Executives
Judy Davies – Vice President of Investor Relations and Marketing Communications.
Jorge Titinger – President and Chief Executive Officer.
Robert J. Nikl – Chief Financial Officer.
Analysts
David Dooley – Steelhead Securities LLC
Olga Levinson – Barclays Capital
Simran Drar – Cowen and Company, LLC
Verigy, Ltd. (VRGY) F1Q11 Earnings Call February 24, 2011 4:30 PM ET
Operator
Good day, ladies and gentlemen. And welcome to the First Quarter 2011 Verigy Limited Earnings Conference Call. My name is Erica and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)
I would now like to introduce your host for today’s call Ms. Judy Davies, Vice President of Investor Relations and Marketing Communications. Please proceed.
Judy Davies
Thank you, Erica, and good afternoon, everyone. Welcome to our financial teleconference for Verigy’s first quarter and fiscal year 2011, which ended January 31st. I’m joined by Jorge Titinger, our President and CEO and Bob Nikl, our CFO.
Our first quarter 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 February 24 through March 10. 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 proposed merger agreement with LTX-Credence and the acquisitions proposal from Adventist are only valid as of this date. 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 or loss, earnings or loss per share and gross margin and operating expenses. 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 and not more than one follow-up. 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 Jorge Titinger.
Jorge Titinger
Thanks, Judy. Good afternoon, everyone, and thank you for joining us for our first conference call of fiscal 2011. Today I will review our Q1 highlights and talk about what we are seeing in our markets. Bob will then provide more detail on our Q1 financial performance and discuss our Q2 guidance.
First however I realize that there is a high level of continued interest in our M&A activity so I will start with that. Let me begin by providing you with an update on our pending merger with LTX-Credence.
As you all know, we are party to a merger agreement with LTX-C and we continue to uphold the terms of that agreement. The STC and the DoJ granted early termination of the rating period under Hart-Scott-Rodino Act with respect to this transaction.
The SEC’s review of the registration statement on our joint proxy statement with LTX-C is ongoing. Once this tax review has been completed it will clear the way for our shareholder vote. As we’ve said in the past we believe there are strategic value in the combination between our companies due to our complementary products our customers.
Now let me turn to the status of the Advantest proposal. Our board, management team and advisors have been in ongoing negotiations with Advantest and its advisors regarding the terms of their proposals since early December. Throughout these discussions we have stressed the importance of deal closure given the impact uncertainty can have in our customer purchasing decisions and employing morale.
Since our conversations began, the ability to obtain regulatory clearance has been a focus of our discussions. As expected last Friday the DOJ issued a second request in connection with the Advantest proposal. We believe that the second request highlights the importance to Verigy and its Stakeholders are having adequate contractual protections and acceptable terms to ensure closing of any agreed upon the sale of Verigy.
As our discussions with Adventest continue, we will remain focused on securing the best outcome for the Verigy and its shareholders. To date, the Verigy board has not withdrawn its support or recommendation in favor of the pending merger with LTX-C nor other board made final determination with respect to the Adventest proportional.
As we said previously well we continue to engage with Adventest, there can be assurances that an agreement will be reached or that our transaction will be consummated. We recognize that this is a period of uncertainty for our customer’s employees and shareholders and we appreciate everyone's patience as we work to achieve an outcome that we will believe will best serve our various stakeholders. We hope to have a resolution in the coming weeks. As we have done throughout this process we will update you on regarding permission to share.
Given that the purpose of this call is to discuss Verigy’s first quarter earnings results we ask that you please limit your questions to our financial results and guidance and appreciate your understanding. Now I would move ahead with the rest of our agenda for today and recap some of our highlights from Q1. Bob will then fill in some other details and conclude with our Q2 guidance.
Sales for the first quarter were $120 million and at the high end of our guidance range. During the quarter we saw sustained strength in RF base band and the application process of our segments as well as increased activity in high-speed memory and profits I will go into that in more detail.
Shortly well we continue to have significant customer interest in our products during the quarter. There were two elements that influence our older outcome. First was the usual Q1 seasonality that we typically see a slower quarter impacting by the holidays including Chinese New years.
Second, was the uncertainty regarding the LTX-C merger and Advantest proposals which caused certain customers to delay final purchase decisions. As a result, orders declined to $98 million resulting in a book-to-bill of 0.82 which was roughly inline with ATE book-to-bill published by SEMI [WW Sims] for the fourth calendar quarter.
While we do not believe that we lost orders to our competitors in the quarter, our bookings activity declined as customers delayed purchase decisions, pending resolution of our M&A activity. During the quarter, our customers gave us a vote of confidence in terms of customer satisfaction. In December, we earned VLSIs five star award for the second consecutive year in their annual customer satisfaction survey on chip making equipment.
Of the 11 companies to receive the award, Verigy was the only test equipment provider to win in each of the last two years. Presented annually, this award is based on an equipment supplier’s customer satisfaction ranking in six categories. Quality of results, product performance, customer service, cost of ownership, technical leadership and commitment.
In five of these six categories, Verigy received the top rating of five stars. The five-star award is based on the results of surveys sent to more than 34,000 decision-makers at chip making companies accounting for 95% of the worldwide semiconductor market. And this month, VLSI also named Verigy the best test equipment supplier in Korea earning the top rank in 11 out of the 13 categories.
These honors highlight the dedication that our employers have to our customers and our commitment to providing an outstanding customer experience. I want to congratulate the entire Verigy team for our success in this area.
I'll take a few minutes now to discuss our markets. External market research firms expect the overall ATE TAM to be flat to slightly up in 2011 at approximately $3.5 to $3.7 billion. This brings us down into the SOC and memory ATE markets. For SOC the 2011 TAM is expected to be essentially flat plus or minus 5% at approximately $2.4 to $2.7 billion.
Industry forecasts suggest that the automotive and analog linear markets will be flat to declining in 2011 after bringing test equipment online in 2010 to address the capacity needs of these markets. However, RF and application specific standard processors are expected to show growth of 5% to 10%, which are areas of market strength for Verigy.
Last year, we gained 17 points of share in RF, growing from 31% to 48% and RF was once again the dominant segment in our first quarter results representing 48% of SOC orders and 50% of SOC revenue.
Now let me provide some data on the memory market. Memory ATE TAM is expected to grow up approximately 25% in 2011 and of this roughly $160 million is forecasted to come from high-speed memory.
We believe that we continue to be well positioned to capture a significant share of the HSM TAM. As we noted last quarter, customers are begun to shift production to a higher speed DRAM devices including DDR3 and graphics DDR used in gaming systems, PCs, laptops and tablet computers. This has prompted memory makers to purchase additional high-speed memory testers and during Q1 our 93K HSM product sales picked up significantly at several major IDMs and OSATs that will use their product to test DDR3 and specialty memories.
As we entered our fiscal second quarter, HSM momentum continued with an order from a major Korean manufacturer for a 93K HSM system. During the quarter, we also received orders for our V6000 product and our probe cards business had a record revenue quarter. Our TDT group is also engaged in multiple DRAM qualifications including a major Taiwanese DRAM manufacturer.
Successful completion of these qualifications will position us to participate in the growing advanced memory probe cards market. For all of our memory related products including the 93K HSM the V6000 and probe cards, revenue was more than 15% of our total revenue in the quarter.
Now looking ahead, innovation continues to be the key driver of our industry, technology changes that enabled Moore's law out of the norm. And regardless of where we are in the cycle, semiconductor manufacturers are continuously innovating to lower the total cost and improve the performance of their products. We are excited about the next technology wave which we call visual mobile transformation. The same nodes will shrink to 32 nanometers and below making devices increasingly more complex.
Products such as Smart TVs, billboards and automotive entertainment navigation systems as well as 3-D mobile and streaming high-definition videos will drive a new set of performance requirements demanding even more advanced capability from test equipment such as interfaces up to 8 gigabits per second, high-speed memory buses, increased analog bandwidth and they synchronize data traffic.
To prepare for this next technology wave, we have been working closely with key customers to develop a suite of solutions that we expect to announce in the next several months.
Before I turn the call over to Bob, I will close by saying that we’re confident in the strength of our products, our roadmap, our employees and our relationship with our customers and we continue to be optimistic about the second half of 2011. Despite the current M&A uncertainty, we remained focused on providing our customers with a higher quality products and world-class service that they have come to expect from Verigy.
With that, I will turn the call over to Bob to give you additional color on our financial performance and outlook, Bob?
Robert J. Nikl
Thanks, Jorge and good afternoon everyone. As a reminder, I will be discussing both GAAP and non-GAAP results, which exclude costs, associated with the company's merger related activities and restructuring actions as well as gains we recognized on the sale of some investments. A reconciliation of our GAAP to non-GAAP income statement information is included in our press release and is available on our website.
As you know, we continue to operate as an independent company and until our M&A situation is finalized, the financial guidance provided for next quarter will continue to be on a standalone basis.
First quarter revenue of $120 million included hardware sales of $83 million or 69% of total revenue and services revenue of $37 million. Our SOC business which also includes our high-speed memory products had sales of $74 million and benefited from continued strong RF demand as well as the first meaningful HSM revenue in some time with nearly $12 million including sales and Taiwan, Japan and Korea.
For our memory related products which include touchdown probe cards, sales were $9 million in the quarter. Our hardware turns of business was 68% compared to 51% last quarter. Our quarterly revenue by ship to region was as follows, America 16%, Asia Pacific 77% and Europe 7%. In this quarter we had one greater than 10% of revenue customer.
Orders from OSAT customers were 62% of the total in the quarter with the remaining 38% coming from IDM and the fables customers. This compares to 37% and 63% respectively in Q4. It is not unusual to see this sort of transition from upstream customers to the downstream side comps.
Quarterly orders by ship to region were as follows, America's 19%, Asia Pacific 74% and Europe 7%. We ended the quarter with $109 million in backlog compared to $130 million in the prior quarter.
Gross margin on the both the GAAP and non-GAAP basis was approximately 47% in Q1 and the decline from last quarter reflected lower revenue volume as well as product mix. Non-GAAP total operating expenses which exclude approximately $9 million of merger related transactions and restructuring costs were $52 million, a decline of $8 million or 13% from last quarter.
Both R&D as well as SG&A expense benefited from tight spending controls, additional time off savings for the holidays and no accruals for variable compensation. Now I'd like to review our balance sheet and cash performance for the quarter.
Accounts receivable at $81 million declined $13 million from the prior quarter as a result of the lower revenue while DSO increased to 61 days from 53. By way of comparison, DSO days in last year's first quarter were 59. We experienced no credit issues or write offs. The normal seasonal slowdown contributed to a heavily back-end loaded shipment month this quarter with approximately 59% of revenue recorded in the month of January.
Inventories increased by $6 million to $91 million and was primarily driven by an increase in pre-builds of systems as we anticipate another high level of turns business in our second quarter. As you know, customer lead times continue to contract and we positioning inventory based on expected configurations.
CapEx spending was only $2 million in the quarter, while depreciation and amortization expense was 5 million. We ended the quarter with $441 million of cash in marketable securities, a decrease of $28 million from last quarter. The decline in cash was due primarily to reductions in current liabilities that reflected variable comp payments for last year, our contribution to our German pension plan and our semi-annual bond interest expense payment.
Now I'd like to provide some color around next quarter sales. Since the start of the year, we had been focused on simplifying our organization structure and driving efficiencies in order to reduce our overall break even point. We are putting plans in place to reduce our fixed costs on an annualized basis by at least $20 million and our financial guidance reflects the initial savings we will realize in the current quarter.
As we mentioned in our press release today, we are expecting revenue to be in a range of $115 million to $120 million. We are assuming gross margin to be essentially flat and non-GAAP OpEx to have a modest uptick of 3% to 4% due to the impact of annual salary increases and reduced time off savings in the second quarter.
Our share-based compensation expense is expected to be $3.6 million to $3.8 million and our estimated income tax provision should be in a range of $350,000 to $500,000. Similar to last quarter, we will not be providing GAAP EPS guidance today since we are not able to assess the full amount of merger-related expenses and potential restructuring costs that we expect to incur in the upcoming quarter. These amounts could be significant.
Accordingly our non-GAAP earnings per share after excluding the items just mentioned is expected to be in the range of minus $0.03 to positive $0.02 per share.
Finally, weighted average shares outstanding to be used for calculating earnings per share is expected to be approximately $61 million. As Jorge mentioned earlier, just based upon the strength of our products and customers, we are optimistic about the second half of the year and anticipate revenue to be between 20% to 30% within our first half.
This concludes my prepared remarks. Thank you, and Erica please now open the call to questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from the line of David Dooley with Steelhead Securities. Please proceed.
David Dooley – Steelhead Securities LLC
Yeah, I was wondering could you give us a little bit more explanation on the customer delays, I guess one of your merger partners reported this morning and I don’t think that they detected delays in customer acceptance and so maybe talk a little bit more in greater detail about why that's happening? Thank you.
Jorge Titinger
Thanks a lot for the question, this is Jorge. We have several situations where customers are essentially waiting for clarity of which direction the company is going to take with regards to the M&A activity and until such clarity is in place, they are pushing out their decisions. In every case, that we have seen like I said in my comments, we don't think we’ve lost any of this orders, but they are pushed out.
David Dooley – Steelhead Securities LLC
And I assume some of your bigger SOC customers?
Jorge Titinger
Yes.
David Dooley – Steelhead Securities LLC
Okay, thank you.
Operator
Our next question comes from the line of Olga Levinson from Barclays Capital.. Please proceed.
Olga Levinson – Barclays Capital
Hi, thanks for taking my question. As part of an expansion of the previous question, can you talk about what sort of milestones those customers are looking for in terms of when they would actually save those orders or shipments, are they expecting some sort of decisions from the board any sort of filings, what kind of conversation are you having there?
Jorge Titinger
I think they are expecting a decision from the Board on clarity on what direction we are going to pursue. I mean, we haven't heard about expectations on filings or not.
Robert J. Nikl
Yeah Olga, it’s Bob. I think part of the, let’s call it uncertainty. It is also wrapped around the end of Chinese New Year. Our sense was that as they started to come back from the break, capital budgets for the near term, we're starting to get firmed up. So our sense is bit more of a pause. It’s not losing the business and it's not pushing out significantly into the future, but it's just enough of a speed bump if you will to have impacted the order situation in Q1.
Olga Levinson – Barclays Capital
Got it. And then in terms of your gross margins, there seems to have been a nice uptick in the gross margin for the service segments, how should we think about that going forward and sort of the linearity in light of the costs partially that you are going to implement?
Robert J. Nikl
Sure. So part of that is just what I would refer to is some mix. In any given quarter, if there are some asset sales that the services and support organization transacts that normally results in a fairly good margin. There was also some incremental sales of demo equipment this quarter, so net net I would tend to think we were revert back to the mean or the norm if you work for those service margins, which as you know in the past probably have trended more around high 20s to low 30s.
Olga Levinson – Barclays Capital
Got it, thank you.
Robert J. Nikl
You’re welcome Olga.
Operator
(Operator Instructions) We have a follow-up question from the line of David Dooley with Steelhead. Please proceed.
David Dooley – Steelhead Securities LLC
Yeah, could you talk little bit more in greater detail about your wins in the high-speed memory area and it seems like we've been waiting for this event for some time and I guess it's a little surprise that we got such a big boost all of the sudden, so could we take a little more greater detail on that topic?
Jorge Titinger
Sure, I think we've said several times in earlier until the higher speed DDRs were started to hit the market, the customers could do with older products to test their own products. And we started to see that transition above 1.6 gigabits for DDR and as that transition occurs with customers, the demand for high-speed, newer high-speed memory testers are starting to pick up and we are very well-positioned both for DDR and also for specialty DRAM where we also have seen good overrate for ourselves in the quarter.
Robert J. Nikl
Yeah Dave this is Bob, just to build on Jorge’s response. To keep in mind again we're talking about final test, the higher speed bins don't really impact much of an incremental demand that the wafer level.
David Dooley – Steelhead Securities LLC
And so, if this is all of the sudden there is more of a mix above this particular speed frequency that you’ve referred to and that’s why all of a sudden, you have triggered orders from. Because its not the – I think, you mentioned three or four customers or it was just one or?
Robert J. Nikl
Yeah, multiple customers, multiple geographies. And yeah, it really is the speed, then if you think of the speed bins having been mostly 1.3 gig last year and say 1.067 the year before, 1.6 is where we are at right now. And I think you'll see bit more incremental demand for the HSM this year.
David Dooley – Steelhead Securities LLC
Okay. And you mentioned from statistics about probe cards and I missed it, could you just repeat, did you say, what percentage of revenue or did you give the revenue number on the probe cards something like 15%, I just want to make sure I understood what that was?
Jorge Titinger
No, the 15% was all of our memory revenue. So, that includes high-speed memory, commodity memory testers and probe cards. But the statistics are, that I did mention on probe cards that we had a record quarter for revenue in our probe card business.
David Dooley – Steelhead Securities LLC
And how, could you give us an idea as to, are we close to a breakeven level of revenue on a quarterly basis there or how much longer it would take for to see breakeven there?
Jorge Titinger
Dave, you’re talking specifically about the probe card business?
David Dooley – Steelhead Securities LLC
Yeah.
Jorge Titinger
Yeah, there hasn't been much of a change in the overall breakeven level for a probe card. I'd say it is still between $8 million and $9 million a quarter. We are not there yet, but clearly we’ve gotten in a lot closer this quarter.
David Dooley – Steelhead Securities LLC
Right, thank you.
Jorge Titinger
Welcome.
Operator
(Operator Instructions) Our next question comes from the line of Simran Drar with Cowen and Company. Please proceed.
Simran Drar – Cowen and Company, LLC
Thank you this Simran Drar calling in for Raj Seth. I had a couple of quick questions for Bob. Last year in your SOC business, you saw your exposure as far to a little bit relative to your largest competitor. How do you see that dynamic came out at this year and secondly, could you tell us what is the breakeven level is in your memory business. Thank you.
Robert J. Nikl
Okay, so let me touch the first one. I think it was already said in this prepared remarks. We actually think the segment of the SOC that were stronger in for its better relative same growth this year than what we experienced last year.
And again I think this, you indicate is mobile device wave that we’re seeing in so many different kinds of products right now bode well for the growth of our SOC business in the second half. As far as breakeven, historically we’ve never tried to disaggregate breakeven by the individual businesses at a total company level however, I say roughly our breakeven today is about 120 with the cost reduction initiatives that we've described in today's script. The goal is to that that breakeven down to roughly $112 million to $115 million a quarter in total.
Simran Drar – Cowen and Company, LLC
Thank you.
Operator
We have no further questions at this time. I will now turn the call back over to Judy Davies for closing remarks.
Judy Davies
Thank you Erica, and thank you everyone for joining us this afternoon. We look forward to seeing you in the near future. Erica?
Operator
Thank you for your participation on today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.
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