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Executives

Mark Gallenberger – VP, CFO and Treasurer

David Tacelli – CEO and President

Analysts

Vernon Essi – Needham & Company

Christopher Muse – Barclays Capital

Tom Diffely - D.A. Davidson

Patrick Ho – Stifel Nicolaus

Christian Schwab – Craig-Hallum Capital Group

Dave Duley – Steelhead Securities

Michael Bertz – Kennedy Capital

LTX-Credence (LTXC) F4Q10 Earnings Call September 1, 2010 10:00 AM ET

Operator

Good morning and welcome to the LTX-Credence Corporation’s fourth quarter and fiscal year earnings conference call. [Operator instructions.] At the request of LTX-Credence, this conference call is being recorded. Speakers for today’s call will be David Tacelli, chief executive officer and president; and Mark Gallenberger, vice president and chief financial officer.

At this time I would like to turn the conference over to Mr. Mark Gallenberger. Sir, you may begin.

Mark Gallenberger

Thank you. Welcome to LTX-Credence Corporation’s fourth quarter fiscal year 2010 conference call for the period ended July 31, 2010. 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 fourth quarter and discuss the business outlook, then I will provide further detail on the company’s financial performance during the fourth quarter as well as provide guidance first quarter of fiscal year 2011. We will take your questions after our prepared remarks.

A replay of this call will be made available through September 30 by dialing 888-286-8010, and the pass code is 48567020, or you can visit our website at www.ltxc.com. As a reminder, the only authorized spokespeople for the company are Dave Tacelli, Rich Yerganian, and myself.

Now, for our Safe Harbor statement. During the course of this conference call we may make projections or other forward-looking statements regarding LTX-Credence’s business outlook or the future financial performance of the company. We wish to caution you that these statements, such as projected revenues, net income, earnings per share, operating expenses, gross margin, cash flow, non-GAAP measures, and breakeven targets are only predictions and that actual events or results may differ materially.

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

Now onto the call. Dave?

David Tacelli

Thank you Mark, and good morning everyone. With revenues up 30% over the third quarter, we had a strong finish to the fiscal year, achieving all of our financial objectives. Fourth quarter revenues were slightly above the high end of the guidance, driven by growth in our core markets as well as continued expansion into our strategic initiatives for the microcontroller, general purpose wafer probe, and precision analog test segments. We see this momentum continuing into the new fiscal year.

Before describing some of the highlights of our fourth quarter and providing some insight into the goals for our next fiscal year, I'd like to review some of the accomplishments of 2010.

Total revenues for the year were up approximately 60% over 2009, while product revenues increased 128%. Product revenues in our core markets improved 70% year over year, while sales into our new markets grew from $10 million in 2009 to $60 million in 2010.

The increase in product revenue was driven by several factors, including share gains in our core markets, expansion of business with our new market initiatives, and an overall improved business environment. The majority of our growth in our core markets, as well as the new market initiatives, were driven by strong demand for both the Diamond and X-Series platforms.

Diamond sales into our new target markets increased over 500% in fiscal 2010 compared to fiscal 2009. This was the result of Diamond's adoption by one significant microcontroller company, and by several OSATs that have identified Diamond as their platform of choice for general purpose wafer probe. We are confident that during fiscal year 2011 we will be successful in adding new customers in both market segments, which will continue to drive significant increases to the Diamond installed base.

In the precision analog market, we have experienced strong demand for our X-Series products, primarily due to the DCTM source and measure instrument, introduced early in fiscal 2010. The DCTM is the industry's most innovative technology for precision analog testing. It combines the high performance needed for the data-converted testing market, along with the lowest cost to test for this market segment.

In addition to the DCTM, we brought two other significant product capabilities to market during 2010: the XVI, a power instrument for the ASL platform, and IMA, which stands for integrated, multisystem architecture.

The XVI is a 14-channel DC source and measure instrument for the ASL that significantly improves the multi-site test capabilities for our customers. With nearly 4,000 ASL systems installed, the demand for this new instrument has been very strong. The introduction of the XVI also demonstrates our commitment to the future of the ASL platform.

With IMA, we have developed the unique capability that gives our customers the ability to connect individual test systems and use this new configuration for massive multi-site or strip test applications. The connected test system can then be separated and used as individual testers, depending on the mix of products that our customers need to ship. The IMA configuration has demonstrated cost savings of 30% to 50% compared to existing solutions, and fits perfectly into a strip testing environment.

From a financial perspective, fiscal 2010 represents a turning point in the performance of the company post-merger. We generated $48 million of positive EBITDA for the fiscal year, or 22% of revenue. Our EBITDA quarterly breakeven revenue number is now in the mid-$30 millions, down from close to $90 million per quarter at the time of the merger.

Our business model goal is to generate strong profitability and cash during up cycles and remain EBITDA positive throughout an entire business cycle. For every incremental dollar above breakeven, our business goal is to drop approximately 60% of that revenue to the gross margin line and 50% to the bottom line. During fiscal year 2010 we were able to meet or exceed both of these objectives.

As we entered fiscal 2010 the final step in the integration process between LTX and Credence was to address the balance sheet. We did this through an equity offering which was completed in March of this year.

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The net proceeds from that offering, approximately $48 million, we used to buy back our own outstanding convertible debt at a discount, saving the company approximately $5 million in cash. At this point, all that remains of the original $122 million in convertible debt we had in 2008 is approximately $900,000 which is due May of 2011.

So with fiscal 2010 as a backdrop, how did we perform during the past quarter? Well, during the fourth quarter we delivered revenues at the high end of the guidance, which represented 30% growth over the third quarter.

We continued to see utilization rates across our customer base remain high, with demand for microcontrollers, RF wireless, precision analog, and consumer digital leading the way. We grew product revenue by 36% in our core markets and 49% in our new market initiatives, with service revenue flat quarter over quarter.

Taiwan and China remained very strong, with 25% of total revenue coming from that region. We also experienced growth from our existing customer base, driven mainly from the need for incremental capacity. During the fourth quarter we shipped a record number of Diamonds, with 70% of those going into the microcontroller and wafer probe market.

As revenue ramped over the last several quarters we have seen the business model we have built get put to the test. Our gross margin during the past quarter exceeded 60% and our EPS was $0.11 per share.

In addition to this P&L performance, we generated $21.6 million of EBITDA during the fourth quarter, which led to an increase in net cash of $19 million.

So what do we see in the overall industry? Well, as we look at the AP market, we estimate that the SOC or non-memory test equipment segment, to be at least $2.4 billion this calendar year, which would translate into about 1.2% to 1.3% ATE buy rate, and while that is significantly higher than 2009, it's still below the trend line for ATE of about 1.5% to 1.6%.

Independent third party research firms are forecasting three years of sequential growth for our industry from 2010 through 2012, and we believe this forecast is reasonable given the underinvestment in SOC test from 2007 through 2009.

We do not believe every quarter will be up and to the right as seasonality or capacity absorption can cause flat to slight down quarters during this growth period. And while our visibility rarely extends beyond three months, we continue to see positive indications from our customers on their business outlook.

Outside of our perspective on the overall industry, our focus as a company will be on three major objectives as we move through fiscal 2011. First, we will expand the share gains we've made in both the core market and our new market segments. Specifically, we expect to win two significant customers in our core markets and at least four new customers in our new initiatives, and we are well underway to accomplishing this objective.

Second, we'll bring new products to market that allow us to expand our revenue opportunities. We will be announcing the first of these new products in the current quarter, followed with another significant product launch early next calendar year.

And third, we'll continue to refine our business model, which is now delivering industry-leading gross margins, strong profitability, and cross-cycle cash flow generation. As we drive top line revenue growth, we'll continually improve the business model and deliver at least $0.60 of every incremental dollar to the gross margin line and $0.50 to the bottom line.

As we start the new fiscal year, all of our focus is on growing the company. We have great customers, innovative new products that expand our market opportunities, and a business model that can generate strong financial results.

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

Mark Gallenberger

Thanks Dave. Revenue for the quarter was $73.2 million, up 30% from the prior quarter. Gross margin expanded to 60.2 percent, up from 57.3% last quarter, which was due to higher revenues and strong variable margin on our product mix.

R&D spending was $12.8 million, which is up $500,000 from last quarter, primarily due to the restoration of the pay reduction we had in place for the last 12 months.

SG&A was $15.3 million, up from last quarter due to a $1.4 million charge related to the write down of fixed assets, the restoration of the pay reduction, and an increase in variable expenses that are tied to growth in both revenue and profits, such as sales commissions and employee profit sharing. Amortization of purchased intangible assets for the quarter related to the Credence merger was $2.7 million.

Net income for the quarter was $14.1 million, or $0.09 per share on a GAAP basis. Excluding the one-time items, our non-GAAP net income for the quarter was $17.2 million or $0.11 per share, which is a penny better when compared to our original guidance of $0.10 per share. The one-time items excluded from the non-GAAP calculation are the $1.4 million charge related to the disposition of some fixed assets, the one-time benefit of $1 million related to the recovery of a previously written off receivable, and the amortization of $2.7 million.

The EBITDA for the quarter was $21.6 million, or 30% of revenue, which excludes stock-based compensation expense of $1.1 million. For the 12-month period ended July 31, sales were $219 million, up 60% compared to the prior fiscal year. Net income was $18.6 million, or $0.13 per share on a GAAP basis. The non-GAAP income for the year was $27.6 million, or $0.19 per share, which excludes amortization of purchased intangible assets and other special one-time items. EBITDA for the fiscal year was $48 million, or 22% of revenue, which excludes stock-based compensation expense of $4.2 million for the year.

Next, I'll provide a breakdown of revenue for the quarter. 55% of revenue came from IDMs, while 45% came from subcontract, test, and fabless companies. 85% of revenue was for product while 15% was for service. For the quarter we also had three customers represent greater than 10% of revenue.

Now, on to the balance sheet. We ended the quarter with gross cash of approximately $93 million and net cash of approximately $92 million. For the quarter, net cash increased approximately $19 million as we generated strong operating cash flow by tightly managing the working capital.

We finished the quarter with trade accounts receivable of $45.6 million and DSOs decreased to 56 days from 61 days in the prior quarter as we were successful in efficiently managing the collections process.

Inventory was $21 million, which is down $5.8 million from the prior quarter, driven by consumption of existing inventory used for revenue shipments. Net capital expenditures during the quarter was $900,000, while depreciation expense was $3.2 million. We ended the quarter with accounts payable of $16.6 million and stockholder's equity of $177 million.

Guidance for Q1 is as follows. We expect revenues to be in the range of $75 million to $80 million, and non-GAAP earnings per share of $0.11 to $0.13, assuming 150 million fully diluted shares outstanding. The non-GAAP earnings guidance excludes amortization of purchased intangible assets of $1.5 million. We also expect gross margin to remain approximately flat at 60%, and for EBITDA, excluding stock-based compensation expense, to be approximately 30%.

This concludes our prepared remarks, and at this time we'd like to take your questions.

Operator

[Operator instructions.] And your first question will come from the line of Vernon Essi from Needham & Company.

Vernon Essi – Needham & Company

Wanted to just discuss the tone of your customers in general. That's a question you always probably get, but just in terms of your backlog and how firm you feel it is going into the turn of the year, what's the tone out there, just in general?

David Tacelli

The tone remains positive. I think going through this entire year, and all the upside we've had over the last several quarters, I would say it's still cautious. And it has remained cautious. Because we are on such short lead time from a delivery standpoint, and have been for the past several years, customers place orders exactly when they need them. But I have seen no change in their tone.

Vernon Essi

I think in the past a couple of quarters you were, at least in the April quarter, there was conjecture and meetings throughout the quarter. You talked about expecting a seasonal muted activity level into the winter months. Now that we're getting a little bit closer to that, do you have any further color on that?

David Tacelli

No, I think we're in the same place. In the prepared remarks I talked about not every quarter being up and to the right, and it's logical when you look out past the October time period for things to generally slow down based on seasonality. So I don't think anything's changed from our comments earlier.

Vernon Essi

And moving over to the - and great job on the cash flow generation - going into next quarter obviously you're going to have to build up more inventory. Should we expect that to be an obvious head wind as you go in to build inventory for your October sales number?

Mark Gallenberger

I would actually say that we don't have to worry too much about building inventory because of the outsource model, so our outsource partners are the ones really driving the supply chain. So as you can see, even with our revenue ramping, we're actually seeing declines in our revenue because we're burning off that inventory. So it's a different model as opposed to being fully in-sourced on the manufacturing side. What you should not expect to see is significant declines in inventory for this quarter relative to what we saw for the July quarter. We saw substantial reduction - it was a very strong reduction, almost $6 million quarter over quarter as revenues ramp. You would not expect to see that same kind of decline going forward, and I think we've optimized the supply chain to the point where I would not see significant reductions in inventory, which obviously would be a source of cash on the working capital side. So that would be the only headwind where you want to see substantial declines in the inventory balances for the quarter.

Vernon Essi

Understood, but I guess I - let me back up. I've heard there's been, and I guess maybe how you're structuring your relationship with your contract providers, but there's been some procurement issues out there for key silicon components in the AT industry. At least that's what I've heard from some of the vendors out there. So I suppose you're not really going to be building inventory necessarily, as those lead times might be extended, at all.

Mark Gallenberger

Yeah, we want to be building inventories and the component shortages that you're referring to, we're still seeing component shortages, so there hasn't been significant relief on that front.

Vernon Essi

And that just leads me to my last question. Any changes in lead time in the industry in general? Or has it just been static since the June timeframe?

Mark Gallenberger

Since the June timeframe I haven't seen a material change, either up or down.

Operator

Your next question comes from the line of CJ Muse from Barclays Capital. Please go ahead

Christopher Muse – Barclays Capital

I guess first question, can you talk about what your expected linearity is within the October quarter, and then as part of that what are the key end markets that's driving the up 5%+ growth to system revenues?

David Tacelli

What I would say is August was actually stronger than we've seen in the past, so from an order standpoint we've seen a very very good start to the quarter. We came into the quarter with a healthy backlog, a lot of that shippable inside the August-September-October time frame. So I would expect it to be pretty smooth throughout the quarter. And the other part of your question was?

Christopher Muse

In terms of the end-market drivers -

David Tacelli

Yeah, the end-market drivers as I stated earlier, we're seeing very strong microcontroller, a lot of touch-screen display type devices, consumer digital, and a standalone RF wireless. I would look at that group as the bulk of the drivers for the demand right now.

Christopher Muse

Okay, the same growth drivers that you saw in the last quarter.

David Tacelli

Yep. Same - it's stayed pretty constant.

Christopher Muse

And then in terms of the OSATs specifically, can you talk about what kind of - are you seeing any sort of change statements in terms of their buy plans or has nothing changed there?

David Tacelli

I've seen some of the OSATs that mainly deal on the PC side back off. Because we're not as exposed, it hasn't really affected us, but I have seen their overall, what I'd say, demeanor change related to capital spend because it is such a big portion of certain OSATs' market. But related to the markets that we serve I haven't seen much change at all.

Christopher Muse

And then I guess in terms of your commentary on the size of the SOC market, that's a little bit lighter than what Teradyne's calling for, although I know you guys don't include service. They do. So I guess the question I have is number one, what kind of market share gains are you assuming in that number with what you're projecting for yourselves? And then also is there still some sort of conservatism in your number?

David Tacelli

The market that I talked about, the $2.4 billion market for SOC, in a lot of the data that I've seen I've seen numbers up around $2.7, and as you pointed out do include service. So we kind of back that number down. So we're looking at about a $2.4 billion market. We are being slightly conservative in our market share growth assumptions because it's very difficult to time when you win an account, how you're going to start to ship, and then how those pieces of business you win are going to roll out into their production plan. So it's very hard to time share gains in any one given quarter. You may have noticed that's why we kind of opened up the guidance a little bit this quarter, mainly due to a lot of the new customer wins we have and how that will time into this quarter versus next. But from a share gain standpoint, you've got to look at it over a longer period of time, and I would say we're being conservative right now as we look out to the balance of this year.

Christopher Muse

Okay, and just a final question from me, can you talk about what your op ex plans are for the October quarter and whether there's any one-time items we should see in that quarter or into the January quarter?

David Tacelli

Right now you shouldn't expect to see any one-time items. R&D spending is probably going to be about flat quarter over quarter. You saw the increase of about $500,000 from the April quarter but that was really driven off of the restoration of the pay reduction. SG&A is going to fluctuate up and down, mainly driven by some of these variable expenses such as sales commissions and profit sharing, so as revenue expands that line will also expand, but as revenues contract that line will naturally contract as well. We also had that $1.4 million one-time fixed asset charge in the July quarter. That will not repeat, so you can shave $1.4 million off the SG&A line for the October quarter just for that one item alone.

Operator

Your next question will come from the line of Tom Diffely from D.A. Davidson.

Tom Diffely - D.A. Davidson

I was hoping first you could talk about your exposure to the PC. Is there some way to quantify that and talk about the business trends there?

David Tacelli

Our exposure on the PC side is minimal. It's hard to quantify. Most of our products being shipped today are outside that and it's hard to even put a percentage on it. There's a lot of our products going in today into communication devices, the iPads, the iPhones, the Droids. Just follow that entire group of peripheral devices. But PCs in general - so you think of what's going in there, whether it's memory, graphics accelerators, microprocessors, very little exposure.

Tom Diffely

Okay. And you talked about the SOC market being a $2.4 billion tester market this year. How do you quantify your served available market inside of that?

David Tacelli

That's a good question. Inside the $2.4 is our - the things we just talked about, right? The microprocessors, graphics accelerators. I would really be reaching to give you a percentage, and it may be better for us to take that off line and talk about that. I don't want to just pull a number out of the air and give that to you.

Tom Diffely

Okay, but it seems like the markets you're in right now are growing faster than the balance of that market.

David Tacelli

It is. We're seeing continued growth in analog segments as well as the consumer digital, microcontroller, all the touch screen display markets. Standalone RF has been very very strong for us as well - things like PAs have been really driving our growth.

Tom Diffely

And when you look at your product line is there a difference in the margin structure between the analog and the digital side, or are most of your products fairly similar?

David Tacelli

The interesting thing is when you look across, let's say, the ACL, X-Series, and Diamond, the three core products, pretty comparable variable margins. Occasionally we'll get a mix where we'll see slightly better or slightly worse, and it may account for a one or two point swing plus or minus in the overall gross margins but nothing substantial like it used to be when we had more of the high-end digital products, whether it was standalone LTXHFI or standalone Credence on the Sapphire.

Tom Diffely

And then earlier you talked about some seasonal trends. Is there a normal seasonal pattern on a percentage basis for the winter quarter?

David Tacelli

I'd love to say there was a normal seasonal pattern. I think in the AT industry there's nothing normal. What companies tend to do is they build up in preparation for whether it's back to school and the Christmas holiday, and then there's just a general tendency to slow down to see the sell-through or the inventory levels as you exit the year. But in my 22 years I don't think I've ever seen anything that's consistent that you can point to this month being bad or this month being good. I would say that we prepare as if it's going to slow down but we, because of the variable model we have and our outsourcing manufacturing model, we're prepared for both.

Tom Diffely

And then finally, Mark, could you give us a feel for the NOL, what's remaining there, and the taxes for the next year or two?

Mark Gallenberger

Because of the combination with Credence and LTX, the NOLs, the change in ownership of both companies limited the usage of those NOLs going forward on both sides of the equation. So right now you would be looking at prior-merger NOLs being limited to $10 million per year and of course any sort of NOLs that have been created post-merger, which we had some in 2009, those obviously are unlimited. So going into this fiscal 2011, we can still use up those 2009 NOLs that were built up post-merger, and once those get bled through then you start eating into the $10 million per year that are limited. I think it's pretty safe to say that going for at least 2011 you're still going to be in a position of only limited to the AMT tax liabilities.

Operator

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

Patrick Ho – Stifel Nicolaus

In terms of the market share gains in your core markets, can you just give a little color in what market segments that they're coming from and which of the product lines you're seeing the gains from?

David Tacelli

Predominantly X-Series and a combination of high performance, mix signal, analog markets. So data converters in the industrial markets, things like that.

Patrick Ho

In terms of some of the new market penetrations you've discussed, both microcontrollers, wafer probe, and precision, analog, I know we've discussed in the past and as you mentioned, timing is always the hardest part to gauge. If you were making an educated guess are these things that you can expect over the next two quarters, or is this something that we could see later on in fiscal 2011?

David Tacelli

I think you're going to see them all the way right through 2011, every quarter in 2011.

Patrick Ho

Okay, and is there one of those three market segments that you expect the biggest growth? Is microcontrollers where you're seeing the strongest growth?

David Tacelli

That's what I would expect to see the most significant growth, yes.

Patrick Ho

Final question on the business model. I think you guys have done a great job of refining it. What additional revisions or what else are you working on to further strengthen it?

David Tacelli

The one thing that I would say, and I'll turn it over to Mark to comment, is we've worked aggressively on the op ex side over the past two years, as we've rebuilt the business, and I'll turn it over to Mark to comment on the things his group is doing on the cost of goods sold side.

Mark Gallenberger

We're constantly looking to find ways to continue to grind down the breakeven levels. We've seen the step function change already happen to be frank with you. And so going forward we'll continue to try to optimize it and further improve it. But you won't see the magnitude in the types of step function changes that we saw through the restructuring activities between LTX and Credence.

But we will be seeing further improvements in the COGS line. I believe long term you're going to see even further improvements down in op ex as well as we start to migrate some more activities in low cost regions. One of our strategic plans that we've had in place for many years is to move certain things that have historically been outsourced, move those back in house where it makes a lot of sense, such as board repair. Board repair to me is very steady, predictable business, and we think we can do those activities more efficiently and more economically in house versus outsourcing those things.

So we still have a few things in our strategic arsenal to further optimize the breakeven level, and we'll just continue to grind it down.

Patrick Ho

I guess just as a follow up to that, are you able to leverage more and more parts between your different product lines that you weren't able to do in the past, like immediately post-merger? Are you finding ways to leverage that?

Mark Gallenberger

You are starting to see some of that and you're going to see even more of that as we roll out new R&D products that are underway right now. So that obviously is a very good point, Patrick, where we are constantly looking for ways to leverage existing products and technologies across the various platforms and so you do get some of that synergy now, but you're going to see even more as we roll out more products.

Operator

Your next question will come from the line of Christian Schwab from Craig-Hallum Capital Group.

Christian Schwab – Craig-Hallum Capital Group

Can you guys talk about what you guys expect the SOC growth rate - you talked about growing from 2010 to 2012. Can you talk about what you guys anticipate that growth rate being?

David Tacelli

The way we've looked at is over the course of that three years it should average somewhere in the 8% to 9% range. And if you look at a total market size the average market size over that three years should be in the $2.3 billion to $2.5 billion market. So if you look at the prior three years, 2007 to 2009, you'd see a whole different pattern. You'd probably see it in the $1.7 billion to $1.8 billion range. So significantly up but probably on a compounding basis somewhere in the 8% to 9% is what we expect.

Christian Schwab

And can you guys - the six new customers wins, two at the core and four in the new initiatives - can you quantify what the revenue potential there is?

David Tacelli

Well I think we've done a good job of quantifying it early on when we talked about our goals for the overall market segments. Our goal was to gain a significant piece of the microcontroller, wafer probe, and precision analog market and I think these wins that we'll capture in 2011 get us to the point where we're in a position to achieve the other objectives. And I think the objectives we set were kind of in the 20% to 30% range of those markets. One of the things we haven't done is been so specific to say, this customer win is going to be this amount of dollars or percent.

Christian Schwab

And then obviously you would assume your growth rate to be better than the industry growth rate?

David Tacelli

That is correct.

Christian Schwab

As we look to exiting this year, even if we have fits and starts along the way as you kind of talked about, nothing can go up and to the right for three years in a cyclical business like this, how much cash do you think you'll have on the balance sheet exiting this year?

David Tacelli

Here's the easiest way to calculate it. If you look at our EBITDA breakeven, the EBITDA breakeven is kind of in the mid-thirties right now, so whatever revenue pattern you want to pick as you build your model, just build it off that because the EBITDA is not going to change much, that breakeven level. So we'll have uses to support the plans we have in place on earnings projects for capital, but capital should stay in the range of $1 million or so per quarter.

Mark Gallenberger

Right, and then you'll have some increases to working capital with revenue increases but I think you can use the past year, which is really how we performed post-restructuring as a basis for any sort of casual modeling for next year.

Christian Schwab

So this kind of back of the envelope, unless the world falls off a cliff, you could exit this fiscal year approaching almost a buck a share in net cash.

Mark Gallenberger

That's about right.

Operator

Your next question will come from the line of David Duley from Steelhead Securities.

Dave Duley – Steelhead Securities

It's year-end, are you going to give us a backlog number?

Mark Gallenberger

Yeah, we'll have that in the 10-K, and that will be issued in October.

Dave Duley

And you mentioned how you shipped a record number of Diamonds during the quarter and could you give us some sort of reference point to the installed base of Diamonds? I'm trying to figure out what that means. Did you ship 20 during the quarter? Did you ship 100? So I'm trying to get some sort of granularity there, whatever you can give us. I realize it's a competitive situation.

David Tacelli

I would say maybe it's better to just give you an overall install base. By the time we exit October the Diamond install base should be approaching 500. We exited the fiscal year - I'll try not to give you a number per quarter, but it was a very very good year for Diamond, very good last couple of quarters, and expect that to continue.

Dave Duley

Maybe give us a little reference point. When you merged the two companies what do you think the install base was?

David Tacelli

Less than 100.

Dave Duley

And did you say, just a clarification point - cash flow from operations in Q1 I think you said 30% EBITDA. Is that going to kind of equate to a $20 million number again?

David Tacelli

I don't think we're actually going to be able to achieve what we were able to achieve in the July quarter, mainly because of the inventory and how that came down almost $6 million quarter over quarter. I just don't expect that to repeat. So that was a source of cash, which contributed $6 million of the $19 million for the July quarter and I just don't see that happening again. I think inventories can stay flat, maybe come down a little bit, but it's not going to come down $6 million. So I do not expect the net cash to grow to the same level as it did, mainly for working capital purposes, not because of the EBITDA. The EBITDA is probably going to be a little bit better than what we saw for the July quarter.

Dave Duley

I guess final question from me is I think you mentioned that the service revenue was flat again. I don't have the numbers in front of me but I think service revenue used to be much higher than it currently is running, and I'm wondering what events would take that service revenue to a higher level again.

David Tacelli

Well, the first thing Dave, in an apples to apples comparison of where service revenue used to be, there were pieces of that service revenue that were sold off. There was a piece that was related to the automotive business that came out of Germany and that was a piece that was sold off before the merger. There was also a piece of the legacy service revenue that was sold off to a company called MV Technical Sales. So if you kind of bring it and equalize everything, say compare today minus those other pieces, we're down slightly but I think you're down slightly for a lot of good reasons. Number one, the products we're shipping are far more reliable, they're easier to install. The service revenue is less because of that, so the cost is down as it relates to that. Going forward into the future I don't see any major growth in the service revenue line. I think you'll see some uptick, again, as you get at more of an installed base of the newer products, but I don't see any major step function change that will return it to where it was, mainly because of the divestitures of some of those pieces.

Dave Duley

Well I think some of the other companies are kind of seeing the same thing, service revenue flat with the overall revenue growing pretty nicely and I'm just wondering is there something changed in the industry with customers -

David Tacelli

There could be a little refresh rate going on too. All of my competitors talk about this refresh rate where companies aren't turning back on older, legacy equipment. They're actually turning on buying new equipment, because the new equipment smaller, faster, less expensive, and more reliable. So there's a piece of that going on as well, and everyone tries to quantify what it means for their business, but long term I do see service revenue kind of hit in fact what I call the low level and I would expect it to start creeping back up but no step function change.

Dave Duley

And final question in this area. Historically you saw a renewal of service bookings. Is that in the October quarter, or in the January quarter?

David Tacelli

It's typically for us the majority of that is in the January quarter on the order front. It's the December - end of year - and because we're at the January quarter we capture - I'll make a guess - 60% of our bookings in that January quarter. And that's the yearly bookings.

Operator

[Operator instructions.] Your next question will come from the line of Michael Bertz from Kennedy Capital. Please proceed.

Michael Bertz – Kennedy Capital

David, you talked about sort of opening up the guidance range a little bit into the next quarter. Do you have any sense about pushes or pulls in terms of - whether it's timing, or size, or what might put you at the top or bottom of that range?

David Tacelli

There's nothing either push or pull related to opening the guidance range. What we have going on right now is we're in so many competitions at new customers and it really is difficult to determine exactly when the first units are going to be revenue, so what we decided to do is open up the guidance range because it's really timing. They could hit this quarter, they could hit next quarter. It's nothing to do with the uncertainty of where customers are. It's really us trying to time and gauge when those first units will revenue.

Michael Bertz

And then secondly, as you look forward - and Mark you talked a bit about how the balance sheet will look and how the inventory may turn over that time period - as you think about, let's say a targeted range of $300 million plus in annual revenue, where would you expect target balance sheet turns to be? And if you want to think about it differently, how would you expect receivables inventory to grow? Like you would look at op ex growing versus revenue growth, again for that time period.

Mark Gallenberger

I think the best way to model those things is in a revenue ramp situation you're going to see inventory levels continue to show some declines, not as much as what we saw last quarter. I think the trough point, we're kind of approaching that. I would say we could maybe get inventory levels down to maybe the $18 million $19 million range from where it is today, but not much more movement beyond that. So that won't be huge either sources or uses of cash going forward. The AR is the AR. That tends to be fairly predictable and we're running right now between 55 and 65 DSOs, and I don't see that materially changing either. So you can model that DSO assumption with any kind of revenue that you want to put into your model.

Operator

And there are no further questions in the queue. I would now like to turn the call back over to Mr. Mark Gallenberger for closing comments.

Mark Gallenberger

Just want to thank everybody for spending the time with us today and look forward to seeing you on the road over the next couple of months. Have a good day.

Question-and-Answer Session

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