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Verigy, Ltd. (NASDAQ:VRGY)

F3Q2010 Earnings Call Transcript

August 19, 2010 4:30 pm ET

Executives

Judy Davies – VP, IR and Marketing Communications

Keith Barnes – Chairman and CEO

Jorge Titinger – President and COO

Bob Nikl – CFO

Analysts

Jim Covello – Goldman Sachs

Wang Jiong [ph] – Citigroup

David Duley – Steelhead Securities

Mike Chu – Morgan Stanley

Tom Diffely – D.A. Davidson

Gary Hsueh – Oppenheimer & Co.

Raj Seth – Cowen & Co.

Operator

Good day ladies and gentlemen and welcome to the third quarter 2010 Verigy earnings conference call. My name is Christine and I will be your operator for today. At this time, all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator instructions) as a reminder, this call is being recorded for replay purposes.

I would now turn the call over to your host for today Judy Davies, Vice President of Investor Relations and Marketing Communications. You may proceed.

Judy Davies

Thank you, Christine, and good afternoon everyone. Welcome to our financial teleconference for Verigy’s 2010 fiscal third quarter, which ended July 31. I am joined today by Keith Barnes, our Chairman and CEO and Bob Nikl, our CFO. Also joining us remotely is Jorge Titinger, our President and COO.

Our third quarter financial press release was sent out today via Business Wire and it is posted on the company’s website at verigy.com. If you are not able to locate the press release or need assistance in finding the information, please contact me directly at 408-864-7549. A replay of today’s call will be available via telephone and webcast from August 19 through September 2nd. You may access the replay by going to the Investor Relations section of our website. And as a reminder this conference call is being recorded.

We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Including uncertainties of the global economic recovery, the conditions of the semiconductor and semiconductor test industries, the strength of our customer’s businesses and foreseeing changes in the demand for our product and unanticipated delays and needing product demand and delivery requirements.

Additional factors that may cause our results to differ materially from the forward-looking statements are discussed mostly in our most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance, provided during today's call are only valid as of this date and Verigy undertakes no obligation to update the forward-looking statements.

In addition, during this call, we will discuss non-GAAP financial measures including non-GAAP net income, earnings per share, operating expenses and gross margin. You will find a reconciliation to the most directly comparable GAAP financial measures on our website.

Thank you all again, and now it is my pleasure to turn the call over to Keith Barnes.

Keith Barnes

Thank you, Judy. Good afternoon and thank you for joining us today on our third quarter 2010 conference call. Today I will review our quarterly financial highlights and market share data and Bob will provide more details on our Q3 financial performance and Q4 guidance. Jorge Titinger, our President and Chief Operating Officer will discuss his priorities as President and provide an update on our products.

We’re pleased to report our second consecutive quarter of profitability on a non-GAAP basis. And in Q3 we also returned to profitability on a GAAP basis. Further we exceeded both our revenue and EPS guidance for the quarter.

Total revenue for Q3 was $154 million, an increase of $34 million, or 28% from Q2. This growth was driven by continued demand for our SOC products. The last time we reported revenue of 150 million or more was in the fourth quarter of fiscal 2008. In that quarter, non-GAAP earning per share were $0.14 and on a GAAP basis we recorded a loss of $0.60 per share. With similar revenue in Q3 we delivered a significantly higher bottom line performance with non-GAAP earnings per share of $0.23 and GAAP earnings per share of $0.21.

Now I’d like to review some market share information. In the past we reported market share data based on hardware sales only while our competitors have included service and support revenues. To provide you with an apples-to-apples comparison we will now do the same.

When we took Verigy public in 2006 our overall SOC market share was 15% including service and support. For the first half of calendar 2010 our estimated overall SOC market share was approximately 21%. We expect to gain additional points of market share during the rest of this calendar year. By the end of 2010 we believe that we will have increased our market share by 8 to 10 points wherein our overall SOC share by more than 50%.

I would also like to point out that our share growth over this period of time has been almost entirely organic and reflects the success of our product development and market segment priorities. If we look at our core market, high-end SOC, our share was an estimated 33% for the first half of calendar 2010.

Before we move on to Jorge and a discussion of our products, I would like to give you some background on his new role. I joined Verigy over four year ago. I thought it was important to put a succession planning program in place, especially for our company officers. When Jorge joined Verigy in 2008 as our Chief Operating Officer, preparing him to assume the role of President became an important part of this succession plan. Since then Jorge has been instrumental in managing a large part of our company though the industry downturn. He has led the product groups that have maintained a very competitive product portfolio for Verigy and he has managed the successful transition from Flextronics to Jabil so that we could benefit from a more simplified outsourcing structure.

Additionally Jorge has developed excellent relationships with the rest of the executive team, chief customers and within his own organizations. For all these accomplishments plus Jorge’s extensive experience, I’m confident that he is the right person to help lead Verigy in today’s environment of change and opportunities. Jorge, again congratulations and thank you for everything you’ve done and are going to do in the future for Verigy. I look forward to continuing to work with you and the Verigy team.

With that I’ll turn over the next part of the presentation to Jorge.

Jorge Titinger

Thanks, Keith and thanks to all of you for joining us this afternoon. I’m excited to assume this new leadership role at Verigy and appreciate Keith and the Board of Directors’ confidence in me.

Today I will comment on two areas, first my priorities as President and second an update on our SOC and our memory product.

June, 2010 marked our fourth year as a public company. The priorities for the company during the first two years were to transition from Agilent and stabilize Verigy. The next phase of our plan was to focus on optimization. And while we made some progress in optimizing the company by moving to a more competitive cost structure and changing contract manufacturing partners, we had to quickly shift to keeping Verigy as healthy as possible during the downturn. We did this successfully and now that the industry is recovering we’re focusing on optimization again. This is a top priority.

Since becoming President we have taken some actions to further advance our product and operational excellence initiatives. For example, we moved all of the product divisions and worldwide customer team including service and support under my organization. This will enable Verigy to further leverage resources and strengthen the integration of our product development and customer oriented activities.

Second we are leveraging our R&D investments across multiple product groups and market segments. I believe this will help improve our cost structure, R&D efficiencies and responsiveness to customers as well as strengthen our technical foundation for future product roadmaps.

Ultimately these changes and others we are making will enable us to better leverage and align resources, increase our focus and accelerate execution of high-potential opportunities.

Now on to our product updates. I’ll begin with SOC. The SOC test market continued to show strength throughout the quarter and across our broad base of customers and applications. Including MPUs, GPUs, application processors, RF and consumer mixed signal.

In the quarter, we received multiple system orders from several customers who are ramping their devices into high-volume manufacturing to meet strong demand. This strong demand resulted in a record build from Jabil of more than 100, 93K systems during Q3, which exceeded the previous record set in Q3 of fiscal 2008.

Another indicator of strength was the utilization rate on the 93K, which remained above 90% throughout the quarter. In the wireless RF area, 93K sales continued to be extremely strong, driven by the ramp of our Port Scale RF customers. I will highlight three successes for our Port Scale RF product. Record shipments and growth, our new Direct-Probe solution, and willing sole source supplier status with our key customer.

In Q3, we set our new record for Port Scale RF shipments. Our installed base grew 20% quarter-over-quarter and doubled from one year ago. In Q3 Port Scale RF generated more than 50% of our total SOC revenue. Our Port Scale RF system has become an industry standard for wafer probe and package testing of 3G, 4G, wireless LAN and Bluetooth RF devices and RF transceivers.

It is being used to test a broad base of semiconductors ranging from low integration devices such as power amplifiers, tuners and transceivers to high integration RF devices containing integrated mixed signal, digital, power management and embedded and stacked memory. During the quarter, we received multiple system order from customers testing these types of devices.

We added a major fables company in China to our customer list due to Port Scale RF’s broad application use. This new customer will use our systems for high volume manufacturing of cellular transceiver devices. We believe this win is significant as it allows us to serve the fast growing RF market in China.

Now I would like to spend some time highlighting our Direct-Probe solution for the 93K. There is an increasing trend to move full performance testing from final test into wafer probe. We believe our Direct-Probe solution is the most advanced, totally integrated offering available for at speed functional test at wafer probe.

Our solution enables customers to meet technology and cost of test challenges required by 3D ICs, AGB [ph] and wafer level chip scale packaging devices. We already have a proven track record with more than 100 Direct-Probe systems installed. Today we are working with a large wireless semiconductor manufacturer to qualify our Direct-Probe RF solutions for using high-volume manufacturing.

In addition to our expanded product portfolio RF customer base continues to grow. I am pleased to announce that in the quarter one of the top 10 IDMs chose Verigy as its sole supplier for its cellular RF SOC and baseband business.

This account was under strong attack by one of our larger competitors. And we were able to win sole supplier status due to the 93K superior ability to meet the customer’s performance and cost of test scores.

Now I would like to provide an update on our low-end IC products. As you may recall we introduced the V101 a little over a year ago. In Q3 we announced a new mixed signal capability for the V101 which is now in qualification at a number of major customers.

While competitors have been in the low-end IC space for over two decades, in the short time that we have been serving this market the combined installations of our V101 and V50 products total more than 350 systems. We have shipped over a 100 low-end systems during past quarter alone. Overall, we are very pleased with the progress we are making in this market.

Now, let’s move on to our memory products. We segment the memory space into three main areas. High-speed memory where we use our 93K platform, commodity memory where we use our V6000 platform, primarily for Flash but we are also getting qualified for DRAM and advanced memory probe cards.

Last month we introduced two new high-speed memory capabilities on the 93K. First the HSM6800. In the quarter we installed that recognized revenue for our first production-ready HSM6800 system at our Korean memory manufacturer. Driven by qualification process, the HSM6800 delivered higher yield and throughput than competitive systems. It is the only high speed test solution available for DDR5 devices with operating speeds above 4 gigabits per second per pin.

Second the HSM3G, this product extends the testing capabilities of our 93K platform for DDR3 mainstream memory devices. We shipped production systems to multiple customers in the quarter, and we are currently in production qualification with these systems. The qualifications are expected to be completed in Q4. We also received an order from a large Taiwanese OSAT customer in the quarter. All of these customers selected the HSM3G for its future-ready upgradability for the next three speed grades of DDR memories, as well as test time savings of up to 20%.

On the commodity side, the memory market is beginning to show some signs of a recovery however, we believe that there is still a significant inventory of used systems in the market today. As we have previously stated, we anticipate that the market will remain challenging throughout the end of this year.

Turning to probe cards. We introduced our one-touchdown 300 millimeter probe card during the third quarter. This card is capable of testing an entire 300 millimeter full DRAM wafer with a single-touchdown, with only 2 grams of force per probe. The low probe force is critical in achieving the required planarity and scrub performance without risking damage to the devices under test, and meets current prober capabilities for very high (inaudible) cards. Today we offer the lowest probe force in the industry, about half that of the competition. We continue to make progress with our probe card qualifications, and we expect production qualification for a major DRAM customer to be completed next month. During the third quarter we also received multiple volume orders from an important Flash customer. These cards are expected to ship in fiscal Q4.

To summarize, our extended product portfolio has been well received by customers and our customer base continues to grow. While the overall memory market remains challenging, we are taking advantage of the opportunities in the 93000-based HSM market and are pleased with the long-term potential of our probe card business.

Finally, we are optimizing our business, increasing our focus on integrating our product development and customer oriented activities, which will enable us to more quickly respond to customer requirements and strengthen Verigy for future growth.

And now I will turn the call over to Bob.

Bob Nikl

Thanks, Jorge, and good afternoon everyone. I will now review Verigy's financial results for the third quarter, review our target financial model, discuss our current cash strategy, and provide some additional detail on our fourth-quarter financial guidance. Please note that our GAAP financial results include charges related to the company's restructuring actions and manufacturing transition; when I discuss our non-GAAP results they exclude the impact of these items.

A reconciliation of our GAAP to non-GAAP information is included in our press release and is also available on our website. As a reminder, both our GAAP and non-GAAP results include the impact of share-based compensation expense, which totaled $5.2 million in the quarter.

Financial results exceeded our guidance range for both revenue and earnings per share with very strong operating performance in our SoC product group.

As mentioned earlier, total company revenue in the quarter was $154 million, an increase of 28% sequentially and 77% year-over-year. Orders for the quarter were $165 million, also a 77% increase over last year, but declined $6 million from Q2. The order decline was entirely driven by the higher seasonal service and support bookings that we had last quarter. Our total company book-to-bill ratio was 1.07.

Our quarterly orders by ship to region were as follows: Americas 7%, Asia Pacific 89%, and Europe 4%. Orders from IDM and fabless customers were 33% of the total, with the remaining 67% from OSATs. This compares to 41 and 59% respectively last quarter.

Hardware sales were 79% of total revenue this quarter compared to 73% last quarter. And for our SoC product in total sales of $119 million were up 43% sequentially, while our memory product revenue decreased from Q2, with sales of $3 million in the quarter. Our turns business was 62% in Q3 compared to 67% last quarter, and our backlog increased to $166 million, the highest it has been in over eight quarters. Services and support revenue was unchanged from last quarter at $32 million, and represented 21% of total revenue compared to 27% last quarter.

Our quarterly revenue mix by ship to region was as follows, Americas 7%, Asia Pacific 87%, and Europe 6%.

In the third quarter, we had two greater than 10% of revenue customers, both of which were OSATs.

Gross margin on a non-GAAP basis this quarter was 50%, 1 point better than last quarter. This was approximately a point higher than we had anticipated and was due to higher-than-expected volume and better mix.

Q3 non-GAAP operating expenses of $59 million were $5 million higher than the prior quarter, due primarily to higher R&D program spending on project material, as well as higher selling expense and variable compensation due to our significantly higher revenues and profitability. Our provision for income taxes for both the quarter and the full year was approximately $2 million, and reflected the increase in both current and projected full-year profitability.

Our ending headcount was 1,450 permanent employees, a net decrease of 14 from last quarter. Since the beginning of the fiscal year, our overall headcount has declined by 33 heads, despite the 68% revenue increase during the same period.

We believe this demonstrates the improved leverage in our operating model, which I will address in greater detail in a few moments.

Now I would like to review our balance sheet and cash performance. We ended the third quarter with $445 million of cash and marketable securities, an increase of $19 million over the last quarter, while cash generated from operations was a positive $22 million in the quarter.

Accounts receivable at $86 million increased $5 million from the prior quarter, while DSO decreased to 50 days compared to 61 days in Q2, and reflected better shipment linearity in the quarter.

Total inventory increased $12 million from last quarter due primarily to an increase in demo equipment, as we placed more evaluation testers in key accounts, and we also had an increase in some critical raw material components and assemblies.

CapEx in the quarter of $7 million was slightly higher than normal due to some one-time purchases of test equipment used in R&D, software licenses, and investment in fab capacity at Touchdown.

Depreciation and amortization expense was $5 million, consistent with last quarter.

I want to spend a few moments now reviewing our target financial model and providing some insight on our current cash strategy. While there has been some concern about our overall target model, our nine-month revenue was up 68% over last year's comparable period, and yet total operating expenses on a non-GAAP basis increased by only 9% with the increase due primarily to the reinstatement of the 10% pay cut and restoration of profit sharing.

We took several actions to lower our cost structure during the downturn in order to keep Verigy as healthy as possible, while continuing to make the strategic investments that we believe have positioned the company for future growth.

Our target model says that on revenue of 165 to $175 million we would expect our operating margin, including share-based compensation expense, to be approximately 15%.

Gross margin across all of the product lines, including our new products, which have low cost IC testers and probe cards in the mix, should be approximately 50% or better over an average cycle.

Throughout the extraordinary downturn in memory ATE demand, we have continuously evaluated our cost of investment in the memory product groups and have made adjustments in order to maintain the capability that customers expect of us.

This has obviously impacted our overall company results, given the depth and sustained decline in memory buy rate. We continue to expect a rebound in 2011 in overall memory ATE demand, but will also ensure that we manage and leverage resources throughout the company in the most productive manner.

Now, some perspective on our cash strategy. At the time that we decided to access the capital markets last year it was by no means certain when the downturn would moderate, and we decided it was critical to maintain financial liquidity and the ability to avoid having to make sub-optimal short-term decisions regarding our investment in strategic programs.

We stated that the proceeds of the convert would provide us with the financial flexibility to allow us to invest in both organic and potentially inorganic growth areas. Our view was that in order to continue the significant market share gains achieved since our spinoff, it was critical to continue to invest in new products and technologies, even as we focused on significantly reducing our costs.

An important part of our cash strategy is to maintain strong cash reserves over an entire semiconductor cycle. While we do not yet believe that the current cycle has peaked, it is only in the last two quarters that we have returned to profitability, and have again begun to generate cash, so we have been necessarily cautious in our cash assessment plans. As you know, shareholders approved a repurchase plan this past April, which authorizes us to buy up to approximately 6 million shares, or 10% outstanding, during the authorization period which expires in 2011.

We expect to be in a position to announce our repurchase plans no later than our Q4 earnings call in November.

Now I would like to close with some additional color on our Q4 guidance. We are expecting Q4 revenue to grow sequentially by 2 to 8% or a range of 157 to $167 million. For the full year that represents revenue in the range of 537 to $547 million, an increase of 66 to 69% over the last year.

Non-GAAP gross margin and operating expenses, after excluding restructuring and manufacturing transition-related charges, are expected to be roughly flat.

Our tax provision is expected to be approximately $2 million to $2.5 million, and share-based compensation expense is expected to be 4.2 to $4.4 million compared to $5.2 million in the third quarter.

GAAP earnings per share are expected to be in the range of $0.22 to $0.27 and after excluding charges related to restructuring actions and the manufacturing transition, earnings per share on a non-GAAP basis are expected to be in the range of $0.24 to $0.29.

Weighted average shares outstanding for the fourth quarter is expected to be approximately 71 million, which includes the dilutive effect of the convertible notes. Accordingly, our earnings per share calculation also excludes the related interest expense related to the notes.

This concludes my prepared remarks, and we will now open the call up for your questions. Christine?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jim Covello representing Goldman Sachs. You may proceed.

Jim Covello – Goldman Sachs

Great guys, thanks so much, congratulations on the good results. A question particular to the memory space. I heard what you said about there is still some excess capacity out there that is unused, and that you expect tougher conditions there between now and the end of the year. Do you think it is ultimately going to be a technology transition that drives incremental spending in the memory test space, or is it going to be the front-end capacity that is now being ordered and will be installed early next year starting that will ultimately drive incremental test growth on the testers – on the memory site?

Keith Barnes

Jorge, you want to go ahead and answer that?

Jorge Titinger

Sure I think this is going to be a combination of both. I think we are seeing some of the devices are getting to the specs of the speeds they are expected to run at, that new technology is going to be necessary to test those devices. We are seeing that in the high-speed memory side, for example. And then ultimately the investment in front-end capacity that will result in higher volume will also start driving back end test needs later in the 2011 timeframe.

Jim Covello – Goldman Sachs

And then if I could just ask about some of the competitive dynamics in the memory space. I mean, you have – particularly in DRAM you have an established incumbent. You have customers that are desperate to find some balance in the market so that the incumbent can't hold them over on pricing and you have several new players in the industry, again, particularly in the DRAM space. How do you think that all shakes out when we do get back to a resumption of growth in this segment? Thanks.

Jorge Titinger

And there what I can comment on is that we have customers that are looking at our products. Because there has been very little to no demand, many of them for whatever small capacity increases they need, they are staying with their current tools of record. But in the future we expect to get some traction with these qualifications. And that will shape the market as volume starts to be larger and customers need to make decisions.

Jim Covello – Goldman Sachs

Great. Thank you so much.

Keith Barnes

Thanks Jim.

Operator

The next question comes from the line of Tim Arcuri representing Citigroup. You may proceed.

Wang Jiong – Citigroup

This is Wang Jiong [ph] for Tim. A couple of questions. First of all, you provided some pretty detailed product and market overview during the SEMICON. Since that time frame in about a month what has the market changed, considering a lot of negative news regarding PC supply-chain and also some of the wireless weakness?

Keith Barnes

Jorge, you want to take that one?

Jorge Titinger

Yes, I will take that one. We have actually continued to see a positive position for our products throughout the end of this fiscal year. So not a lot of difference from what we had spoken during the SEMICON show in the outlook that we have for the remainder of this fiscal year.

Wang Jiong – Citigroup

Okay, just a quick follow-up. In your conversation with the OSATs, any showing of possibility in terms of order push-outs or cancellations in the next couple of quarters?

Jorge Titinger

Our focus so far has been understanding this quarter we just finished and the current quarter that we just started, and in this time frame we are not seeing any cancellations or push-outs.

Keith Barnes

And Wang I would add to that in the customers – in the OSAT community that I have talked to generally they have been in pretty good shape from a buying standpoint. There have been maybe one or two cases where customers have had some issues, but those are very situational. And I would say for the most part, because of a high utilization rate, the OSATs are still buying.

Wang Jiong – Citigroup

Great, great. One last question. You mentioned about you securing as a sole supplier for one of the key IDM accounts. Could you just give us a little bit description or color what makes your product be more competitive in the last several months to be able to achieve that kind of success?

Jorge Titinger

As I said when I was talking about that success, is we have been able to achieve – to meet the requirements at the most efficient cost and performance for them. So they are very happy with the work they are doing with us and have awarded us sole supplier.

Wang Jiong – Citigroup

Great, thank you.

Jorge Titinger

Yes, thank you.

Keith Barnes

Okay, Christine.

Operator

Your next question comes from the line of David Duley representing Steelhead Securities. You may proceed.

David Duley – Steelhead Securities

Congratulations on a nice quarter. I was wondering if you might just talk a little bit about your GPU business. You mentioned it, I think, in your prepared comments that MPU and GPU were pretty strong during the quarter. You know there is a lot of publication about how at least one customer in that area is having some trouble, so I was just wondering if you could just give us a little bit more color as to why that segment is so strong for you during the quarter?

Jorge Titinger

Yeah, I think in part it's because our position in the segment in total is very strong. So that segment continues to do well, but there are, as you mentioned, some dynamics between different customers, but our position is pretty strong across the whole segment. So we see it as a positive for us going forward.

David Duley – Steelhead Securities

So while one customer might have been losing share the other customer was picking it up and you don't really care either way since you have both?

Jorge Titinger

You could say that.

David Duley – Steelhead Securities

Okay. And just a little bit – another question – a follow-up on the previous one. The account where you became a sole source supplier, was that because you could do better on a newer product or an integrated product or is it just that you got more efficient testing the separate pieces?

Jorge Titinger

I think, I mean, I don't know if it is a specific reason like that. We are the incumbent. We have continued to perform and work very closely with our customers like we do, and demonstrated the most efficient solution for them, both in the terms of cost and technical performance for their needs.

David Duley – Steelhead Securities

Okay. One for Bob. You talked about your target model, I think in the 165 to $175 million revenue range. The upper end of your guidance this quarter will be at the lower end of that target model. Should we expect you to achieve the metrics of 50% gross margins at that point?

Bob Nikl

Yeah Dave, so again, I think I mentioned gross margin performance next quarter we are expecting to be in line with target model. We still have two businesses that are suffering from a lack of substantive demand, which is the drag, if you will. If you disaggregate the product lines SoC is just performing magnificently right now, far in excess of their own internal target models.

So our expectation is that we start to see some incremental topline. I would expect to see better overall operating margin performance than even the target model suggests at the moment. But I think timing for that is going to be a 2011 issue – early 2011 discussion.

Operator

Your next question comes from the line of Atif Malik representing Morgan Stanley. You may proceed.

Mike Chu – Morgan Stanley

This is Mike Chu for Atif. Congratulations on a good quarter and gross margins.

Keith Barnes

Thank you.

Mike Chu – Morgan Stanley

My question is around – you had indicated that the lower bookings for the quarter were due to some seasonality in the service business. Could you maybe provide a little bit more color on that?

Bob Nikl

Sure, so normally there is a bit of lumpiness relative to seasonality in the beginning part of the year. In fact, as things were slowly starting to pick up, our Q1 service bookings were a bit lower than historical norm, and that got more than compensated for in last quarter. So the sequential decline looks a bit more serious than it actually is. I think when we look at the full-year bookings profile for the service business it is fairly normal. It is just the first half, and Q2 in particular, was skewed to the high side.

Mike Chu – Morgan Stanley

Was – can you comment if the product bookings were higher than in the July quarter?

Bob Nikl

Yes, they were. So product bookings were up quarter-on-quarter.

Mike Chu – Morgan Stanley

Then on the comment about the sole-source win, was that a top-five customer of yours? And you mentioned you were an incumbent. Is this an account where you actually shared as an incumbent with another competitor and you had – and now you have taken share at that account, or is it an account that you have defended against another competitor from coming in?

Keith Barnes

Yeah Mike, it is more of the latter. And whether or not I would call them top five or top 10, it really depends upon when anybody is buying.

Mike Chu – Morgan Stanley

But it has been a top 5, top 10 customer in the past?

Bob Nikl

They have been an important customer, yes.

Operator

The next question comes from the line of Tom Diffely representing D.A. Davidson.

Tom Diffely – D.A. Davidson

Yeah, good afternoon maybe a couple of quick questions on the memory market. When you look out to next year, how do you think the market splits out between the demand or the use of a high-speed 3G type tester versus what you call the commodity testers? At some point do we get to a place where the common – the commodity 3D DRAM is going to be actually a high enough speed to use a 3G?

Keith Barnes

Jorge, do you want to grab that one?

Jorge Titinger

Sure. Let's call it commodity versus specialty DRAM just to differentiate it. So I think the specialty DRAM will continue to be a smaller total market as the market evolves. And at least from what we see today, the speed differences are still pretty significant, and we don't see in the road maps of our customers that commodity DRAM will be approaching 4 or 5, and in some cases even 6, 6.8 gigabits per second. They now suspect that about 1.6 to 1.8. So there are still quite a bit of difference. We don't see that gap closing anytime soon. So it will still be EDR versus GDDR, a very different speed.

Tom Diffely – D.A. Davidson

So the two of you have the 3G tool. That is just for 1.5G to 2G products then?

Jorge Titinger

Correct.

Tom Diffely – D.A. Davidson

Then looking at the probe card business, how big a market do you think that is going forward?–.

Jorge Titinger

As it gets back to real health the total market is about $500 million.

Tom Diffely – D.A. Davidson

Okay, that is a combination of NAND and DRAM?

Jorge Titinger

Total, yes.

Tom Diffely – D.A. Davidson

Then finally, it sounded like you're going to announce a plan for share purchases sometime in the fourth quarter. Does that mean there is no share repurchasing until then?

Bob Nikl

That is our current thinking, yes, Tom. As we said in the prepared remarks, we anticipate we will be able to announce something by the fourth quarter earnings call, but no later than that.

Tom Diffely – D.A. Davidson

Then last question, do you have a sense in the memory market, once again, what the utilization rate is of the tools in the field?

Bob Nikl

Hey Tom, it is Bob. I think the sense is that there is still a lot of capacity. To your earlier point about speed, I think there has been some misconception about the dynamic that that plays. The vast majority of commodity DRAM that is tested at the wafer level is extraordinarily low speed compared to the specialty devices which means that to the extent that you've got excess capacity sitting out there, even if it is a DDR3 memory device, it still gets tested adequately on this old equipment. So the speed inflection point that most have been referring to 1.6 gigabits is really a final test discussion, not a test at wafer level.

Keith Barnes

Tom, this is Keith. If you took a look at the market pundits' information for 2011, they are expecting the memory ATE market to be about 850 million, about 700 million this year. It is not a significant growth next year. So I think there's a lot of excess equipment out there that is impacting the growth of that market.

Tom Diffely – D.A. Davidson

Okay, thank you.

Keith Barnes

Thank you.

Operator

Your next question comes from the line of Raj Seth representing Cowen & Co. You may proceed.

Keith Barnes

Hello Raj? Christine, I think he dropped off.

Operator

Your next question comes from the line of Gary Hsueh representing Oppenheimer & Co. You may proceed.

Gary Hsueh – Oppenheimer & Co.

Thank you for taking my question. Nice job on the quarter. I wanted to ask some questions around the market-share gain expectations here for the second half. I don't put much stock into tracking market-share on a quarterly basis, and I don't think you guys do either. But looking at the second half I think historically there have been some sort of precedent were you guys have naturally gained share. I don't know whether it is because of the PC market or end market rotation, but arguably this year you probably have a better product cycle in your quiver across multiple product lines. I wonder if you can help me break down in terms of the roughly the 10 percentage points of share gain in the second half where is it coming from, which product lines, and how much of it is coming from natural market rotation in your favor in the second half?

Keith Barnes

Okay, so let me clarify a couple of things. We are not talking about 10% market share gains in the second half. We talked about – maybe this was something that I could have clarified a little earlier on. What we talked about is, since we spun out we gained 8 to 10 and overall market share points, and grew our market share by 50%. So let me go into a little bit more detail here. So our forecast for 2009 is that we will be in the 22% range for overall ATE market share, and we will grow to somewhere in the order of 25% for SoC. Now 2009 was such an odd year, and memory was such a strange situation over the last couple of years, it is hard to put any real focus on the memory side from a market share standpoint. And the market isn't going to be growing substantially in 2011.

But just to reiterate, we went from spin out at about 15% overall market share to this year we expect to end up at 22%, or maybe even a little bit more. And the biggest share gains will be in SoC, which we expect to end the year at around 25%.

Bob Nikl

And then just to clarify Gary, in Keith's remarks he was referring to this year's forecast '10, not '09.

Gary Hsueh – Oppenheimer & Co.

Okay, great. Thanks for setting me straight there. And you talked a lot about Direct-Probe. Certainly the 100 systems installed in the field year-to-date, a pretty good indication of the success of that product. What sort of the longer-term view on the market size of this product, or what the installed base on two to three years out, what should it be? I am just trying to understand what the market opportunity? And second question is my understanding was that this is purely additive. Is that correct? Is there really no SoC kind of wafer probe test product out there that this could potentially cannibalize? Is it purely additive from an organic basis? Thanks.

Keith Barnes

Jorge, do you want to take that one from Gary?

Jorge Titinger

Yes, I will take it. So I don't know if we have a good sense on the size of the market. What we do see is numerous technical directions from customers and needs that are driving the move to wafer sort, and away from final test. There is things like wafer level chip scale packaging, things like known-good-die for stack packaging or 3D ICs, for example.

With this solution we believe we have the best solution to really enable that transition. So we expect there to be growth in that market. We expect the trend to continue to grow. We are very well positioned. For us, at least, this is certainly an additive revenue streams; we can sell systems that have that capability. We can sell them as upgrades. So it is something that is very positive for us going forward.

Keith Barnes

I want add to that, – this is Keith. Traditionally, as you probably know, the 93000 has been focused on final test at very high-end. As the customers need to move to high-speed wafer sort capability with known-good-die for these packages, it opens up a larger portion of the market to us in the wafer probe area.

It is not that we haven't been in probe, but people have typically use our products for package testing, and this opens up more opportunities in wafer probe for our 93000 products, so we could get some more out of it.

Gary Hsueh – Oppenheimer & Co.

Just while I have you all on the phone here, just one last question about NAND Flash and the memory market looking into 2011. Supposedly a pretty good growth year for NAND bits. Is there any kind of talk or any kind of market transition towards built-in self test on the NAND side that potentially could start to drive market rotations to lower end NAND Flash memory testing on the final test side? –

Jorge Titinger

(inaudible).

Keith Barnes

Jorge, you want to start with that?

Jorge Titinger

So there is definitely, and it has been now for years, direction towards built-in self test. So when we look at the recovery of the total market compared to its peak, we definitely see an impact on things like built-in self test. I am not sure about the rotational aspects of the question. But in part what one of the things that happens is as you are moving to built-in self test, and one of the key strategic directions that we took is the contactor business probe cards continue to be driven, so while you may have lower end testers, you will still continue to have a significant probe card business, and we are getting positioned there as well.

Gary Hsueh – Oppenheimer & Co.

Fantastic, thank you.

Keith Barnes

Thank you.

Operator

(Operator Instructions) your next question comes from the line of Raj Seth representing Cowen & Co.

Raj Seth – Cowen & Co.

Thanks for taking my question. Sorry about that earlier. I just wanted to follow up on a couple of the previous questions. First, Bob, you talked a little bit about seasonality and service in last Q1, etc. I know Q1 is a ways away, but how in general, and maybe in this cycle nothing is normal, but how should we think about normal seasonality in this business into Q1? Thanks.

Bob Nikl

Are you asking just about service and support or overall?

Raj Seth – Cowen & Co.

Both.

Bob Nikl

So I don't think service and support is going to behave quite the same way it did this past year. Again, as we were coming out of the downturn which was very steep, customers were just very reluctant to sign contracts when they had idle capacity. So they just opted for time and material. The seasonality question, I think we talked about a little bit earlier. We are not quite seeing yet at this point, other than what OSATs normally do or say at this point in time. I think there is still this overhang somewhat of the macroeconomic environment, but I wouldn't say that over the course of the last two or three weeks we have seen anything substantial that would alter our view as to at least what we see over the next quarter or so.

Raj Seth – Cowen & Co.

So Bob – so what would normal seasonality in a Q1 be? I wasn't really asking if things had changed, but –?

Bob Nikl

Oh, sorry, sorry. Just typically, as you can imagine, by the time you get to late November or early December a lot of the rush is over for the seasonal piece. And depending upon where Chinese New Year falls on the calendar, I would say typically our fiscal Q1 would be softer. From a calendar perspective maybe 5% down in calendar Q4 and 3% down in calendar Q1.

Raj Seth – Cowen & Co.

Great, that's helpful. I wonder if I could follow up a little bit on the – a couple of questions around DRAM. Keith, you – I think a lot of discussion about what is happening in DRAM commodity versus non-commodity. You do have this platform V6000, which my understanding it is positioned to test more mainstream memory. You have qualifications going on. I guess my question is, can you remind me how many DRAM qualifications do you have going on? Are those in sort or final test? And then whatever the market size is, 900 million or so – I think you mentioned 880, what proportion of that spend goes to sort versus final? Thanks.

Keith Barnes

Yeah, well, first of all, we have never talked about how many evaluations we have going on or with whom, so I'm going to have to beg off on that one. The size of the market in total next year would be about $850 million – that is DRAM and Flash. We are engaged with a number of customers in Flash, and have been both a number of customers on the DRAM side for a while. They just haven't been buying any systems, because they have had excess inventory and they have already had suppliers in there who have supplied the few systems that they have purchased.

If you look at the purchases from the companies who have greater market share in that space, they have not been very substantial purchasers in the last quarter or two compared to what they were in previous cycles. So the jury is still out on when DRAM is going to take off in the commodity space. We are seeing a lot of activity in the high-speed area.

Raj Seth – Cowen & Co.

Keith, I know you can't even get into particulars, especially as it is fairly concentrated, but have you yet done, or do you anticipate by the end of the year being qualified – maybe you won't see workers, but qualified for a mainstream DRAM in either sort or final, or is that – those qualifications take a little bit longer to turn?

Keith Barnes

I wouldn't want to get involved in specifics on this, but I think that we are working in both areas with different customers, and as we get information that we can pass on, we will do it. So we are qualified in some accounts now, we are just waiting for them to turn on.

Raj Seth – Cowen & Co.

Thank you.

Keith Barnes

Thank you.

Operator

This concludes our question-and-answer session on today's call. I will now turn the call back over to Judy Davies. You may proceed.

Judy Davies

Thank you, Christine, and thank you ladies and gentlemen for joining us this afternoon.

We are scheduled to participate at the Morgan Stanley Semiconductor and Semi-Cap Equipment Corporate Access Day on August 25 in Chicago; the Citi Global Technology Conference on September 8 in New York City; and the Kaufman Annual Investor Conference on September 15, also in New York City. We look forward to seeing you there.

Please call the Investor Relations department with any follow-up questions from today's conference call.

We thank you for your participation and your continued support. This concludes our call. Christine?

Operator

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day everyone.

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