Rich Yerganian - Director, IR
CJ Muse - Barclays Capital
LTX-Credence Corporation (LTXC) BarCap Global Technology Conference December 8, 2011 3:30 PM ET
CJ Muse - Barclays Capital
My name is CJ Muse with Barclays Capital. I guess welcome to one of the last sessions of our conference. It my pleasure to introduce Rich Yerganian, Director of Investor Relations with LTX-Credence. And with that, I will turn it over.
Okay. Thank you CJ. I am here with David Grace too. He is the Vice President of Financial [Group], he is responsible for managing our relationship with our partners, Spirox in Taiwan and China. So, he will available for answering questions following the presentation as well.
Certainly, you know, Safe Harbor statement, in these times, these are very helpful statements. Because it’s very difficult to know where the industry is going, or business is going, and I encourage you all to familiarize yourselves with the risks associated with investing in our industry, our business, our company.
Okay, on to the more interesting things. So, you know, what I’ll start out with is just a little bit of an overview. First question on everyone’s minds, what do we think is going on with the industry, from a industry perspective in our last conference call, just a couple of weeks ago. We felt that our January quarter represents, what we think will be the bottom for the industry. As we’ve said in on some of our customers or semiconductor presentations over the last day or two. They’ve been basically calling the bottom, although, not sure where we go from here and I think that’s pretty consistent from our perspective. We believe that we are at the bottom of the cycle, given our expectations for the January quarter and what is unclear is, do we go up from there or do we stay at these levels for some period of time.
The interesting thing, from our perspective is that, our business will be purely driven from the macroeconomic environment. We’ve a very, very strong and broad portfolio of customers. We have a great line up of products that are being very well received in the market place. You may have noticed yesterday morning, we had a press release on a company ANADIGICS adopting one of our newer products for RFPA testing looking forward. So from the product and customer portfolio perspective, we are very encouraged and our growth will be based on an improvement in the macroeconomic environment. And finally the business model is one that the company has really refined over the last several years and it is continuing to refine just to give a little bit of insight when we merged with Credence in August of 2008, the combined company in the first quarter, to breakeven on a net income basis, we would have required a $180 million in revenues.
As we finished the integration process and restructuring and as we sit here today that breakeven is down from a $180 million to about $44 million in revenues to breakeven and on EBITDA basis, just as impressive at the time we merged with Credence it would have been about $88 million a quarter in revenues to breakeven and today we are at about $35 million. And we’ve maintained the discipline in that business model throughout the up cycle that we went through over the last couple of years and you will see it perform equally as well as we go through this down period in the business environment.
And then finally our balance sheet very strong and we will show you a little bit later on that, but from an overall perspective, whether it be customers, products, business model, balance sheet, the company is in a very, very strong position and our focus is on continuing to find ways to grow the topline. You know as a company, as an industry, the semiconductor test equipment market is broken, it’s a two major pieces, memory test and non-memory test and for calendar year 2010 product revenues were about $2.3 billion for our industry.
That's going to be down significantly for calendar year 2011. Of course we have to wait to see what it plays out to be, but a lot of customers right now are coming into about $1.8 billion compared to the $2.3 billion for 2010. But for us we focus on only the SOC side or the non-memory part of the semiconductor market and even within that space it can cover a broad range of purely analogue to purely digital and every combination in between. For us we focus on five specific sub segments of the SOC space, micro controllers, power management, application specific products, data convertors and RF power amplifiers.
And in 2010 that was about $1.5 billion in product revenues, and basically represents about 70% of the overall SOC market space. So for us the addressable part of the SOC space is about 70%. The two easy ones to point to that aren't included in our target markets are microprocessors and graphics processors. Those are two easy identifiably market segments that we do not aggressively focus our solutions on.
Looking at our target markets a bit more granularly, we could see on this chart that there is a series of columns, probably the most important one on this chart is the one that's unit volume CAGR, compound volume growth rate. What that means is we are looking at market segments with at least 11% compound annual growth rate through the next five years from a unit volume perspective and that is key because for our equipment it is purely driven by unit volume.
So the more devices that our customers make, the more test equipment they require, the more testers that we sell. When looking at each market segment from estimate on what the size of the test equipment market size was, you can see here the application specific market is by far the largest and where we have the smallest amount of share, but the other market segment are ones that power and micro controller in particular are important targets for growth for the company in ones that we have pretty good share position in ones that are growing fairly steadily for us.
In our industry there are three major vendors left and we are the smallest of the three, but when you look at the specific market segments that we’re focused on. We’ve very strong positions in some and where those are number one and number two in four out of five and certainly the smallest market segment is one that we want to focus a lot of our efforts on in improving that share over the coming years.
We have three major product lines, the Diamond X-Series and ASL, each of these are focused on primarily on a specific sub segment of the market. So the Diamond is very strong in the micro controller space and touch screen controller space as well as into the more digitally oriented basic type devices, the things that may go into a digital camera or so on and so forth.
The X-Series is more broadly based in terms of very various market segment. So there is some micro controllers that have specialized RF or power requirements. So those would be the ones that will find their way on to an X-Series, also a lot of the basics that are more mixed signal or RF related would be in that platform as well as our RF front end test and data convertors and so forth. The ASL platform is the one that is focused on the lower complexity power management type devices. Interestingly enough, that will be in an area that people say, one day you have some insight as to when things are turning around.
Historically, the low end analog part of the semiconductor market is what has turned on first in terms of the beginnings of a recovery mode. So our ASL product line typically leads the way in terms of increasing levels of demand on that product line, that is kind of four on two or recovery in the overall industry and no we haven’t seen that dynamic happen just yet. We’ve looked at the market from a technology perspective. Now what are the end market drivers and there are three major drivers to our business, the automotive space is a growing part. It represented about 22% of our revenues back in calendar year 2010, handsets also in the 25% range and again this may be touch screen controllers, it maybe RF power amplifiers, it may be power management.
So all those different technologies find their way into each of these segments. The consumer one is by far the largest, it is a basically catch all for things like digital cameras, tablets I would put into those category. It could be semiconductors that make their way into smart refrigerators and so forth. So basically our industry overall in ourselves are consumer driven, whether it be an automobile, consumer product or handsets, very important driver is the sentiment of the consumer or the behavior of the consumer.
I mentioned earlier we have a very strong portfolio of customers and a growing portfolio of customers. This slide has basically broken down into three sectors that give you a flavor. It is certainly not all inclusive, but to give you a flavor of the type of companies that we do business with. The top two lines, companies like a TI or NST or Maxim or Atmel and so forth we refer to as IDMs or integrated device manufacturers. Atmel and TI have been graded in 10% customers for us the last two fiscal years, our fiscal year ending July 31st. ST is also a very important and growing customer for us as is Maxim and Renesas out of Japan.
The middle third of the slide refers to what we call fabless companies. These are companies that design and market their own products, but they outsource all the manufacturing, the fabrication and the assembly and test. You could see here a list of various end markets from Power to RF to home networking, a wide network of end markets, geographic locations, you will find companies in Taiwan and China. You will find companies we do business with in Europe and the US, so a very wide range of end markets and geographic locations and then the bottom of the market is all we refer to as OSATs or Outsource Assembly and Test Providers that provide those test services to those fabless companies into a degree to IDM manufacturers as well and these are all the major IDMs throughout the world that we have a pretty good level of business with.
Moving on to the financials, this is a chart that shows you the progression of the company revenues and gross margin since we combined with Credence, so it starts with the very first quarter. You can see that we are looking at revenues almost back down to where we were back in 2009. So a very, very sharp pull back over the last quarter into this quarter. Certainly something that I think, so a dramatic a pull back was not expected but what we did is when we combined with Credence and restructured the company we built a business model that is very variable in nature, takes into account that we are in an industry that does go through very severe changes, both to the negative and to the positive.
You can see we peaked out at $76 million in revenues at 62.5% gross margin and even coming down to $34 million, dropping $30 million in revenues and we are still able to achieve gross margins north of 50%. If you go back in the early part of the last decade you are looking at an industry where gross margins at the peak of the cycle would peak out at roughly 50%. So a very, very strong business model with great leverage on the upside. This breaks down what we've done on a quarterly basis over the last four quarters and reiterates for historical purposes only our guidance for our second fiscal quarter which ends January 31 and a very strong gross margin performance and EBITDA performance. Last fiscal year we generated over $70 million of EBITDA.
So a very, very strong performance about 28% of our revenues and on a net income basis a very strong performance as well as the model that we tell investors to look at our business for, is that for every dollar above our breakeven level that you could model 60% of that dollar going to the gross margin line and 50% going right to net income. So a very strong business model that can generate a lot of profitability and a lot of cash.
From a balance sheet perspective, another great story here; when we merged with Credence, Credence came over with a 122 million of convertible debt during the year 2009, I think we bottomed at about 4.5 million of net cash. We had somewhere in the mid range of 85 million of cash on hand and about 80 million of debt as we had continued to buyback some of that debt. You know today, we stand here with a 153 million of cash at the end of the last quarter, no debt and a very, very strong balance.
The way that we’ve talked to investors about how we look at the balance sheet, we view 70 million is about the number that we think is appropriate to have as a buffer going into any kind of extended downturn to ensure that the business is very solidly supported.
About 70 million to about 140 million, we view that is funds that we would like to have available for strategic investments. Things that could help accelerate share gains in our target markets and above the 140 million level, we would you know consider ways of returning that to shareholders and in our September Board Meeting there was a $25 million share buyback program approved by the Board that is open ended in terms of time and is something that we’ve already purchased about, approximately $5 million worth or 25 million of stock and so we will continue to look at that moving forward.
This model here at different revenue points gives you sense for what we’re able to achieve on that 60-50 model guidance. If you look at the $75 million quarterly revenues and what we have there for our estimates, and what we can perform; if you go back a few slides the $76 million, we far outperformed this. So you know we look at this as somewhat conservative, but to give people an idea at different revenue points what the company could perform at.
And that’s the presentation; I’ll open up for questions, but just summarizing, you know market conditions remain difficult at the time being. As a company, we are very well prepared to weather the storm. We have a new product that we’ll be introducing in the first calendar quarter of next year that we are very excited about. We have a really strong list of customers and an expanding list of customers we referenced on our last conference call an important new win for us and we’re very excited about that win as we move forward and we have other ones that are ongoing as well.
Even though the revenues in the top-line and the industry conditions may be difficult, there is no shortage of opportunities for setting the company up for expansion as move into the next flip cycle and we’re very encouraged about our opportunities to do that even as we go through these tough times from an industry macro-condition level.
So with that, I will open it up for questions.
You mentioned you have a strong position in the touch market? Just wondering, who are your customers are there outside of Atmel?
Atmel is the primary customer for us in that market segment. Like I said, they have been our largest customer over last couple of – well, two fiscal years ago they were our largest customer last year. They were greater than 10% company for us.
You had a great slide there where you talked your market share at various sub-segments in touch. I am curious given what we’ve heard at the conference and mid-quarter updates, comp industrial have weakened and smartphones to the right guys have no one I guess the strong point. Curious, you know based on those sub-segments, how do you see the recovery off of that January bottom given that backdrop and which sub-categories do you think will shine and what do you think will underperform and how should we therefore think about the trajectory for you guys at the bottom end?
So I think from a, which ones where we expect to see initial recovery in first, I would suspect that the analog-power would be the early indicator, because historically that’s the one that has shown recovery for us. So that’s one that we’ll be closely monitoring to see you know how that kind of business is trying to come off the bottom.
From a little bit longer view in terms of all those five market segments which are the ones that could represent the higher growth levels for us moving in through the next cycle; you know, I would say that we think the microcontroller space is one that we – we’ve had about 20% share; we’ve targeted 30% share over the next – by the end of the next year or so I think that’s one that you know we should be able to achieve that if not surpass that target. We’re very excited about our opportunities there.
I think the power management market is probably the second market that has the level of growth potential for us from a gaining share within that particular market segment. We’ve had some very good traction with some of our products here. The ASLx that we introduced last year as an extension to our ASL product line has been very well received in the marketplace.
And then I mentioned the new product we’ll be introducing in the first calendar quarter of next year, that’s primarily focused on improving our position in what is our small share won which is application specific area and we think as we approach the market like we have the other market segments which is the overall riding factor is being able to deliver our customers the lowest cost solution for testing their parts, that product will be hitting the sweet-spot for how long we have to gain share. And a part of that market segment that we have not currently been participating in.
The RFPA market is one where from a commercial supplier we dominate that market today, so that will be more as that market grows, we will grow along with it. It’s not a share gain story for us there. And the data convertible market segment is a pretty small one, but what’s important about that market segment is that it’s a technology leader, so it’s an entry point in to companies that make high performance data convertors of which our solution is better than anyone else is on the market. Those companies make a much broader portfolio of marketable products.
So our goal is to show differentiating technology for testing these high performance data convertors and then once adopted, be able to use that leverage or use that as an entry point into getting other markets and product lines on to other, our test platform. So that would be kind of the way I would look at it moving forward.
If I could just follow-up on that; you talked about the trends that you are seeing both in the RFPA and in touch; and I guess over the last couple of quarters and how you see the trajectory from there?
Yeah, I am specifically not going to comment on any one particular customer. So I just want to start with that and make that clear. I think in the RFPA market there has been you know there has been some customers that I think clearly have been disappointed that their own business you know didn’t you know materialize, you know I’ll give you an example of one customer that back in the summer timeframe was very much expecting a ramp in their business over the back half of the calendar year, and we’re talking to us about you know pretty good number of machines that they would need for capacity purposes.
That bounced around over a couple of months period of time from meeting a lot, to meeting none, to meeting one, so I mean, I think you know the market conditions right now are conducive to a lot of certainty and that’s been no matter what the market segment, I think there has been a lot of lack of confidence on where the business is heading and therefore the first thing that customers will do in our industry is pull back on capital purchases with any degree of certainty. And especially, in an industry where now we’ve all gotten very efficient at being able to deliver product on short (inaudible). Our industry is very different from the front end.
In test, we can deliver product in four to six week time period from the time a customer tells us they need the product and that can be delivered in the morning and one in volume production in the afternoon; that’s a very different dynamic then and the fun end part of the business where you have a long gestation period for getting you know getting a fab up and running or getting a line up and running.
So the good news is that those shorter times from one customers needed to one they actually get it from us means that we should not get out of a deep alignment in terms of what the capacity requirements are and what I mean by that is, if you look back to the year 2000 when lead times were in the 14 to 16 week period on average across all of the vendors, what happened then is we shift in a whole lot of excess capacity that by the time our customers realized business conditions were changing dramatically, there was already a whole bunch of capacity added to the market that wasn’t needed. The end result of that was that our industry did recover till almost two years later when that capacity was finally absorbed.
You fast forward to today is even what significant drop-off in revenues, our utilization rates in our equipment is still staying in the 70% plus range, so this is more of a – I know it’s a bit of semantics, but this is more of a demand driven slowdown rather than a capacity driven slowdown. So it’s not like we shipped a whole lot of capacity to the marketplace to wasn’t going to be needed, we shipped what was needed. But then demand fell off; so as that demand comes back, it should very quickly, I would expect within a quarter’s time, as our customer start seeing improvement in their business, I would expect our industry to start seeing that benefit very shortly thereafter.
Rich, how big can the application specific get, I mean is the goal to get it to sort of that 20% industry share and what do you have to do to get to number two or what can you do to develop a little faster if anything?
Well, that size, that’s about $1 billion market in our space. So for us to go from 70% to 20% well it would be very nice to do that; I mean that’s a pretty you know major leap. And I think that to achieve that is certainly possible, but more a longer term in nature for us to get to that point.
Our goal is much more modest than that. So you know our goal is, you know if we can take that 7% up you know anywhere from you know about 10% to 15% that can have a significant impact on our revenues, even 10% just a few points of share there with our business model can have a dramatic impact on what we’re able to deliver on from a financial performance.
So you know we’re very excited about, you know the products that we have and the ones that are coming for us to be able to you know be a player in that market much more so that we have been today. And again, you know I want to be a little clear, so that’s $1 billion market and even though we show as that’s one of our addressable markets, the reality of it is, with our product line up as it has been today, we’ve been addressing only a portion of that $1 billion and what this new product will do is open up a much larger available tem within that particular market segment.
C. J. Muse - Barclays Capital
Move to breakout.
Very good. Well, thank you very much.
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