Executives
Judy Davies – Vice President, Investor Relations and Marketing Communications
Keith Barnes – Chairman and CEO
Jorge Titinger – President and COO
Bob Nikl – Chief Financial Officer
Analysts
Atif Malik – Morgan Stanley
Tom Diffely – D.A. Davidson
C.J. Muse – Barclays Capital
Patrick Ho – Stifel Nicolaus
Wenge Yang – Citigroup
Jim Covello – Goldman Sachs
Krish Sankar – Bank of America Merrill Lynch
David Dooley – Steelhead Securities
Raj Seth – Cowen & Company
Verigy, Ltd. (VRGY) Q4 2010 Earnings Call November 23, 2010 4:30 PM ET
Operator
Good day, ladies and gentlemen. And welcome to the Fourth Quarter and Fiscal Year 2010 Verigy Limited Earnings Conference Call. My name is [Amnesia], and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)
I would now like to turn the call over to Ms. Judy Davies, Vice President of Investor Relations and Marketing Communications. Please proceed.
Judy Davies
Thank you, Amnesia, and good afternoon, everyone. Welcome to our financial teleconference for Verigy’s fourth quarter and fiscal year 2010, which ended October 31st. I’m joined by Keith Barnes, our Chairman and CEO; Jorge Titinger, our President and COO; and Bob Nikl, our CFO.
Our Q4 and fiscal year 2010 financial press release was sent out today via Market Wire and is posted on our 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 November 23rd through December 7th. You may access the replay by going to the Investor Relations section of our website.
We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that may cause results to differ materially from those in the forward-looking statements are discussed in our most recent periodic and current reports filed with the SEC.
These forward-looking statements, including guidance, provided during today’s call and expectations regarding our merger with LTX-Credence 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 profit loss, earnings and loss per share and gross margin. You will find reconciliation to the most directly comparable GAAP financial measures in the Investor Relations section of our website and in our press release.
At the conclusion of our prepared remarks, we will open up the call for questions, to enable us to answer all of your questions, please limit yourself to one question. As a reminder, this conference call is being recorded.
Thank you all again, and now it is my pleasure to turn the call over to Keith Barnes.
Keith Barnes
Thank you, Judy. Good afternoon, everyone, and thank you for joining us today. As we look back on fiscal 2010, I’m pleased with the significant progress that we’ve made. We introduced several new products, reduced our costs structure and return the company to profitability.
Further, we ended our fiscal year by signing a definitive merger agreement with LTX-Credence. We expect that the merger of two strong ATE suppliers will change the landscape of the test industry by creating a new company to be called Verigy that will provide a comprehensive portfolio of engineering and production testers, as well as advanced memory probe cards.
Turning to our financial results, Q4 was another strong quarter of profitability and cash generation for us. Total revenue of $159 million was within our guidance range with continuing robust demand for our SoC products.
Port Scale RF contributed more than 40% of our revenue, nearly 50% of orders in Q4. Orders in the fourth quarter were $123 million, down 25% from Q3 and our book-to-bill ratio was $0.77 for the quarter and $1.06 for the fiscal year. We believe that the sequential order decline is due primarily to the industry entering the seasonally low period of the year and we expect the holiday season will set a positive tone as we enter 2011.
Our customers have been closely managing their IC inventory levels and according to VLSI research, there does not appear to be a significant over supply at this time. IC inventory is relatively low at 1.1 times billings, compared to 1.5 times billings in early 2008 at the beginning of the downturn.
For the full fiscal year revenue was $539 million, an increase of 67% over last year and orders were $569 million, up approximately 76% from last year.
On a non-GAAP basis, earnings per share for Q4 were $0.29 and for the fiscal year earnings were $0.57 per share, compared with a loss of a $1.49 in fiscal 2009. Overall, we greatly improved our financial performance in fiscal 2010.
For 2011, market research firms continue to forecast growth in IC revenues, which should translate to a positive year to the test industry. Based on channel checks, our customers expect to resume purchasing test equipment at higher rates in Q2, with an increase in investments projected in the second half of the year.
As a result, we anticipate our fiscal second quarter revenue to return to a higher level and our annual revenue to grow approximately 20% over 2010. Bob will provide more details about our financial results and discuss our Q1 guidance.
We will not go into detail about the definitive merger agreement with LTX-Credence, but we will discuss our leadership change, included Jorge’s promotion to CEO and my priorities as Verigy’s Chairman of the Board.
To prepare for smooth leadership change after our merger closes, I will transition from Verigy’s CEO to Chairman of the Board as of December 31, 2010, and Jorge will be promoted to Verigy’s CEO and President.
The merger provides a logical and timely opportunity to accelerate our planned succession. This will allow me, as Verigy’s Chairman to focus on the investor community, to work towards successfully closing the merger and the integration of our new Board.
As a result, this will be my last earnings call as Verigy’s CEO. I want to thank all of you very much for your support over the last four and a half years, and for your continued support of the Verigy management team as we move forward.
And with that, I will now turn over the call to Jorge for a product update and the company’s priorities for 2011.
Jorge Titinger
Thanks, Keith, and good afternoon, everyone. On behalf of the entire Verigy team, I want to acknowledge and thank Keith for his leadership at Verigy over the past four and a half years. And I look forward to continuing to work with him, as I transition into the role of CEO.
For 2010, Verigy’s strategies were clear. Grow our RF business, expand into new markets and achieve an improve level of operating performance. We have delivered on all three.
We also had several successes on the product front during the year, including new capabilities on our 93K and V101 platforms, as well as our new 300 millimeter full-wafer probe card from Touchdown Technologies. These products and capabilities have been well received by our customers and show the strengths of Verigy’s technology innovation.
In Q4, we were awarded an RF design win for our major wireless connectivity device at a large U.S. fabless company. This is a significant win because this device will be used in a variety of smartphones and other mobile electronics, and is projected to be the customers’ highest volume device. We believe this device has the potential to drive the purchase of several dozen Port Scale RF systems over the next few months.
Overall, wireless continued to be extremely strong for the 93K across our broad range of customer and application segments, including smartphones, wireless LAN, Bluetooth, WiMAX and TV tuners. As a result, we now have approximately 340 total Port Scale RF systems installed with nearly 150 of those systems installed during fiscal year 2010.
In the application processor segment in Q4, we achieved a design win at a large European IDM. This is an important win because it allows us to serve another segment within this customer account, as well as validates the 93K’s position in the growing application processor market.
We also received a multiple system order from a large U.S. fabless company. This brings a total number of 93K’s ordered this year from this customer to more than 30 systems. These were just a few of the SoC highlights in the fourth quarter, they were many more. But now, I would like to spend some time talking about the SoC market and what we’re seeing there.
As I mentioned earlier, the wireless and our earth connectivity segments remained robust. However, there were some softening in other segments.
In the notebook and mobile PC segment, there was feasible slowing in the traditional PC market. We believe the strength of the tablet market may have contributed to this weakness. There was also some softening in the TV and set-top box markets during Q4. However, we believe that the demand should resume in early 2011.
Now, I’ll move onto the memory business beginning with high-speed memory. For high-speed memory, some customers are finally starting to ship their production to the higher speed DRAM devices, including DDR3 and Low-Power DDR.
As we have said in the past, we expect that a transition from devices at 1 and 1.3 gigabits per second to 1.6 gigabits per second and higher will trigger memory manufacturers to purchase additional high speed memory testers. We believe Verigy will be well positioned to address the speed requirements with our 93K HSM product.
While revenue for our commodity memory products including advanced probe cards grew to $9 million. Total industry sales of memory ATE were less than $200 million in calendar Q3.
As we have indicated previously, there continues to be an excess inventory of used testers on the market and customers are continuing to maximize the use of their current systems and delaying purchases of new memory testers as long as possible.
There is good news however on the probe card front. Our Touchdown Technologies business is beginning to show good traction and orders have increased each quarter during fiscal year 2010.
We successfully completed production qualification for our 300 millimeter full-wafer DRAM probe card at our major DRAM manufacturer and we are now competing for production orders.
Furthermore, we achieved multiple customer agreements to start DRAM qualifications. We expect successful completion of these qualifications throughout 2011 will allow TDT to participate in greater than 70% of the total available DRAM probe card market estimated to be approximately $350 million. This is in addition to our presence in the flash probe card market, which is estimated to be approximately a $150 million.
Turning now to our operations. In 2010, we made significant progress aligning resources and managing our cost structure. We grew our annual revenue by 67% while reducing headcounts. We completed our transition to our contract manufacturer while significantly increasing volume output every quarter throughout the year. And we integrated Touchdown Technologies and completed several probe card qualifications.
Before I comment on the upcoming year, I would like to acknowledge and thank the entire Verigy team for their achievements during 2010. We have a great team and a solid foundation for the years ahead.
While we see 2011 as a growth year, concentrating on both short-term and long-term actions to drive cost down and improve the overall performance of our company will remain our priority. In summary, 2010 was a solid year and we have set the stage for 2011.
We expect our SoC business will continue to perform with RF growing faster than other segments. Our goal is to continue to expand our presence in the overall SoC market. As we know with our recent announcement, we expect the merger of Verigy and LTX-Credence to create our new company with a powerful and comprehensive product portfolio serving an entire spectrum of SoC applications.
And now, I’ll turn the call over to Bob for more details about our Q4 financial results and our Q1 guidance. Bob.
Bob Nikl
Thanks, Jorge and good afternoon everyone. As this is our year-end call, I will be discussing financial results for both our recent fourth quarter and full year and then conclude with some color on our guidance for Q1.
While I realize that there is a lot of interest in our recently announced merger with LTX-Credence, we are still very early in our integration planning. Accordingly, I will be limiting my remarks to our standalone fiscal Q1 guidance. Also as reminder, I will be discussing both GAAP and non-GAAP results, which exclude cost related to our restructuring actions, impairment of goodwill in fixed assets, merger transaction costs and the loss on the sale of an investment. A reconciliation of our GAAP to non-GAAP income statement information is included in our press release and is available on our website.
Fiscal 2010 certainly represented a strong recovery from last year and we expect 2011 to be another year of growth, notwithstanding the seasonal softening in our first quarter that many of us in the industry are seeing. Our full year non-GAAP net income improved over $120 million from fiscal 2009 with gross margins of over 49% for the full year.
Let me spend a few minutes now on our most recent quarter’s results. Revenue of $159 million was within our guidance range and after excluding the charges mentioned earlier, our non-GAAP earnings per share was $0.29 at the high end of our guidance.
Orders of $123 million were down 25% from the previous quarter. As customers pause to observe CapEx acquired and began to moderate purchases in anticipation of the seasonal holiday slowing. As mentioned earlier, we see this as a pause, not the beginning of a cyclical downturn.
In Q4, our systems turns business was 51% compared to 62% last quarter. Our quarterly orders by ship to region were as follows. Americas 11%, Asia-Pac 81% and Europe 8%. Orders from our IDM and fabless customers were 63% of the total with the remaining 37% from OSATs. This compares to 33% and 67% respectively last quarter and again reflects digestion taking place in the downstream.
We ended the quarter with a $130 million in backlog compared to $166 million in the prior quarter. Our quarterly revenue mix by ship to region was as follows, Americas 12%, Asia-Pac 82% and Europe 6%.
Turning to our product revenue, SoC sales were $114 million, a slight decrease of 4% sequentially. For the full year, SoC sales more than doubled to $385 million from $179 million last year. Memory sales in the quarter increased to $9 million and for the full year, memory sales were $24 million compared to $22 million last year.
Q4 service and support sales were $36 million, up $4 million or 13% from last quarter and we’re $130 million for the full year compared to $122 million last year, an increase of 7%. The revenue split by products and services for the fourth quarter was 77% and 23% respectively compared to 79% and 21% in Q3.
This quarter we had three greater than 10% of revenue customers in the quarter and one for the full year. Our fourth quarter non-GAAP gross margin was 50% unchanged from Q3 and our non-GAAP operating expenses of $60 million were also essentially unchanged from last quarter.
Now, I’d like to review our balance sheet and cash performance for the quarter. Accounts receivable at $94 million increased by $8 million from the prior quarter, while DSO increased to 53 days compared to 50 days in Q3.
We experienced no deterioration in the overall quality of our receivable portfolio and continue to have immaterial bad debt reserves, with 94% of our accounts receivable current and no write-offs during the quarter.
Inventory increased by $5 million to $85 million due to slight increases in demo equipment and finished goods. CapEx was $8 million in the quarter, while depreciation and amortization expense was $5 million.
We ended the quarter with $469 million of cash and marketable securities, an increase for $24 million over last quarter. As we announced last week, upon shareholder approval, we plan to implement a 10% share repurchase program as well as an out lot buyback of all holdings less than 100 shares, which would reduce our outstanding share account by over 8 million upon completion.
Turning now to our first quarter guidance, revenues expected to be in the range of $115 to $120 million and the non-GAAP EPS range is a loss of $0.03 to a profit of $0.02. We are not providing GAAP EPS guidance at this time since we are not yet able to assess the total amount of transaction-related expenses and potential restructuring costs that we expect to incur in the upcoming quarter.
Share-based compensation expense is expected to be between $4.3 million to $4.5 million and weighted average shares outstanding to be used for calculating earnings per share is expected to be approximately 61 million.
This concludes my prepared remarks. And with that, we will now open the call up for your questions. Amnesia?
Question-and-Answer Session
Operator
(Operator Instructions) And the first question comes from the line of Atif Malik with Morgan Stanley. Please proceed.
Atif Malik – Morgan Stanley
Hi. Thanks for taking my questions. Keith, congratulations and good luck.
Keith Barnes
Thank you, Atif.
Atif Malik – Morgan Stanley
I have a question on, if I look at the comments, that you’re making that the revenues could go higher in your April quarter. My question is, is that due to a particular ramp of a device maybe perhaps at a large fabless dying in U.S. or is or your comments reflecting broad industry uptick?
Jorge Titinger
Atif, it’s Jorge, I’ll take the question. Now, it’s more -- it’s a broader industry uptick. We’re seeing in all of our course with customers is that they are seeing the normal seasonal slowdown post purchases for Christmas and Chinese New Years and they expect that be -- after that they will start buying again and we see that reflected in our comments for Q2 and beyond.
Atif Malik – Morgan Stanley
Thanks. And then this morning LTX-C, their expectations for microcontroller unit market is flat to up, analog maybe up a little bit, but it sounds like given your exposure to smartphones and success with the Port Scale project, the product, I mean is 20% revenue growth for next year seems to be a kind of quite different from what the analog and microcontroller markets are seeing. So, I mean that’s -- is it because that you’re seeing very high growth rate in the smartphone tablet segment that’s benefiting fairly more than let’s say the analog and microcontroller markets?
Jorge Titinger
Some of it is that and some of it is we are anticipating some share gains in the spaces where we play today and so that is why our -- what we’re seeing in especially Q2 and second half is potentially higher growth number than what you may have heard this morning.
Atif Malik – Morgan Stanley
Thanks. And then one last one the memory segment, I mean your revenues are not close to the 70 million kind of a run rate that you guys saw in 2007. Is the company considering any kind of restructuring in the memory side of the business as it considers potentially incorporating LTX-C orders?
Jorge Titinger
Well, we haven’t started our process of integration of the roadmaps and so when we do that we’ll clearly look at all the products. As of now, we are maintaining our presence in memory in all three segments that we participate in.
Atif Malik – Morgan Stanley
Okay. Thanks.
Operator
And the next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed.
Tom Diffely – D.A. Davidson
Yeah. Good afternoon. Getting back to that kind of the rough guidance of 20% growth year-over-year, how big a part of that is going to be memory?
Keith Barnes
In what we’re looking at is fairly small, we see the numbers we using show some growth in memory, but it still -- we see that the used equipment consumption doesn’t get cleaned up into 2011. So it’s only latter part of the year that we see memory picking up.
We do see opportunities in the HSM part of the market, although that market segment is not as large as commodity memory and there we see a strong participation by Verigy and then also growth in probe cards. But commodity memory will continue to see not a very large number of the 20% growth is there.
Tom Diffely – D.A. Davidson
It will be on the Flash side?
Keith Barnes
Yeah. That’s what I mean, whether it’s DRAM or Flash, that’s what we’re calling a commodity market.
Tom Diffely – D.A. Davidson
Okay. All right and then just to clarify that 20% reference for the fiscal year not the calendar year?
Keith Barnes
That’s fiscal year, yeah.
Tom Diffely – D.A. Davidson
Okay. And then getting back to I guess your margin structure, if we look at the April quarter a year ago, you also had about 120 million revenues, which had a little higher EPS. What’s the difference between the two quarters? I would have thought that with your cost reduction programs, you’d have actually better profitability this time around?
Jorge Titinger
Yeah good question, Tom. Frankly, from the standpoint of the operating expense base itself, we are about where we were last year. The difference based upon top-line is nothing more than a bit of mix and margin flow through to the bottom.
I’d want to say, I think last year when we were at a 120 or so, we dropped 3% operating margin and I think we still at that time were benefiting from some of the cost reduction actions that had been implemented the prior year during the downturn.
Tom Diffely – D.A. Davidson
Okay. And you also expect the service portion to be a little larger as well. Are going to maintain this 36 or so level?
Jorge Titinger
Well, you’ll start to see that creep backup incrementally again due to higher system sales and then an increase in the installed base, but the lumpy part of the equation that’s a little bit more problematic in predicting is what sort of service projects do we get and varies time and material and the mixes, people start to get a little bit more comfortable with the overall outlook. We see more service contracts again versus time and material. So, I think we’ll start to see a gradual increase in the overall service and support growth throughout 2011.
Tom Diffely – D.A. Davidson
Okay. And then what’s your sense for the utilization rates of new tools in the field?
Bob Nikl
Right now, we’re in the low 80s.
Tom Diffely – D.A. Davidson
Okay. And I mean historically it’s been a fairly healthy rate, hasn’t it?
Jorge Titinger
Yeah. I think we had dipped to below that and we started to see it picking backup into the low 80s and that’s why also supports our assessment that Q2 will start gaining attraction.
Tom Diffely – D.A. Davidson
Okay. And then finally, looking the difference in the relative strength of your IDM customer versus your OSAT customers?
Jorge Titinger
Can you ask that again? I am not sure I didn’t understand the question?
Tom Diffely – D.A. Davidson
Which one and if your IDM customers remained stronger at this point than the OSAT customers?
Jorge Titinger
Yeah in general, I think they are more optimistic and the OSATs tend to be more cautious as to when they start spending and also when they slowdown. So, that is accurate.
Tom Diffely – D.A. Davidson
Okay. Thank you.
Jorge Titinger
Thank you.
Operator
And the next question comes from the line of C.J. Muse with Barclays Capital. Please proceed.
C.J. Muse – Barclays Capital
Yeah. Good afternoon. Thank you for taking my question. I guess first question, I am curious to hear your thoughts on the impact of Sandy Bridge on your business. I guess both positive in terms of the DRAM side and moving of 1.6 gigahertz and higher and how that can impact your high-speed memory business. But, then also, I guess potentially negatively how the integrated graphics could impact your standalone graphics customers. So, if you could provide some insight there would be very helpful?
Jorge Titinger
Yeah. It’s I think we continue to work with them on positioning our products. We’ve had some successes in getting to some other graphics products and it’s a customer that we continue to work with them. And so, with more graphics and more products are applicable for a 93K, we expect to see some growth there.
C.J. Muse – Barclays Capital
And on the memories front?
Jorge Titinger
Sorry, can you say that again, I can’t hear you?
C.J. Muse – Barclays Capital
Any impact as well on memory?
Jorge Titinger
Yeah. Again there we see opportunities for our HSM products and on high-speed memory tests, nothing on the commodity side.
C.J. Muse – Barclays Capital
Okay. And I guess in terms of service, you talked about growing gradually. If we started off at 36, 37 growth by 1 million equip, you’re talking 15%, 18% growth. Bob, is that the right kind of number we should be looking at or is it little bit more muted than that?
Bob Nikl
No well, I’d say 12% to 15% is what I would be looking at for next year, C.J.
C.J. Muse – Barclays Capital
Okay. And then I guess lastly, in terms of your up 20% outlook for fiscal ‘011, what should we be thinking about for overall memory as a driver there? Could that double or would that be too optimistic?
Jorge Titinger
In total memory, yeah, probably double from what we did this year.
Bob Nikl
Yeah. I guess in other way to respond C.J. is that the 15% to 20% year-over-year revenue growth doesn’t place a lot of reliance on a significantly expanded memory year for us. We really see a lot of strength in SoC. The aspects where we do see growth in our memory portfolio, again, is HSM and the probe cards. But, again, from the standpoint of the total composition of the revenue, it’s again much more of an SoC story for us.
C.J. Muse – Barclays Capital
Very good. Thank you.
Bob Nikl
Thank you.
Operator
And the next question comes from the line of Patrick Ho with Stifel Nicolaus. Please proceed.
Patrick Ho – Stifel Nicolaus
Thanks. Keith, best wishes and Jorge, good luck going forward.
Jorge Titinger
Thank you, Patrick.
Patrick Ho – Stifel Nicolaus
First off, on the probe cards of side of things you mentioned the qualifications and the progress you’ve made. Can you give a little color in terms of RDs with the 4x-nanometer node or the 3x-nanometer node? And can you comment a little bit about the pricing environment and how you see currently today may be as you look into 2011?
Jorge Titinger
So most of this is for the 4x nanometer node. The pricing continues to be challenged in this space and I think the current suppliers or probe cards are trying to recover pricing and we are going to – [lowest co-tails], but it is depressed pricing environment that’s compared to a couple of years ago.
Although we have our cost structure that allows us to compete favorably in that space.
Patrick Ho – Stifel Nicolaus
Okay. Great. And maybe a follow-up on just the probe card business. On the infrastructure side of things do you believe you have the necessary infrastructure to grow over the next couple of years or is it something as you grow in 2011 where you’ll need to add onto it at certain revenue points that you reach?
Jorge Titinger
Well, as you can imagine we have been investing in the business throughout (inaudible) that we acquired Touchdown and so we have capacity to serve us to a certain revenue level beyond where we are today and the nice thing is that the incremental growth does not require a significant capital to produce much more capacity.
Patrick Ho – Stifel Nicolaus
Right. And Bob final question on my end. It looks like you guys have made some improvements on the business model over the past year. What are some of the margin levers right now that you can manage as you go into this kind of pause period? What are the flexible variables that you have as your revenue levels drop in the next quarter?
Bob Nikl
Sure, first I want to say that Norwegian head was not a probe card dropping on the conference table. The leverage would be the traditional that we tend to look at right time off obviously variable compensation drops down significantly at these sort of profit levels to very small amounts.
The other area though that we’re starting to make some traction on is on the manufacturing side of the house within operations. As the relationship with Jabil becomes more mature, we’re excited about what we see as potential improvements in the cost of direct material, as well as the overheads that go along with running that part of the business from an internal perspective as well as external perspective.
Patrick Ho – Stifel Nicolaus
Right. Thank you very much.
Bob Nikl
Okay. Patrick. Thank you.
Operator
And the next question comes from the line of Tim Arcuri with Citigroup. Please proceed.
Wenge Yang – Citigroup
Hi. This is [Wenge Yang] for Tim. Congratulations Jorge on the new position.
Jorge Titinger
Thank you.
Wenge Yang – Citigroup
So, you provided a much more positive outlook for 2011, compared to some of your peers. So, I just want to understand is it because of your product exposure more to SoC less analog, or is it because of the segmentation exposure more to the OSATs versus IDM. I just try to understand why you’re more positive compared to couple of your peers?
Jorge Titinger
Yeah. I’m going to say that it’s probably some of both, I mean, our products and the segments that we compete in lend themselves well to broader OSAT presence. And so, the two are linked and we continue to see strength in some of the segments are very strong for us like RF. And some of our new product entries and new capabilities on the 93K are in those segments that we believe we’ll see growth in 2011.
So, I think a lot of it is what segments we are in and consequently where our customers are and where the actual testing happens. We see consumer mixed signal coming back as well with HDTVs and 3D TVs. So, those segments will well position and we see growth there.
Wenge Yang – Citigroup
Okay. So, you mentioned about some early indications of Q2 revenues could be up again. So, the early indications that I just want to know where are they from? They are from IDMs or from OSATs?
Jorge Titinger
It’s across the board and it’s in many cases is what we call the upstream customers where they’ll be IDMs or fabless that will drive the OSAT presence. Our conversations with them indicate that we should see a strong back-end of ‘11.
Wenge Yang – Citigroup
Okay. Out of the sectors SoC versus analog versus memory, I assume this has driven primarily by (inaudible) as well, right?
Jorge Titinger
That’s correct.
Wenge Yang – Citigroup
Thank you.
Jorge Titinger
Thank you.
Operator
And the next question comes from the line of Jim Covello with Goldman Sachs. Please proceed.
Jim Covello – Goldman Sachs
Hey guys, good afternoon. Thanks so much for taking my question and congratulations on the new roles to everybody.
Jorge Titinger
Thanks Jim.
Bob Nikl
Thanks, Jim.
Jim Covello – Goldman Sachs
If I kind of take a step back and look at the profitability across the back-end of the tests segment in this cycle. You guys were a little light relative to competitors on profitability kind of at the peak and if this quarter is the trough. Is that a mix issue or is there something structural there that you guys think you need to fix or it will be fixed through the acquisition?
Bob Nikl
Jim, it’s Bob. Clearly, it’s a mix issue, because I mean throughout 2010 in addition to what we believe to be is a very strong SoC business, we’ve had three other product lines, if you will, that have been a bit of a drag from an overall profitability contribution standpoint. Commodity memory has not rebounded during 2010 to any meaningful levels plus we’ve made strategic product line investments in a low-cost tester for SoC.
In addition to what we see is perhaps potentially a very attractive way to play the commodity DRAM and Flash space which are the probe cards. But that’s still a nascent business in 2010. So, that’s where the drag has been, I would say like-for-like comparing our SoC business it clearly outperformed this year for many -- any financial metric that we use internally.
Jim Covello – Goldman Sachs
Now, one other things that led to Verigy’s tremendous profitability in prior cycles is kind of the streamline business model where you had a very specific focus. Are you comfortable that the diversification is ultimately going to result in greater time and profitable or do you worry at all that you guys might be spread a little too thin.
And relative to that, in the probe card segment, what do you guys think you can do differentially that some other folks that have made big efforts in the probe cards mainly Formfactor and Advantest on some level haven’t been able to do from a profitable perspective?
Thank you and congratulations again on the new roles.
Keith Barnes
Thank you. So, let me just make sure I understand your question, when you talk about diversification what exactly are you referring to?
Jim Covello – Goldman Sachs
Well, I mean in the last cycle there wasn’t as many different segments in product lines and the company was extremely profitable?
Keith Barnes
Okay.
Jim Covello – Goldman Sachs
In this cycle there has been this diversification into a number of new product lines and the profitability hasn’t been as robust?
Keith Barnes
Yeah. Okay. So, as Bob said earlier two of those product lines are still in investment mode. So, we anticipate as those get to maturity, they will be contributing to our profitability. And one of the product lines, namely the commodity memory, when you look at in the last cycle, 2007 I think memory time was around $1.7 billion and this year we’re going to be lucky if we’re – about 800 or we’re going to be below. And so, the market as a whole is less than half what it used to be and some of our key customers in the last cycle have suffered some. All right? And so, last one that is not necessarily based on where we diversified, but as a business that we already were in and that hasn’t recovered.
And your second part of the question was with regards to the probe card business, why do we think we could do better than others? Some of it is our cost structure. We believe we have a lower cost structure. Since we have a single substrate, we have our own ceramic manufacturing. We have a very good spring capability and that is all vertically integrated.
So, we don’t need to go and produce profits for subs in that space. And at the same time, we need to keep working on our cycle time and our capacity and capability to penetrate the market and be differentiated. So, we see a lot of promise in that space going forward.
Jim Covello – Goldman Sachs
Thank you so much.
Keith Barnes
Thank you.
Operator
(Operator Instructions) And the next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed.
Krish Sankar – Bank of America Merrill Lynch
Yeah. Thanks for taking my question. I had a couple of them, Keith or Jorge you guys guided to 20% growth in fiscal ‘11. What do you think is SoC broader market growth next year?
Keith Barnes
I’m not sure that we’ve looked at it as a total market. What we’re seeing is that we think ICs are going to grow in this single-digits and that equipment will grow some what more than that.
Total market for SoC probably in 10 to low teens and again based on those segments that we’re in and based on some of these investment businesses that we’re in, that will start growing faster in ‘11 that’s where we’ll get the 20%.
Bob Nikl
Yeah. Let me add to that, I think in the comps area we continue to see strength across the board. In the networking area there is a little bit of softening that’s been occurring. But I think in general, it’s pretty much comps and consumer mixed signal areas that we see growth in 2011 and that’s what our customers are telling us.
Krish Sankar – Bank of America Merrill Lynch
Got it. All right. And you guys mentioned about your U.S. fabless customer multi-system order. Do you think that is going to flow into 2011, or do you think that’s going to go, end by end of this year?
Keith Barnes
Now, we expect continued growth in business with them
Krish Sankar – Bank of America Merrill Lynch
Into 2011 too?
Keith Barnes
Yeah.
Krish Sankar – Bank of America Merrill Lynch
Okay. Great. And then final question Bob, how do you think about R&D for fiscal ‘11?
Bob Nikl
Yeah. Because, believe it or not, we really haven’t been investing hugely in it. We did on a non-GAAP basis in Q4, $26 million which is the most we have spent in some time. The beginning of the year, we are around 22. Going into the next quarter that number will come down somewhat to reflect the fact that topline is dropping and again some of the variable levers kick in.
But my view is overall OpEx this past year grew only about $0.10 for every growth in a revenue dollar. I don’t think we’re going to diverge much from that over the course of the year. We plan to be fairly circumspect about how we back to the base after having taking out a significant amount of headcount during the downturn.
Krish Sankar – Bank of America Merrill Lynch
Got it.
Bob Nikl
So, for modeling purposes, I mean on a standalone company basis, I wouldn’t deviate from what we have said in the past about better than 50% gross margins and operating margins that are around 15% to 16% at a revenue level of 165 to 170.
Krish Sankar – Bank of America Merrill Lynch
All right. Thank you.
Operator
And the next question comes from the line of David Dooley with Steelhead Securities. Please proceed.
David Dooley – Steelhead Securities
Congratulations on every ones new role and Keith we’ll miss you on the upcoming conference calls.
Keith Barnes
Thank you, Dave.
David Dooley – Steelhead Securities
One quick question, I guess you mentioned earlier on that you had a customer. I think that was going to have a new product ramp that would drive – in terms of purchases of several dozen testers, is that what you said and can you just give us a little bit more flavor of what’s going on, what’s driving that kind of volume?
Keith Barnes
Yeah. So, that is what we said. Nothing other than they believe this is going to be their number one volume product and we won that node and that product on our testers. And so, based on their projections on volume and the capacity necessary to test those is where we’re concluding that.
David Dooley – Steelhead Securities
Now, we’ve seen some large orders already kind of across the tape I think for that program through ASE. Is that -- are you referring -- are we thinking going forward that this is going to drive several dozen more testers or is that included what’s already been bought?
Keith Barnes
I can’t answer that one without exposing the customer. So, this is what we see going forward. So, my projections are for going-forward business.
David Dooley – Steelhead Securities
Okay. And this new product ramp-up, this is -- is this an integrated type product? This is where you’ve done well? I think with these customers in the past, I’m just wondering is your -- has your platform one that integrated product from these guys?
Keith Barnes
It is integrated, yeah.
David Dooley – Steelhead Securities
Okay. Great. And then a couple of questions. The memory revenue during the quarter I think you mentioned it was $9 million, could you give us an idea how much the probe card revenue was and what is the approximately level of revenue on a quarterly basis we need in probe cards to breakeven?
Bob Nikl
So, let me take that one, Dave. For purposes probe card break-even I think we have said on the past it’s a number somewhere -- pardon me. We’ve said in the past it’s probably about $10 to $11 million. At the moment there is no much value and break-even down between the commodity memory business and probe cards themselves.
David Dooley – Steelhead Securities
Is there a timeframe when the probe card business would be profitable, or can we see profitability at this point given what development designs? Is that what you’re seeing?
Keith Barnes
Yeah. I think -- I think we should see profitability in the second half of next year.
David Dooley – Steelhead Securities
Okay. Thank you. That’s it from me.
Bob Nikl
Thank you, Dave.
Keith Barnes
Okay. Thanks, Dave.
Operator
(Operator Instructions) And the next question comes from the line of Raj Seth with Cowen & Company. Please proceed.
Raj Seth – Cowen & Company
Hi. Thanks. Bob, you touched on your mid cycle model a minute ago, I think you said 160 to 170. Can you remind me what is included in that assumption for memory and touch on, what were the assumptions in the mid cycle model? Thanks.
Bob Nikl
Sure. We’ve never really broken it out, but I would say from the standpoint of modeling and profiling, clearly about 125 to 145 would be SoC and the rest would be a mix. And when I say SoC, I mean including the service and support business. So, the other three pieces would make-up the balance to get toward level of 165 to 170.
Raj Seth – Cowen & Company
And can you -- you talked about a variable component and OpEx, is there anyway you can help me determine sort of how variable that is, how much of OpEx is variable in that way?
Bob Nikl
Well, I would say broadly speaking about 30%. The two big drivers would be sales compensation and profit sharing.
Raj Seth – Cowen & Company
So, just for example if we went from your guidance in Q1, let’s say to $100 million, hopefully that doesn’t happen but 100 million revenue, how much would naturally come out of OpEx on that kind of a decline?
Bob Nikl
I’d say between $3.5 to $5 million.
Raj Seth – Cowen & Company
Okay. Good. And last one for me, cash flow in Q1 sort of near break-even, is that the right way to think about it?
Bob Nikl
That’s the right way to think about it.
Raj Seth – Cowen & Company
Thank you.
Bob Nikl
Okay. Raj.
Keith Barnes
Thanks Raj.
Jorge Titinger
Thank you.
Operator
Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to hand the call over to Ms. Judy Davies for closing remarks.
Judy Davies
Thank you, Amnesia and thank you everyone for joining us this afternoon. We plan to be on the road over the next several weeks and hope to meet with you in person.
We are scheduled to present at the Barclays Global Technology Conference on December 8 in San Francisco. Also please make note that we’re scheduled to attend the Needham Growth Conference, in the week of January 10 in New York City. We will announce our presentation date, once it has been confirmed. We look forward to seeing you at one of these events. Thanks again.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
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