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Executives

Mark J. Gallenberger – Vice President and Chief Financial Officer

David G. Tacelli – Chief Executive Officer and President

Analysts

Patrick Ho – Stifel, Nicolaus & Co.

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

Christopher J. Muse – Barclays Capital

Christian Schwab – Craig-Hallum Capital

David Duley – Steelhead Securities

John M. McLane – Tiedemann

Thomas Diffely – D. A. Davidson & Co.

John Nelson – State of Wisconsin Investment Board

LTX-Credence Corporation (LTXC) F2Q11 Earnings Call February 24, 2011 10:00 AM ET

Operator

Good morning and welcome to the LTX-Credence Corporation’s Second Quarter Analyst Conference Call. During the presentation, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) At the request of LTX-Credence, this conference is being recorded. The 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 J. Gallenberger

Thank you. Welcome to LTX-Credence Corporation’s second quarter fiscal year 2011 conference call for the period ended January 31, 2011. Joining me on today’s call is Dave Tacelli, CEO and President. After my introductory comments, Dave will discuss the company’s performance for the second quarter and discuss the business outlook. Then I will provide further detail on the company’s financial performance during the second quarter as well as provide guidance for the third quarter of fiscal year 2011. We will take your questions after our prepared remarks.

A replay of this call will be made available through March 23, by dialing 800-642-1687, and the passcode is 39934113 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 on to the call. Dave?

David G. Tacelli

Thank you, Mark. Good morning, everyone. On today's call, I'll be focusing my comments on the performance of our business model, our position in specific market segments of the SOC test space, recent product introductions that enhance our position in those markets, and finally, a few comments on the business cycle.

There are three key components to our corporate strategy: focus on high growth market segments with an SOC test to strive for market leadership in each one; fund a strong pipeline of differentiated cost optimized products designed using innovative technology with the ultimate goal of lowering our customers’ test costs; and continuously improve on a business model design for our cyclical business.

First, a brief review of our quarterly financial results. At $52.5 million, revenues were slightly below the lower-end of our guidance, while EPS exceeded the high-end of our guidance range provided on the last call. The business model continues to deliver excellent results with another quarter of industry-leading gross margin and strong EBITDA performance. We remain confident that our business model can continue to generate positive EBITDA throughout an entire business cycle.

The general guideline we’ve been communicating to our investors is that for every incremental revenue dollar above breakeven, about $0.60 should go to the gross margin line and above $0.50 to the bottom line. Because of the variable cost structure we’ve put in place, we believe this formula is valid for periods of both growth or decline.

I’d like to now spend a few minutes describing how we view the semiconductor test market, which sub-segments we focus on, why we see them as attractive and our market position in each. SOC test devices can range from pure analog to pure digital and everything in between including RF. Within the SOC test market, the specific segments we focus on are heavily biased towards analog and mixed signal technologies, which represent about 70% of the overall SOC market. These market segments include microcontrollers, power management devices, standalone RF devices including RF power amplifiers, front-end modules and transceivers, data converters and application specific products or devices designed for a specific purpose such as baseband, integrated RF, cellular, Bluetooth or other devices used in automotive applications.

We focus on these particular market segments for several reasons. First, they contain a mixture of analog, digital and RF technologies providing significant opportunity to develop differentiating test solutions. Second, we have a deep pool of application engineering talent that have on average, 15 years experience developing test programs and innovative test techniques in our target markets. Third, these markets represent high growth segments with a compound annual growth rate of unit volumes forecast to be over 12% between 2011 and 2015.

Four, there is a broad diversity of end customers, both diversified manufacturers and fabulous companies. And finally, testing analog, mixed signal devices are inherently more complex than testing digital only devices, which enables us to develop differentiated test solutions that lead to more stable pricing.

With the exception of the application-specific market, we are either the number one or number two provider of test equipment for the market segments we focus on. Based on the latest data for these individual device markets, our market share ranges from 22% to 31% depending on the market segment and continues to grow as we win new customers and expand in size from existing accounts.

In the application-specific product market, our market share is estimated at 8%. We do see good opportunities for growth and it’s very large space, based on both our recent product introductions and projects that are still in development.

We are gaining momentum in our target markets based on recent competitive wins, and I expect this to continue to build over the next six to 12 months, as these new customers began ramping in volume production. The other exciting part of the success is that all three of the major product lines Diamond, X-Series and ASL are contributing to our share growth.

I spoke several quarters ago about a series of major new products in the pipeline that we will be introducing during the first six months of our fiscal 2011. As promised, we’ve introduced two during that period, the first being the ASLx, and the second, the more recently introduced PAx. The ASLx was the first major product to combine Credence and LTX technology into a new product that brings us subset of X-Series instruments and improved multi-site test capability to the ASL product line.

It does this while maintaining complete compatibility to over 3,500 ASL testers installed at customers around the world. A wide variety of OEM and fabulous customers across multiple market segments have already started to embrace the ASLx as their next generation analog test system.

We are pleased with the adoption rate of the ASLx with several customers currently developing applications that should be released a volume production over the next few quarters.

Our second and most recent product introduction was the PAx. The PAx or PAx tester was specifically designed to be very low cost solution for testing RF Power Amplifiers and Front End Modules. The PAx is expected to strengthen our position as the number one supplier of commercial RFPA and front end module test solutions and provide a serious alternative to those companies who rely on internal customer “rack & stack” solutions.

We have experienced a very strong early adoption of the product by three customers in this market segment, which several others will be making the move to PAx’s over the next six months. We expect to begin volume shipments in the current quarter. Both of these new products are important components of our growth strategy over the next 12 to 24 months. Each new product that we planned to introduce is being designed specifically to enhance our position as the lowest cost test solution provider in a target market, with the ultimate goal of being the top supplier in that market segment.

Our corporate strategy is to provide the lowest cost test solutions when compared to competitive offerings. This strategy not only guides our product designs, but how we run the company, which results in delivering the lowest cost solutions to our customers while maintaining the highest gross margins in the industry. This is further proved that our focused strategy is delivering the best value for our customers.

Now I would like to add a few comments on the business environment. Our guidance for the third fiscal quarter reflects the turning point in the market confirming what we have been predicting for sometime now that our industry would experience a mid cycle correction through the first calendar quarter. The recent industry results and outlook are consistent with the comments we made on previous conference calls. We are optimistic that the business environment will remain strong for the next several years as forecast by several independent research fronts.

Prior to the holiday break our customers were indicating to us that while the first quarter of 2011 would exhibit a seasonal slowdown their prospects for the balance of the year were quite high. We were encouraged to return from the holiday break with customers offering incrementally more positive views of their business conditions moving forward.

While, visibility is always limited in the semiconductor capital equipment industry, it does appear to us that calendar 2011 could be a solid year for SOC test, which is consistent again with independent research.

We do believe that sub segments of the overall SOC test market will experience higher growth and those are the markets we’ve targeted for expansion in 2011 and 2012. Thanks to a strong expanding customer base, segment focused product portfolio and industry leading business model and balance sheet LTX-Credence is well positioned for profitable growth.

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

Mark J. Gallenberger

Thanks Dave. Revenue for the quarter was $52.5 million compared to the prior quarter revenue of $75.6 million. Gross margin was 59.8%, which exceeded the plan of 57% due to favorable product mix.

R&D spending was $12.9 million, which is slightly lower from the prior quarter. SG&A was $12.7 million, which is down from last quarter due to a decrease in variable expenses that are tied to revenue and profit such as sales commissions and profit sharing.

Amortization of purchased intangible assets related to the Credence merger was $1.5 million. Net income for the quarter was $4.7 million or $0.09 per diluted share on a GAAP basis. Excluding amortization of $1.5 million and expenses related to the proposed merger with Verigy of $2.8 million, our non-GAAP net income for the quarter was $9 million or $0.18 per diluted share.

Despite the fact that revenue was slightly below the low end of the original guidance of $53 to $58 million, the non-GAAP EPS was $0.02 better than the high end of our original guidance of $0.11 to $0.16, primarily due to our business model performing better than expected. The EBITDA for the quarter was $12.6 million or 24% of revenue, which exclude stock-based compensation expense of approximately $1 million and the $2.8 million of merger related expenses.

Next, I’ll provide a breakdown of revenue for the quarter. 75% of revenue came from IDMs, while 25% came from sub-contract tests and fabless companies. 29 – or I’m sorry, 79% of revenue was for products while 21% was for service. For the quarter, we had two customers represent greater than 10% of revenue.

Now, onto the balance sheet. We ended the quarter with gross cash of approximately $126 million and net cash of approximately $125 million. For the quarter, net cash increased approximately $9 million as we continue to generate strong cash flow from operations driven by income from operations and effective working capital management.

We finished the quarter with trade accounts receivable of $36.5 million. DSO increased to 63 days from 50 days in the prior quarter. However, accounts receivable balance actually declined by over $5 million from the prior quarter. Inventory was $19.4 million, which is slightly up from the prior quarter.

Net capital expenditures during the quarter was $1.4 million, while depreciation expense was $3 million. We ended the quarter with accounts payable of $14.3 million and stockholders' equity of $203 million.

Guidance for Q3 is as follows. We expect the revenue to be in the range of $57 million to $61 million, and non-GAAP earnings per share to be in the range of $0.17 to $0.21, assuming $50 million fully diluted shares outstanding. The non-GAAP earnings guidance excludes amortization of purchased intangible assets of $1.5 million and any expenses related to the proposed merger with Verigy. We also expect gross margin to be approximately 59% and for EBITDA, excluding stock-based compensation expense to be approximately 24%.

In summary, although our industry just experienced a mid-cycle pause, the company’s business model continued to perform very well. By designing a business model with a more variable cost structure, we’re able to adapt to the cyclical nature of our industry and generate profitability throughout a cycle.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Patrick Ho from Stifel Nicolaus.

Patrick Ho – Stifel, Nicolaus & Co.

Thanks a lot, and congrats on a nice quarter. Guys, maybe given all the uncertainty surrounding your deal with Verigy and Advantest’s bid for them, should your deal fall apart with them and they accept Advantest’s bid, can you just comment a bit on your competitive positioning in this new landscape, what’s your take, again, as a standalone company with a potential Advantest Verigy deal?

David G. Tacelli

Patrick, what I would say is it’s pretty simple. We face that everyday today. When you look at our competitive position, the proposed deal with Verigy made a lot of strategic sense because we didn’t have overlapping products and overlapping customers. When you look at any other proposed merger, we’re still in the same position we were before. You look at the markets we focus on, we’ve targeted specific markets in SOC and that competitive landscape doesn’t change based on a merger. One of the things that we’ve tried to do, tried to do recently and in our IR presentations, just talk about the market segments where we are focused, our competitive position in those markets and any deal outside of the deal between us and Verigy does not change that competitive landscape one bit.

Patrick Ho – Stifel, Nicolaus & Co.

Great, thanks a lot on that. Just going back to the overall business environment, the revenues, as you mentioned in your prepared remarks, were a little bit short versus guidance. Would – did you see any pull-ins, push-outs, what happened on that front?

David G. Tacelli

Patrick, we didn’t see any push-ins, we didn’t have pull-ins and push-outs, we shift the customer demand. The only thing that I would add that’s different in this quarter as you have the holiday break and more specifically, the Chinese New Year. I don’t think we saw a lot of effect from that. But outside of that, it was delivering the customer demand, nothing outside of that.

Patrick Ho – Stifel, Nicolaus & Co.

Right. And final question for me. As we look forward, I think we know at least you mentioned some of the areas where you guys are well positioned in. What are some of the specific, I guess, market segments that you’re seeing strength in the April quarter? Is it still in the microcontrollers, RF, what markets are you seeing strengthen as we progress through this quarter?

David G. Tacelli

It’s definitely in the microcontroller market in a lot of areas, mainly touch screen display. We are seeing a pick up in business in certain RF applications, whether it’s related to power amplifiers or standalone RF and we are seeing some strength in the automotive market. So I would pick those three as areas of strength in the April quarter.

Patrick Ho – Stifel, Nicolaus & Co.

Great. Thanks a lot guys.

David G. Tacelli

Thanks Patrick.

Operator

Thank you. Our next question comes from the line of Vernon Essi from Needham & Company.

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

Thank you very much. I’m wondering if you could go over, just to show me you follow on that last line of questioning that the PAx or PAx product and sort of the market opportunity you are seeing there. The question, I guess, I have behind the scenes on the PAx side is we’ve had a nice amount of demand that’s been pent-up from a unit perspective in that market, and I’m just curious, how you see that playing out over the next two years from a capital equipment perspective? Obviously you come out of this new product with sort of [TAM] objective that you’re looking at here.

David G. Tacelli

Well, thanks Vernon. If you look at the PAx gesture, we specifically designed it as we said they go after this market. This market had been bifurcated with customers buying external ATE and we’ve been the dominant supplier of external ATE into that market. The other piece for customers that we’re developing their own “rack & stack” solutions based on the cost competitive nature, which they could develop those solutions. The PAx kind of bridges both. It takes the technology that was existing in our X-series product, but it also puts in a lower cost profile that for some customers may open up an opportunity to supplant their internally based “rack & stack” machines. So from a market, let’s call it addressable market standpoint, we potentially could open that entire internally-based market where customers were building those machines to an ATE solution, we hope PAx can fill that gap that we estimate that that could be upwards of $75 to $100 million of addressable market. I don’t think we’ll get all of that, our goal is to start to penetrate that market and gain some share.

Vernon Essi, Jr. – Needham & Company

Okay. And so from the perspective though of the actual investment that’s taking place, you’re still obviously convinced that we’re in the initial phases of a capacity expansion and PA testing, if you will.

David G. Tacelli

Absolutely. If you look at all the different communication devices that are out in the market and the ones that plan to come out, I see this and the microcontroller space as two areas that will continue to grow over the next several years.

Vernon Essi, Jr. – Needham & Company

Right. And just switching gears here and I apologize, Mark. I think you went over some of the points on the guidance and I missed it. But did you give guidance on gross margin and OpEx ?

Mark J. Gallenberger

We gave guidance on the gross margin, Vern. We said it to be approximately 59%, we did not guide to OpEx.

Vernon Essi, Jr. – Needham & Company

And any guidance on tax rate?

Mark J. Gallenberger

It’s still like the minimum 2% AMT. This quarter you can see, we actually had a benefit to the P&L because we released some reserves that we have accrued, which were no longer required. So that actually created a small benefit for the quarter. But I would still be modelling a very small amount, we still have enough NOLs for the foreseeable future.

Vernon Essi, Jr. – Needham & Company

Okay.

Mark J. Gallenberger

Premerger with Credence as well as some of the post merger analog that were created in that first year, which have no limitation in its usage.

Vernon Essi, Jr. – Needham & Company

Okay. And then finally – and I don’t suspect I’ll get an answer on this. But what – any real update to your situation with Verigy at all that you can speak up?

David G. Tacelli

Yeah, I mean, I guess doing thing, we would say on that burn is that we’re continuing to progress towards closing our proposed merger with Verigy. We did get clearance from HSR, so that’s completely off the table.

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

Okay.

David G. Tacelli

And that the last piece that we’ve got to get cleared is the S4, which needs to become effective through the SEC, and they are going through their process of review. So that’s the last hurdle, once we’re over that, then it's simply sending out the proxies for the shareholders of Verigy as well as the LTX-Credence and set the shareholder date.

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

Okay.

David G. Tacelli

All right. Thank you.

Operator

Thank you. Your next question comes from the line of C.J. Muse from Barclays Capital.

Christopher J. Muse – Barclays Capital

Yeah, good morning. Thank you for taking my question. If you look at 2010, the SOC market customer mix wise heavily favorite paradigm. And so I’m curious, as you look at the 2011 landscape. What kind of changes do you see in terms of customer mix and pockets of strength and weakness that, I guess gives you the confidence in terms of what kind of share gains you can make, so would love to hear a kind of the different segments that you think will grow year-over-year, and then it’s part of that what kind of improvement do we see in your market share year-over-year in ‘11.

David G. Tacelli

C.J. that’s, that’s a really interesting question. The first thing I would say is without getting into customers specific let me dive down into the market. So I think that microcontrollers will continue grow it will grow above the rate that we saw expansion in 2010. We are now a significant player in that market. We have targeted to be 30% share by 2012 of the microcontroller market it’s very, reasonable that we could be there by the end of 2011 with the amount of growth we’ve had in the microcontroller space.

Another area where we’ve seen very good growth, we’ve talked about RF-PAs. Let’s talk about another specific segment, which is automotive. We had good growth in 2010, and a lot of the customers we had growth with, were just starting to put some of their new devices or devices into volume production. We expect that to continue in 2011.

In addition to those two, we’ve seen very good expansion early on in 2010 in the general purpose wafer probe market. I think that slowed a little bit as we enter the last calendar quarter of 2010. And I look for renewed interest in our solution, which is unique to the market for wafer probe from a cost, size and throughput and quality of test endpoint and I think that will expand again in 2011.

So, those are some of the areas where I think we’ll see share growth. We’ll also see share growth from some existing accounts. We’ve put a lot of effort into winning analog business in several places and I think we’ll see that pay dividends as those devices go into volume production, as I’ve said earlier in 2011. So that’s kind of a snapshot of what I see in the market segments and without getting customer specific.

Christopher J. Muse – Barclays Capital

That’s very helpful. I guess as part of that, is there any impact to gross margins that we should think about in terms of that mix shift that we’re going to see this year?

David G. Tacelli

No, I don’t think you’re going to see much margin change at all. I mean, most of the products we have kind of float around the same margin percent. I think when we do a little bit better in margin is when you have some specific upgrades to existing accounts that drives us up up-tick, but I don’t think you’re going to see any major margin swings up or down, plus or minus one or two points.

Christopher J. Muse – Barclays Capital

Okay, that’s helpful. And then final question, thank you for highlighting kind of the timeline specific to you and Verigy the combination, but I guess specific to Verigy and some of the decision making they need to make around potential with Advantest what’s – what are the key kind of the action points that we should be looking for on that front?

David G. Tacelli

The one thing I would say related to that transaction is I really don’t have a comment that that’s more for Verigy to comment, specific to what where they are in that process my comments could be more focused on what we need to do to execute our transaction I think Mark, covered it quite clearly, but as far as timeline, we are on our timeline to execute our deal any other comments is really reluctant on C.J.

Christopher J. Muse – Barclays Capital

Okay, thank you very much.

David G. Tacelli

Thank you.

Operator

Thank you. Our next question comes from the line of Christian Schwab from Craig-Hallum Capital.

Christian Schwab – Craig-Hallum Capital

Great, thank you. Thanks for all the information on the share growth in the new products. I was just wondering you talked earlier David, about over the six to 12 months you have numerous new customers that are going to start to ramp with you is there any way that quantify the revenue opportunity from new customers that you are highlighting that you are not doing business with today?

David G. Tacelli

See, Christian, its very hard because a lot of the products that were working with these new customers on are their new designs, so really it will depend on the success of that design as they gets into the marketplace. It would be a lot easier, if I was talking about conversions from existing product than the quantities are pretty well thought through. But when you’re working on new products, it’s really left to the success of how they do in the marketplace.

Christian Schwab – Craig-Hallum Capital

That’s fair. Can you quantify the number? Is that important?

David G. Tacelli

The number of new customers?

Christian Schwab – Craig-Hallum Capital

Yeah.

David G. Tacelli

Well, I would say, less than 10 and more than five.

Christian Schwab – Craig-Hallum Capital

Perfect. If you look at the business, Mark, over the course of this recovery after the one quarter drop, what’s a realistic timeframe to get back towards that $75 plus million range if the share gains are in the SOC [tab] is approximately about the largest competitors believes it could be this year and the new customers, how would that ramp look, do you think?

Mark J. Gallenberger

Well, I think the ramp – every ramp is different and every slope is different. That’s why it’s so difficult to predict, first [thing] that we just simply rely on giving guidance one quarter out at a time and to try to estimate when we’re going to get past $75 million in revenues, it’s too specific to try to pinpoint when that could happen. If 2011, based upon independent research is going to play out the way they expected to, then it’s probably realistic to assume that it’s going to occur sometime this calendar year.

Christian Schwab – Craig-Hallum Capital

Perfect. That’s all I have. Thank you.

Mark J. Gallenberger

Okay.

Operator

Thank you. Our next question comes from the line of David Duley from Steelhead.

David Duley - Steelhead Securities

Good morning. Couple of questions for me. Mark, on the closed margin guidance for the current quarter, I thought you said 59% and if I’m not mistaken, I thought it was 59% in the quarter that just ended and you’re kind of guiding revenue up. So is there a reason why margin is flat with the uptick in revenue?

David G. Tacelli

Yeah, no there is a specific reason to that. It was really that the out performance of the business model in the January quarter. We had guided originally for January to be about 57% and we came in basically at 60%. So we were three points higher than the plan and that was really driven by the product mix. We had specific configurations and upgrades go out the door or the quarter that were quite favorable to our target business model. Those configurations I don’t expect to repeat in our April quarter and so that’s why we basically guided back to the business model, which is consistent with what we’ve been able to achieve in the last few quarters are just happened to be the out performance for the January quarter.

David Duley – Steelhead Securities

Okay, and just Dave I think you mentioned that you thought it could get your goal of the microcontroller business market share to 30% maybe by the end of 2011, since where almost in the third month of that timeframe. I would guess that you are thinking that you’re going to have more customers joined the mix there. Is that how should we get interpret it or just kind of really grow with the first one?

David G. Tacelli

That’s how you should interpret it.

David Duley – Steelhead Securities

Okay, and about the merger, mergers can be very distracting on management’s time. I’m just kind of wondering, if you seen kind of any impact one way on the other because of the merger on your overall business?

David G. Tacelli

Well. It is really good question and there is a very, very simple answer and then there is a little bit of a detail behind it. The simple answer is we’ve seen absolutely no issues at all whether it’s internal or external related to the merger. On an external basis side the customers have seen the value in putting these two companies together, because of the minimal product and minimal customer overlap. And now scope of the products and depth in the strategy in which we’re going to try and – when we put the merger together we’re going to try and employ.

That has had zero effect on order rates, zero effect on customer decisions, customers willing to engage in benchmarks. So from that standpoint, I would say real zero internally. I’m sure people from time-to-time kind of think about what’s going to happen and what their jobs are going to be at locations and product mix. But I think the management team here has done a very, very good job of getting everyone focused on executing to the plan and I think it comes back to the minimal product and customer overlap and that we’ve tried to and still having all the employees that we just need to march forward. So, internally a little bit of distraction. I think that’s natural. Externally I haven’t seen it at all.

David Duley – Steelhead Securities

And just a couple of follow-up. When I think about power amplifiers, I think of you guys as being kind of a key player there, particularly in the test and assembly houses. So with the introduction of this new kind of PA tester, how is that going to roll out, are you kind of roll it out to new customers first or is it going to be replacing in the old tester and in the fleets in the test and assembly houses?

David G. Tacelli

We’re doing it in parallel. We’ve brought it out, as you might imagine, and [data] with some of our existing accounts who readily adopted it. And the second phase of that is we’re also bringing it to accounts that we haven’t done business with. And mainly those accounts that we haven’t done I’ll say a lot of business with because they’ve been more internally-based “rack & stack” type supplier or customers.

David Duley – Steelhead Securities

And that’s kind of a big opportunity here as obviously you want to upgrade and keep up with your customers’ road maps, but the key here is to pick up more share with the customers that you gave.

David G. Tacelli

You know, you’ve got it with that so the change, and you don’t just want to roll over same product and reduce your margin and that was the whole driving force behind designing the PAx and I think that the PAx and the cost structure of it and the capability of it now put it squarely and management tends whether they want to continue internally develop – developing their own test solution or they want to go to a commercial solution, which then folds into the second part, Dave when you’ve talked about in the Subcon world, you don’t have a lot of, rack and stack type solutions in the Subcon world, because it’s not commercial. This gives some of those suppliers’ and ability, if they want to go to a subcontract base test.

David Duley – Steelhead Securities

And one final thing from me, as far as an overall market share number for 2010, what do you think it? Where do you think it came in at as far as the total in the SOC industry?

David G. Tacelli

If you look at the total SOC and I’ll cover everything. So, even areas we don’t compete with. I’m going to guess probably in the 10 to 11% range. If you look at the areas where we do focus on, because some areas we just we don’t focus on at all. I would say that our shares probably in the 20 like I said 22 to 31% in most of those key markets.

David Duley – Steelhead Securities

And what was what will be an estimate of that market share in the power amplifiers space is that are you capable breaking it out that granularly?

David G. Tacelli

We’ve looked at it. The hard thing is how do you quantify the value of all the internally rack and stack built machines, but it’s probably in excess of, its probably somewhere between 30% and 35% and at that rate we are the dominant supplier in that market. That just shows you how much rack and stack is still in that space. So although the balance, a lot of the balances is with you, with big top guys that build the testers?

David G. Tacelli

I see to [that] or it’s very, very old legacy machines, which people still use.

David Duley – Steelhead Securities

And it would be typical in that space to have to kind of show a 35% or 40% improvement to win the business from…

David G. Tacelli

At least.

David Duley – Steelhead Securities

Okay. Thank you.

David G. Tacelli

All right.

Operator

Thank you. Our next question comes from the line of Tom Diffely from D. A. Davidson.

Thomas Diffely – D. A. Davidson & Co.

Yeah, good morning. Your margins are so much higher than your peer were funded, digging that a little deeper. It sounds like the margins are pretty similar among products, was that when you introduce some new products, does it take long to ramp up to volumes to get to the company average?

David G. Tacelli

No, no, it does not, especially given the fact that these products that we’re introducing is leveraging as much as we possibly can existing technologies. And so we don’t see a huge hit. Quite frankly, you’re not going to see any hit whatsoever with the introduction of these two new products because they are derivatives of existing product lines.

Thomas Diffely – D. A. Davidson & Co.

Okay. And was that going forward if you increase your penetration (inaudible) that customers, is that a hit to margins at all?

David G. Tacelli

No. No, we got – you can’t have two tier pricing between IDMs and OSATs. You got to be consistent across the board, and so you wanted to get hit because of that. Everyone wants the lowest cost solution, trust me.

Thomas Diffely – D. A. Davidson & Co.

I was thinking by the line that sometimes they can order in higher quantities and get more of a volume discount pricing.

David G. Tacelli

I think what everyone is more focused on is capital spending discipline, and I don’t see the mega orders like that where I think a lot of times what they’ll do is they’ll just add capacity as they need it and they tend to do the incremental buys more so than China, kind of lead with their chin, if you will, and I invite the capacity well in advance of any real demand.

Thomas Diffely – D. A. Davidson & Co.

Okay and the final thing on margins. Do you – and most companies have pretty especially lowest margin than they do for products does that hurts your margin at all?

David G. Tacelli

For I – you broke up there Tom can you repeat it?

Thomas Diffely – D. A. Davidson & Co.

The service portion of your business is lower margin so as cost becomes bigger means do it helps?

David G. Tacelli

Yeah that that is correct service. The service business is a lower margin so incremental revenue from service will drop through at a much lower rate than product revenue will and that but on the foot side service revenue doesn’t really move around from quarter-to-quarter so that’s the steady part of the business, which is tied to the installed base and so that’s why you rarely see the service revenue either ramp up or down in a material way.

Thomas Diffely – D. A. Davidson & Co.

Okay and then what kind of linearity did you see during the reported quarter and what do you expect for the out quarter?

David G. Tacelli

Linearity in some of the shipments you are talking about?

Thomas Diffely – D. A. Davidson & Co.

Yeah, the business shipments.

David G. Tacelli

Yeah I would say this quarter was fairly consistent with other ones where you tend to see more like a I’d call it 25- 25,50 type of situation sometimes that can be 30-30 and then a 40 but I’d say – I would say that for April its going to be about the same. No real change there.

Thomas Diffely – D. A. Davidson & Co.

Okay and then just in general are you seeing more seasonality in your business and you have any thoughts over the second quarters or into which comp or as impar loss did before continue to calendar quarters?

David G. Tacelli

I don’t think there is – I mean I think there is going to be a little bit of that time and I think you are going to see some more seasonality just as the whole semi-chip industry evolves more towards a consumer-centric business, but given the volatility of semi-cap equipment that will far outlay any sort of seasonality that would bleed into our line of business.

Thomas Diffely – D. A. Davidson & Company

Okay, great. Thanks for your time.

David G. Tacelli

Sure.

Operator

Thank you. Our next question comes from the line of Drew Figdor from Tiedemann.

John M. McLane – Tiedemann

Gentlemen, good morning. It’s actually John McLane for Drew. And I hate to distract anyone from the strong fundamental story of the company anymore, but I was wondering if you could give one more question on the proposed deal with Verigy. I’m just curious whether or not you folks have received a change of recommendation notice from Verigy and any event that you do receive, one, whether your plans are to compete for the offer by agreeing to different terms potentially? Thank you.

David G. Tacelli

I apologize for this answer, but if and when that were to happen we would think about what our alternatives are, discuss it as an executive team and a Board and then make a determination on what we wanted to do. We believe that the deal that has been decided on between LTX-Credence and Verigy is very good for both groups of shareholders, but other than that I have nothing else to count on.

John M. McLane – Tiedemann

All right. Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of John Nelson from the State of Wisconsin Investment Board.

John Nelson – State of Wisconsin Investment Board

Hi, Dave and Mark. Congrats to you and all the employees in LTX and an excellent execution over the last quarter.

David G. Tacelli

Thank you.

John Nelson – State of Wisconsin Investment Board

My question is related to the location of the orders that geographically where the orders are coming from both currently and in the future, any particular areas of significant growth or decline geographically in the new orders?

Mark J. Gallenberger

Let me kind of give you a kind of pattern of how 2010 played out and how 2011 started because I mean that will help, I think in 2000 early part of 2010 it was very strong kind of in Taiwan and China. I think as 2011 ended China and Taiwan were a little bit later and most of strength as the year tailed off was in Europe and the U.S. and as we go into this quarter, I think you’re going to see Taiwan and China pick up a little bit, we talked about that in the prepared remarks, and I’m continuing to see strength out of Europe and the U.S. regions as well. I haven’t seen a lot of strength through that whole period in areas like Korea and Japan. So that’s the way I would describe the order pattern of PAx lets say we’ll call it 15 months

John Nelson – State of Wisconsin Investment Board

Okay. And do you see that over the next couple of years shifting significantly in any particular way as far as the customer base such as China, Taiwan becoming a much larger percentage of your revenues couple years out.

Mark J. Gallenberger

I don’t want to say a much larger I think I’ll say a significant piece because of all the business that we’ve won with a major diversified companies not just subcontractors, so the actual producers of the device is that are driving, that are located in Taiwan and China are becoming stronger, so I would think a major piece. I don’t think it will become the more predominant piece, but you could see over time that occupies 35%, 40% of our business over the next several years.

Thomas Diffely – D. A. Davidson & Co.

Okay, thank you. That’s it from me.

David G. Tacelli

Okay thanks John.

Mark J. Gallenberger

Okay thank you.

Operator

Thank you. I show no further questions in the queue. And we’d like to turn the conference back to Mr. Gallenberger for closing remarks.

Mark J. Gallenberger

Okay, well thank you very much for joining us today and we look forward to seeing you over the next few months and have a very good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does concludes the program and you may all disconnect at this time.

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