologize for going a little bit later today but there was a lot of information that we felt was important to share with you. We look forward to speaking with you in the near future. Have a good day.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program, you may all disconnect. Everybody have a great day.

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