Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

David Tacelli – President, Chief Executive Officer

Mark Gallenberger – Vice President, Chief Financial Officer

Analysts

Vernon Essi – Needham & Co.

CJ Muse – Barclays Capital

Christian Schwab – Craig-Hallum Capital

Patrick Ho – Stifel, Nicolaus

Tom Diffely – DA Davidson

David Dooley – Steelhead Securities

David Wu – Indaba Global Research

LTX – Credence Corporation (LTXC) Q1 2012 Earnings Call November 22, 2011 10:00 AM ET

Operator

Good morning and welcome to LTX – Credence Corporation’s First 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. At that time, if you have a question please press star and then one on your touchtone telephone. At the request of LTX – Credence, this conference call is being recorded.

Speakers for today’s call will be David Tacelli, Chief Executive Officer and President, and Mark Gallenberger, Vice President and Chief Financial Officer. At this time, I would like to turn the conference over to Mr. Mark Gallenberger. Sir, you may begin.

Mark Gallenberger

Thank you, Karen. Welcome to LTX – Credence Corporation’s First Quarter Fiscal Year 2012 conference call for the period ended October 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 first quarter and discuss the business outlook. Then I will provide further detail on the Company’s financial performance during the first quarter as well as provide guidance for the second quarter of fiscal year 2012. We will take your questions after our prepared remarks. A replay of this call will be made available through December 22 by dialing 855-859-2056 and the passcode is 24857480; or you can visit our website at ltxc.com.

As a reminder, the only authorized spokespeople for the Company are Dave Tacelli, Rich Yerganian and myself. Also, the Company will be presenting at the Barclays Technology Conference in San Francisco on Thursday, December 8 at 3:30 in the afternoon.

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 for the future financial performance of the Company. We wish to caution you that these statements, such as projected revenues, net income or loss, earnings or loss per share, operating expenses, gross margin, cash flow, non-GAAP measures, and breakeven targets are only predictions and that actual events or results may differ materially. The guidance provided during this call represents the Company’s estimates as of this day and the Company assumes no obligation to update this guidance. Please refer to our Safe Harbor statement in our earnings release for more information on important factors that could cause actual results to differ.

Now onto the call. Dave?

David Tacelli

Thank you, Mark, and good morning everyone. During today’s call, I’ll review our first quarter performance and second quarter business outlook, how we’re managing the current business environment, and I’ll also provide in-depth commentary on one of our target markets, power management.

As expected, the current environment was challenging as weak economic conditions impact our business consistent with the rest of the industry. We don’t expect any short-term growth catalysts until after the calendar year-end as we are now in the most seasonably weak quarter of our fiscal year. We are now beyond the point where customers will add capacity in anticipation of the holiday build. At this point in time, customers tend to wait until after the Chinese New Year before assessing their growth prospects and test capacity needs; however, we’re optimistic that our second fiscal quarter will represent the low point of this cycle.

There are a number of reasons that support our position, which include the quantity of new devices that our customers are working on, the number of projects that are not yet in volume production, and the low level of excess test capacity in the supply chain. From an LTX – Credence perspective, the revenue contribution from the additional customers added over the past two years and a business expansion with our existing customers will drive our revenues to peak at a higher level as we move into the next period of growth for the semicap industry.

During this downturn, we will continue running the company as we have in the past while constantly searching for ways to improve the business model while moving full-speed ahead on R&D projects and new business development activities. When we combined LTX and Credence, we put in place a variable business model that flexes with industry conditions. Even with the significant decline in revenues, our gross margin remained industry leading at over 53%, and while our revenues were just below our guidance, our loss per share at $0.08 was in the middle of the range.

We continue to execute against our strategic goals which include developing additional business opportunities in all of our targeted areas while bringing innovative new products to market, helping our customers achieve the lowest overall cost of test. We continue to have success winning new customers and the results of these efforts will show up as we move through the next business cycle. It is our plan to support these wins with the development resources our customers require as we help them get their next generation products into the market.

On the development front, we have a full pipeline of new products that will be introduced throughout the next fiscal year. One of these products will leverage the development efforts of our existing test platforms enhanced with new innovative technology that will drive market share growth for us in the $1 billion application-specific market segment.

As I’ve done in previous conference calls, I’d like to now spend a few minutes talking about another key market segment for us, the power management market. Today, this market accounts for over 150 million in annual tester sales for the industry. Power ICs play a critical role distributing power accurately and efficiently in all types of electronic devices. You may be surprised by how many power management devices there are in current electronic products. In a typical laptop, there may be 20 different devices classified as power management ICs with multiple quantities of each type in the product. In a smart phone, there may be upwards of eight different types of power management devices including ICs for managing system power, screen illumination, RF signal generation, sensor applications, and battery charging.

The automotive industry is also a growth driver for power technology as the trend toward electronic vehicles increases and the demand for battery management along with the goal of enhancing fuel economy through more efficient motor control technology. Whether used in automobiles or portable consumer electronics, these devices range from complex power management ICs that contain analog and digital technology to less complex devices that only use analog circuitry.

So what are the characteristics of a test solution for this market segment? One thing we now for sure is one size does not fit all requirements. In order to achieve the right cost to test profile, customers require a test system developed for a specialized range of applications. The more complex devices contain a large amount of both analog and digital circuitry and therefore require a test system with a wide range of digital and power instrumentation. That same system also has to have the ability to test a higher number of devices in parallel. Power devices are high volume and cost sensitive, so when a more complex test system is required, the ability to test a high number of devices in parallel is a critical capability.

As an example, for one of our customers we developed a solution on our X-series test platform that can test up to 48 complex battery management devices at one time, which is significantly more than other competitive solutions in the market. This of course translates into more devices tested in less time, which means lower cost of test for our customers.

For the higher volume and less complex portion of the power market, the devices are normally pure analog, which means the solution can be more focused and not burdened with the costly high performance digital infrastructure. Within the power market, devices that have lower complexity and small pin count represent the highest volume, making up approximately 60% of the overall market. This segment is where our ASL platform has been a dominant solution for more than 10 years. These systems, however, may have more specialized power requirements, resulting in instruments capable of supplying high voltages, high current, or both. For these types of devices, our ASL and now ASLX test platform remain an industry workhorse with nearly 4,000 testers installed worldwide.

Our test solutions are being used by many of the market leaders, both IDM and fabless and our large installed base of ASLs in the OSATs around the world is a significant advantage for us as we continue to target share expansion in this market segment. With the introduction of the ASLX, a product that combines ASL and X-series technology in a system that is compatible with existing ASL applications, we have given ASL customers access to higher levels of capability with some of the most technically advanced instruments available in the market today. We have done this while preserving their previous investments in training, capital and program development. We estimate our current share to be approximately 30% of the power device market. With our existing customer base and additional customers we expect to win, our goal is to capture up to 40% of this market by the end of 2013. This growth in market share will drive between 15 and 20 million a year in additional revenue for the Company. Even in the current business climate, we are confident in our ability to win new customers not only in the power management segment but also in the microcontroller, application-specific, RF front end, and data converter markets.

Since the last down cycle, the Company has been completely transformed. We have a more diversified customer base, strong line-up of products, solid balance sheet, and a proven business model. We are positioned for strong growth and profitability when the cycle turns.

In summary, our industry is in the midst of a downturn and we believe we’re at the bottom. We continue to execute our strategy which is to aggressively pursue additional business opportunities, launch new products into the market, and continuously refine our flexible business model. Targeting high growth market segments like power management allows us to bring differentiated solutions to a broader customer portfolio, which translates into market share gains over the next several years. And because of our flexible business model and strong balance sheet, we have never been better prepared to weather our industry’s current business environment.

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

Mark Gallenberger

Thanks, Dave. Revenue for the quarter was $33.8 million, a decrease of 46% compared to the prior quarter revenue of 62.7 million. Gross margin was 53.4% which is slightly better than our target model at this revenue level. Total operating expenses declined by $2.6 million from last quarter due to reduction in variable expenses such as commissions and profit sharing that are tied to revenue and profitability. Amortization of purchased intangible assets was $791,000 and is expected to run at this quarterly level for the remainder of the fiscal year.

Net loss for the quarter was 4.9 million or a $0.10 loss per share on a GAAP basis. Excluding amortization of $791,000 and special items of 161,000, our non-GAAP net loss for the quarter was 4 million or $0.08 loss per share. Our EBITDA for the quarter was slightly negative at $700,000. This calculation excludes stock-based compensation expense of 1.3 million and special items of 161,000.

Next, I’ll provide a breakdown of revenue for the quarter. Sixty-eight percent of revenue came from IDMs while 32% came from subcontract test and fabless companies. Sixty-nine percent of revenue was from product while 31% was for service. For the quarter, we had two customers each represent greater than 10% of revenue.

Now onto the balance sheet. We ended the quarter with net cash of approximately $153 million. Excluding our share repurchases of approximately $5 million, net cash decreased by 5 million. This was better than our plan for a decrease of $9 million, which was driven by better collections performance and a push-out of our final exit payment into the January quarter to our outsource supplier that we are exiting from.

We finished the quarter with trades accounts receivable of 24.4 million. DSOs increased to 65 days from 61 days in the prior quarter. Inventory was $28 million, which is up approximately $7 million from the prior quarter. The increase was driven by our decision to build a buffer in our inventory that will ensure customers are not impacted by the consolidation of our outsource manufacturing partners.

Net capital expenditures during the quarter were 1.4 million while depreciation expense was 2.1 million. We ended the quarter with accounts payable of $7.7 million and stockholders equity of 231 million.

Guidance for Q2 is as follows: we expect revenues to be in the range of 26 to $30 million and non-GAAP loss per share to be in the range of $0.20 to $0.15, assuming 49 million shares outstanding. The non-GAAP guidance excludes the amortization of purchased intangible assets of $791,000. Gross margin is expected to be approximately 49% and cash is expected to decline by approximately $7 million primarily due to the net loss from operations and the final exit payment to our outsource supplier.

While our business model performance has exceeded our expectations over the last two fiscal years by delivering strong profits and operating cash flow, we are constantly looking for ways to streamline our business. For instance, our decision to consolidate all of our manufacturing with Jabil Circuit is just one example of how we are able to drive down our manufacturing costs and improve operating leverage.

We have other process improvement activities currently underway that will lead to additional savings as well; however, given the current revenue level, we don’t expect these process improvements will yield material changes in our business model performance in the short term, but they are expected to improve our operating leverage during cyclical growth periods.

In summary, although our industry is experiencing a downturn, we’re streamlining our business and manufacturing processes that adapts to the semi-cycles, enabling us to focus on our primary objective of winning new customers.

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

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question at this time, please press star followed by the number one key on your touchtone telephone. If your question has been answered or if you would like to remove yourself from the queue, you may press the pound key. Again, if you do have a question, you may press star and then one at this time.

Our first question comes from the line of Vernon Essi from Needham & Company.

Vernon Essi – Needham & Co.

Thank you very much. Listen Mark, I was wondering if you could go over some of the different moving pieces in your gross margin. You’re obviously posting a really strong number given the light revenue, and I’m trying to understand if some of that is already beneficial from this manufacturing transition or if there is a mix issue that might also be giving you a little bit of tailwind, because it seems in you’re coming in a lot better than I would have expected on this revenue level, and your guidance is strong as well. If you could just elaborate on that, I’d appreciate it.

Mark Gallenberger

Yeah, thanks Vernon. It’s a good question. We’ve been working for many, many years to continue to find ways to move as many costs from the fixed component to a variable component, and that allows us to essentially have more buffer, if you will, even at these low revenue levels. So we’re continuing to drive down that fixed cost component and we’re being pretty relentless from that perspective.

In terms of this move down to one manufacturing partner, there is no savings whatsoever that you’ve seen yet, so that’s all savings that are yet to come in the future. And one of the things that we mentioned on our last earnings call back in August was that once we can get back to 70 or 75 million in revenue levels per quarter, we should expect to see an additional $2 million of savings in the gross margin line. Now, you don’t really see those savings at these revenue levels, so that’s why I talked about in my prepared remarks how in the next up-cycle we’ll see even more operating leverage than what we saw in the past cycle. So hopefully that answers your question.

Vernon Essi – Needham & Co.

It is helpful. And how should we be thinking about this inventory buffer that you have and how that might play out in the coming quarters?

Mark Gallenberger

Yeah, we built this extra buffer. The transition is actually going very, very well. We’re near complete and basically right on plan. I don’t see inventory levels declining in the January quarter, but it’s not going to go up another $7 million like it did this quarter. It may increase maybe 1 or $2 million from this point and then you’re going to start see a bleed off of that inventory. Of course, I’d like to see the revenue levels higher and bleed that inventory off quicker, but I think it’s going to be more of a slow bleed right now. But really, a lot of it is going to be a function of how the industry starts to pick up again. But right now at these low revenue levels, you shouldn’t expect to see inventory materially go up or down. Obviously what we do is we do a sensitivity analysis each quarter on the E&O, and right now we don’t see any risk of taking any write-offs with this inventory. It’s just going to be slow moving.

Vernon Essi – Needham & Co.

Okay. And then just a housekeeping question – maybe you had this in your prepared comments. Cash from operations, what did that look like in the quarter?

Mark Gallenberger

Yeah, cash from operations in the quarter was about minus $3.5 million.

Vernon Essi – Needham & Co.

Okay. And then finally on Dave’s side of things, just wondering when you look at the market overall right now, there was some small pockets of optimism on the tester side, although from an unfortunate situation over in Thailand. Just wondering what your outlook is with your customers and the dialogue around that – has that really impacted order rates at all, or is that in the grand scheme of the cycle, this downturn that you’re in, going to be almost negligible if you get any incremental orders out of that?

David Tacelli

Well, two things, Vern. First, we are providing all the support that all of the customers that have our equipment over there need, and as they come out of this situation we’re reviewing their test floors and providing them with reports on what needs to be replaced or what can be salvaged, that’s number one. Number two, in what we’ve done and what we’ve guided to, we have taken into account zero upside for anything that could potentially happen over in Thailand.

Vernon Essi – Needham & Co.

Okay. And just from the standpoint of taking it outside the scope of LTX, do you believe there is a lot of equipment orders that may result from this, or does it seem like people are able to stretch what they have and reconfigure their floors and what have you?

David Tacelli

Too early for us to speculate. I’m sure that across the industry and across other capital equipment manufacturers, there probably are going to be some level of orders that result from this. I also know that a lot of the factories over there that we’re dealing with have very old legacy equipment, not only for us but for a lot of the competitors, so it will depend on how much and what they want to replace for those legacy machines, and also with the new capability that’s out in the marketplace, productivity is much higher. They may not need to replace on a one-for-one. So all that will be kind of ironed out, I guess, over the next three to four months as Thailand tries to get back to some level of normalcy.

Vernon Essi – Needham & Co.

Okay. All right, thank you very much.

Operator

Thank you, sir. Our next question comes from the line of CJ Muse of Barclays Capital.

CJ Muse – Barclays Capital

Good morning. Thank you for taking my question. I guess first question was hoping to dig a little bit deeper into SOC market share. I know Intel was a 200 million-plus spender this year, so that kind of makes things a little bit more complicated; but even if I remove that, it looks like your share dipped by about 150 BPs year-over-year based on your guide for the calendar Q4. So when we started the year, you were very optimistic about share gains, so curious what transpired during the year, and then how should we think about the trajectory from here going into 2012?

David Tacelli

First on the short term, CJ, I don’t think you can take any one point in time and draw a conclusion from any one quarter. I think what you have is customers have buying patterns that are very different depending on how they’re releasing products, where they are in the marketplace, how their sockets win. I think you’ve got to look over the long term. I think as you go into 2012, I think you’ll start to see that turn back to where it was, and I also believe with the amount of customers that we have an one of the sockets we’re designed into, as long as those sockets are successful with those customers, you should see that share rebound if not increase in the short term in 2012.

CJ Muse – Barclays Capital

I hear you on the short term nature, but I’m talking about four quarters; so in that sense, your share did drop even if I pull out Intel from the spend. So within that, what changed? Did microcontrollers in the last two or three quarters slow relative to some other segments, or how should we interpret the overall trend for calendar 2011 versus where you thought it would be six, nine months ago?

David Tacelli

Well, I think you have seen a slowdown in some industries. I think you’ve highlighted one of them. We have seen some of our customers have slowed down, and it’s not just related to that industry; it’s other industries as well. So it really relates to the customers you’re dealing with and the success of their products. Again, the number of new customer we’ve won and the devices that we’ve been designed into, you should start to see that pick up as we go through 2012. We’re very confident of that.

CJ Muse – Barclays Capital

That’s helpful. On the inventory side, is that final testing inventory or is that just assemblies on the buffer side?

David Tacelli

Yeah, CJ, what we did is we actually built up higher levels of finished material. As we were exiting one of our outsource suppliers, we wanted to make sure that we had enough in place, so it’s primarily either finished units or finished subassemblies, so that gave us comfort that that allows us to de-risk that transition.

CJ Muse – Barclays Capital

Got you. And then last question from me – on the gross margin side, you saw a nice uplift in the actual quarter, so curious what drove that? Was that entirely mix, or is that something that at the kind of $35 million run rate we should see you guys continuing to do 53%-plus gross margin?

Mark Gallenberger

I would estimate that we were probably about two points better than our target model at this revenue level, so if you wanted to kind of model it from that perspective. And if you look at the guidance that we gave for next quarter, I would estimate we’re probably about two points better and that was really mix driven.

CJ Muse – Barclays Capital

Great. Thank you very much.

Operator

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

Christian Schwab – Craig-Hallum Capital

Good morning guys. Can you give us an update on where you believe the utilization of your equipment at your most significant customers or accounts is? I know you guys talked about that last quarter at being at more than 80%. Just wondering if that’s still the case, or how much that has decreased.

David Tacelli

At our biggest accounts if you look back over the past four quarters, I’d say the utilization is still high. I don’t want to say its in the mid-80s. I would say it’s probably more in the high 70s to low 80s. It’s probably dipped a few points. Subcontract test, it really is market dependent. There are some areas of subcontract test in some markets that have held up very well in the mid-80s, and there are some market segments, mainly I’ll call on the pure digital side, that have dipped down into the mid-70s. So I think it’s market dependent on the subcontract side. On the major IDMs, it’s held up pretty well but down a few points.

Christian Schwab – Craig-Hallum Capital

As we try to answer probably the most important question – the pace of the recovery and what it’s going to look like – if we look at your two large customers over the last couple of years being TI and Atmel, who have been significant contributors for the last fiscal year, and we look at their revenue projections, which of course the macro could change at any moment, but what that translates to CAPEX, it’s pretty depressed levels from what we saw at this most current year that’s going to be ending. So if we look at the next wave of customers, are there other customers that you’re talking about on the power management side that are going to take over for those two customers, or are you in essence saying unit volume has to obviously expand at those two customers to get you back to breakeven?

David Tacelli

On the power management side, those would not be two of the customers that we’ve done—

Christian Schwab – Craig-Hallum Capital

No, I realize that. The question is—two questions. On the power management side, which customers, three or four, are you most tied to for that 20 million market share gain, if you could talk about it; and then just in general, the pace of recovery, what are you—Spirex (ph) being kind of an anomaly situation, but what are you expecting out of TI and Atmel next year as far as spending, capital equipment spending with you year-over-year?

David Tacelli

Let me break it down, then, and answer this way. On the power management piece, the growth we’re expecting comes from specifically Europe and Asia. We have several accounts in North America that we’re working with and that we’ll see volume, but I think the significant volume will come from Europe and Asia, and I don’t want to label the customers. The other customers you mentioned, I’m really not going to get into their spending patterns and their revenue guidance. That would be bad form for me to talk about their businesses and how they’re going to move forward. Both are significant customers, both are active with multiple programs across a wide range of different device types; but as far as their revenue and spending patterns, I’m going to leave it up to them.

Christian Schwab – Craig-Hallum Capital

Perfect. And then lastly, as we call the bottom this quarter, instead of me trying to figure out the math, what do you guys believe the pace of the recovery is going to look like from here, then?

David Tacelli

That’s the $64 million question. If you go back to historical trends, it could be flat for a quarter and then rise slowly, and I’ve also seen rapid rise in the 20 to 30% range on a quarter-over-quarter basis. Which one this is going to be? I wouldn’t make a guess on right now; but based on the level of activity with programs, based on the level of activity with customers going into production using our equipment that they haven’t used in the past, I’m pretty confident that we’ll some kind of rise. The pace, I couldn’t guess at this point, Christian.

Christian Schwab – Craig-Hallum Capital

That’s great. Thank you. No other questions.

Operator

Thank you, sir. Our next question comes from the line of Patrick Ho of Stifel, Nicolaus.

Patrick Ho – Stifel, Nicolaus

Thank you very much. First, just two quick housekeeping questions. Can I assume that the merger expenses came out of the SG&A line? And what were the total number of shares repurchased?

Mark Gallenberger

Yeah, that’s correct, Patrick. The merger-related expenses did come out of the SG&A line. In terms of the total number of shares that were repurchased, I don’t have the exact number for you, unfortunately. I think it was right around 900,000 but I can get that exact number to you.

Patrick Ho – Stifel, Nicolaus

Okay, great. Maybe a big picture kind of question for Dave, and I’ll try and get around what I think Christian just asked. As we look at the current environment and as you look forward at a potential recovery in 2012, which market segments or which applications do you see the opportunities for that recovery? Where do you find it the most optimistic?

David Tacelli

Well, let me give you two market segments. We talked a lot about power management, but I’m going to give you two other ones that I’m actually very excited about our potential to grow in. First one, we’ve talked a lot in the past about microcontrollers. One of the positive things that happened in the quarter as that we have now received acceptance and revenued our first machine at a brand-new microcontroller company, so pretty excited about that. As their products now start to ramp through 2012, hopefully we’ll start to see volume in addition to the other customers we already had in that space. The other area that we’ve been very positive about and we have a very dominant position is in the PA space, and we’re pretty much designed in with all of the manufacturers that use external equipment to test power amplifiers. If they’re using a rack-and-stack, we’re still looking to try and crack that market as we have been over the last few quarters; but if they’re using external equipment, all those manufacturers have now looked at—they’ve already made the switch, or they want to make the switch to the PAx tester. So those are two areas in addition to power management we’re pretty excited about.

The third, which we talked a little bit about here – the application specific market, which is a very, very big market that we’re in – we’re going to be launching a brand-new product in the first part of the fiscal year that makes us not only competitive in that market but makes us a compelling solution, competing for more complex devices against what I’ll call higher performance, higher priced competitors. So outside of power management, I think those are the three areas we’re most excited about and give us the most optimism for growth for us in 2012 going back to CJ’s point on share.

Patrick Ho – Stifel, Nicolaus

Great. Final question from me, maybe a little bit related to that share question as well. You guys have focused on specific markets like microcontrollers, power management. You’ve discussed those today and in the past. Are there any other marketplaces that you’re at the early stages of, I guess, at the qualification or entering those type of markets that you haven’t discussed? Can you give us a little bit of color on any of those?

David Tacelli

Yeah, the one market we haven’t gone into and we plan on the next conference call was the application specific market, because it’s such a diverse and broad market. It includes everything from single chip cell phones to a wide range of higher performance digital devices to really complex analog. And the reason we’ve held off talking about that market is we’re planning to tie in talking about the market with the introduction of our new product. So you’ll start hearing a lot more about that market. You’ll start hearing a lot more about the breakdown of that market and the types of devices that we’re going after, and the accounts that we’ve won.

Patrick Ho – Stifel, Nicolaus

Great. Thanks a lot, guys.

Operator

Thank you. Again, if you do have a question, you may press star followed by the number one key. Our next question comes from the line of Tom Diffely from DA Davidson.

Tom Diffely – DA Davidson

Yeah, good morning. Maybe another question on the trough quarter and the potential recovery in the April quarter. What gives you the most confidence at this point? Is it just kind of the seasonality that’s come into the business over the last couple of years because of your short lead times, more so than maybe a cyclical recovery?

David Tacelli

No, I don’t think it’s seasonality for us as much as with the volume of programs that either we’re working on with customers or customers are working on independent of us on our equipment, we’re counting on them to get those products to market because they are next generation for a wide range of devices. So we’re helping them get those products to market, they’re successful in getting next generation sockets, then we’ll be successful in providing capacity to build them and test them.

Tom Diffely – DA Davidson

Okay, so really it’s kind of a bottoms-up view of individual customers.

David Tacelli

Yeah, we’re not looking back saying historically it looks this way. That’s kind of the overriding factor on where we are today, but what gives us the confidence and the optimism is kind of where we’ve been designed in and the customers’ success, or our belief of their success moving forward.

Tom Diffely – DA Davidson

Okay. And then maybe going back to Patrick’s question on the individual markets, you talked about utilization rates being in the high 70s, low 80s. Does it vary much between the three, four end markets that you’re really keyed on?

David Tacelli

Yeah, it does. It does. I mean, I’ve seen on the PA side—if you go to PA manufacturers, and most of those PA manufacturers are direct, meaning they’re not using subcontract supply, their utilization is really high. You’ve got some areas, what I’ll call digitally intensive devices, they’re tending to be on more of the low side of the numbers that you mentioned. And then depending on the device and where we are in the introduction, some automotive devices are kind of—you know, we’re doing really well at some suppliers. So it’s really hard—it’s kind of a mixed bag. When we look at some of our major—you know, one of the questions that was asked was if you look at your major customers, how they’re doing in utilization. It’s a little bit easier for us to pick one or two of those accounts because you’re able to measure on their volume, how many testers on the floor, devices that they’re ramping, and that’s where the low 80s number comes in.

Tom Diffely – DA Davidson

Okay. And as we enter the trough quarter here, are you seeing any changes on the competitive front from either a pricing point of view or reaction from the Japanese merger?

David Tacelli

You know, two questions. I’ll give you answers on both. On the pricing side, I’ve seen no change. I think in our space, it doesn’t matter if you have five suppliers or three suppliers – I think it’s been pretty competitive, so I’ve seen really no change on the pricing front in the last quarter or so. On the merger side, I think it’s going to present some opportunities for several of the players in this space. As we launch new products and new instruments into the application specific market, I think we’re going to run head-to-head a little bit more with that combination. Up until this point, we have not been as engaged against them versus our other competitors. So I think it will provide a little bit more opportunity, but I haven’t heard anything negative from the transaction. I think that’s going to play out over the next several quarters. As they understand products and rationalize portfolios and rationalize what customers are buying, I think it will open up at that point.

Tom Diffely – DA Davidson

Okay. And Mark, on the model side, you talked about cash burn of maybe 7 million in the January quarter. What’s the projected cash burn from operations itself?

Mark Gallenberger

Are you talking about the January quarter now?

Tom Diffely – DA Davidson

January quarter, yeah.

Mark Gallenberger

January quarter, I would say the cash burn from operations is probably going to be around the 6 million range, and then add maybe another million to CAPEX.

Tom Diffely – DA Davidson

Okay, great. And then finally just if you could remind us what the current plan is for the share repurchasing?

Mark Gallenberger

The current plan is we have a $25 million share repurchase plan in place. We’ve bought back approximately 5 million of the 25, and so we’re going to continue to be opportunistic.

Tom Diffely – DA Davidson

Okay, thank you.

Operator

Thank you, sir. Our next question comes from the line of David Dooley from Steelhead.

David Dooley- Steelhead Securities

Thanks for taking my question. A question on the new design wins – coming into this downturn, you were really excited about the new design funnel, and then we came into the downturn and of course we haven’t really seen those come to fruition yet. I’m just curious – are those the same wins that you expect to ramp up here early next year, or is it a new set of design wins that’s been won over the last six months that you expect to ramp, or is it both?

David Tacelli

It’s an easy question to answer – it’s both. You have some customers that when they design kind of a new socket in their market space, it takes a while for them to get samples out there and get that accepted, and in a downturn economic conditions only slow that process down. The good thing is we have not seen a slowdown in the number of additional projects either we’re given or our customers are doing themselves on our equipment, so it’s a combination of the two. I think what will affect the short term the most, Dave, are the things that we were expecting to ramp in the back half of this calendar year, I’m expecting now in the first half of next year.

David Dooley – Steelhead Securities

Okay. When you talk about the business bottoming, do you expect—can we assume that your product revenue grows in the April quarter, or is it more of the first quarter out, we have this bump-up in the service on the year-end stuff?

David Tacelli

The service is pretty consistent quarter-over-quarter. What you’re thinking about is more the bookings that kind of come in a lump sum, either in for some companies the December quarter or the January quarter. But revenue is pretty consistent, so the bump-up would be all product related.

David Dooley – Steelhead Securities

Okay. Someone was asking about market share earlier. Where do you view your market share for this calendar year that’s about to wrap up? I heard you talk about trying to gain share in a specific market. How do you think that translates into your overall market share?

David Tacelli

Well if you look at the markets that we target, and I think CJ tried to do a really good job and he was looking at the market minus Intel. The way we look at it is we look at it as the markets minus high-end digital, so it would be companies like Intel or companies like Nvidia because we’re really not going after the graphics accelerators. If you take that view of the market, we actually say we’ve stayed pretty consistent. We don’t see the declines that CJ has talked about, but I can understand with Intel being such a big buyer in the back half of the year kind of propping up one of our other competitors in the space, how you kind of get lost in the 1.5 point share. I understand that.

We look at the markets knowing what we’ve done, knowing the customers we’ve won, knowing the products that get introduced and say we’re selling to customers today we weren’t selling to a year ago. And we haven’t lost any customers, so in theory as those customers ramp, that’s market share gains for us. So we kind of look at it, I hate to say, simplistically, but that’s the way we look at it.

David Dooley – Steelhead Securities

All right, thank you.

Operator

Thank you. Our next question comes from the line of David Wu from Indaba Global Research.

David Wu – Indaba Global Research

Good morning. I’m sorry, I was late getting on; but I have two quick questions for you. The first one is are there any more of those written off Sapphire HD that’s going to come in to help your gross margin the next six months? And second question I have is whether you—when you look at your business, is there a way to manage your business other than getting bigger that if we go through another cyclical downturn that you can achieve breakeven? In other words, are there any changes that you plan to make in your—refine your business model further so that either you get better gross margins at the same revenue level, or be broad enough so that the next downturn you’ll be able to achieve either cash flow breakeven or earnings breakeven?

Mark Gallenberger

Yeah David, it’s Mark. In terms of your first question as it relates to the Sapphire material, we did benefit the P&L several quarters ago and that bubble is behind us. So you would not expect to see that same kind of benefit to the P&L over the next six months. I can’t say for sure if we’re ever going to see that benefit again, but right now we’re not forecasting that kind of benefit for the next six months as it relates to Sapphire.

David Tacelli

Yeah, Dave, on the manage the business differently and change the P&L performance to drop breakeven, over the past three years we’ve made a lot of changes to restructure the Company but we continue to do that whether it’s good times or bad times, whether it’s up-cycle or down-cycle. And the reason we do that is we’re not looking for a short-term gain in any given quarter when things get bad; we’re looking to put things in place that are more systematic so that as we go through up-cycles, there’s additional leverage on the upside. And that’s happening, right? Mark talked about one of them which is the cornerstone of some of the things we’re doing now – the consolidation of outsource suppliers. There’s a host of other process changes that we’re in the midst of making that will have long-lasting effects. Will that get us to breakeven in the next down cycle? All depends on kind of where the revenue is. If the revenue bottoms out to where it is today, probably not. If we do the things that we expect and grow the business from this cycle to next, then I would say yeah. The goal is not to just be breakeven. The goal is to make money right through the cycle, and hopefully with the revenue and the growth and the P&L things we’re doing, we should achieve that.

So we are putting a lot of things in place. As most of the people, most of the investors know, we kind of under-promise and over-deliver on the P&L expense side, and that’s going to be our plan moving forward.

David Wu- Indaba Global Research

Thank you.

Operator

Thank you, sir. And our final question comes from the line of Christian Schwab from Craig-Hallum Capital.

Christian Schwab – Craig-Hallum Capital

Great, thank you. Just two quick questions – first, David, you never really answered the question on market share. What do you think—excluding high-end digital, what do you think your absolute market share is in ’11, and should the industry do whatever it does minus high-end digital, what do you think your market share is actually in ’12?

David Tacelli

I think if I exclude what I’ll call high-end digital, our market share is somewhere between 13 to 14%; and the plan for 2012 is to grow that two to four points.

Christian Schwab – Craig-Hallum Capital

Awesome. And then my last question is can you quantify for us, obviously without naming the customers, what these new programs and design wins over the next 12 months, should the economy not worsen, what you believe the value of those design wins could be worth? A broad range would be fine, obviously.

David Tacelli

Yeah, if you look at our overall objectives - and I’ll give you a little bit broader picture - if I said over the next couple of years, you heard us talk about 15 to 20 million in additional business we expect on the power management side. I think if you summed up all the expectation, you would be looking at a revenue upside of somewhere between 30 to 60 million on an annual basis.

Christian Schwab – Craig-Hallum Capital

Great.

David Tacelli

And I say 30 to 60, I mean, that’s a wide range. We’re looking to grow 20 to 30% over a two-year period, and of course in our target markets drive up our market share over that same time by five or six points.

Christian Schwab – Craig-Hallum Capital

Great, thank you. No other questions. Thank you.

Operator

Thank you. We have no further questions at this time.

Mark Gallenberger

Okay, well I just want to thank you very much for joining us today. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LTX - Credence's CEO Discusses Q1 F2012 Results - Earnings Call Transcript
This Transcript
All Transcripts