Eagle Test Systems F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

Nov.19.07 | About: Eagle Test (EGLT-OLD)

Eagle Test Systems Inc. (EGLT-OLD) F4Q07 (Qtr End 9/30/07) Earnings Call November 19, 2007 6:00 PM ET

Executives

Len Foxman - CEO

Steve Hawrysz - CFO

Analysts

Dave Eagan - Lehman Brothers

Dennis Wassung - Canaccord Adams

Kim Peter - Deutsche Bank

Chris CynkarCynkar - Banc of America Securities

Alec Berman - Silvus Capital

Jonathan Robohm - Gagnon Securities

Operator

Good day, ladies and gentlemen, and welcome to the FourthQuarter 2007 Eagle Test Systems Incorporated Earnings Call. My name is Nikitaand I will be your coordinator for today. At this time, all participants are ina listen-only mode. We will be facilitating a question-and-answer sessiontowards the end of this conference. (Operator Instruction)

As a reminder, this conference is being recorded for replaypurposes. I would now like to turn the presentation over to your host fortoday's call, Mr. Len Foxman, CEO. Please proceed, sir.

Len Foxman

Thank you, Nikita. Good evening and welcome to Eagle TestSystems' fourth quarter fiscal 2007 and year-end earnings conference call,where we will discuss the Company's fourth quarter results, which were releasedearlier this evening. I'm joined this evening by our Chief Financial Officer,Steve Hawrysz.

This call will begin with Steve handling some administrativeissues and then discussing our fourth quarter financial results and our firstquarter projections. Steve will then turn the call back over to me for somecommentary on our industry and Eagle's business. We'll then open up the call totake questions from the participants. For planning purposes, this call will endin approximately one hour from its start.

I'll now turn it over to Steve. Steve?

Steve Hawrysz

Thanks, Len. I'll begin by addressing some administrativeissues.

First, Eagle Test's press release, with our most recentfinancial results, was sent out via PR Newswire at the close of market today.And it is available at the Investor Relations section of our website or bycalling and leaving a message on our Investor Relations help desk at847-327-1033. This call is being simultaneously webcast over our website atwww.eagletest.com. A replay of this call will be provided on our site startingabout one hour after the call is completed. A telephone replay of this call canbe accessed by dialing 1-888-286-8010, or outside the US you can dial1-617-801-6888, and provide the pass code 45060850. Replays will be availablefor two weeks following the call.

Second, the Investors should consider the contents of thiscall as the official guidance from the Company for our first quarter of fiscal2008, which ends December 31, 2007. The Company has a policy not to updateguidance given on our call. However, if we do have any communications forpublic dissemination, our intent is to do so simultaneously to all investors tothe best of our ability. Investors should note that Len Foxman, our CEO, andmyself, are the only authorized representatives to provide Company guidance.

The items discussed today, other than historicalinformation, may include forward-looking statements related to future financialperformance and other performance expectations, which may include commentary asto revenues, demand for our product, operation spending, earnings per share andnumber of shares outstanding and other opinions of management. Investors arecautioned that forward-looking statements are neither promises nor guarantees,and involve risks and uncertainties that may cause actual results to differmaterially from those projected in those forward-looking statements. Some ofthose risks and uncertainties are detailed in our filings with the Securitiesand Exchange Commission, included on our annual report filed on Form 10-K,dated December 8, 2006, and we incorporate herein the discussions of those riskfactors. A copy of our Form 10-K can also be accessed through our InvestorRelations website.

I will now review the financial performance for the fourthquarter and fiscal year ending September 30, 2007.

Our results for the fourth fiscal quarter, representsresults for the three months that ended on September 30, 2007. Net revenues forthe quarter were $20.8 million, which is up on a percentage basis sequentiallyby 4.6%. Revenues for this quarter were down 43.8% from the same quarter lastyear, as demand for semiconductor capital equipment from our customerscontinues to be soft in the current year quarter period versus the same periodlast year. This is reflective of the semiconductor market conditions affectingour customers' demand for test equipment.

We reported net income for the quarter of $3 million,representing 14.4% of net revenues for the quarter, or $0.13 per common shareon a fully-diluted basis compared to net income of $9.3 million, or $0.44 perdiluted common share, representing 25% of revenue for the same quarter in theprior fiscal year.

The gross margin percent for our fourth fiscal quarter of2007 was 61.7%, down from the 62.3% gross margin reported for our June 2007quarter. This change in margin percentage primarily results from product mixbetween quarters. Our gross margin percentage, reported in the same period of ourprior fiscal year, was 62.9%, which also is reflective of our product mix shiftin the prior year quarter.

Operating income for the quarter was $2.3 million or 10.9%of net revenues. This decrease in operating income of $10.9 million from thesame quarter in the prior year was due to $10.4 million less in gross margin,as a result of lower revenues resulting from a decrease in demand and slightly lowergross margin percent. Also SG&A increased by approximately [$500,000]

SG&A expenses for the quarter that ended September 30,2007, were $8.2 million or 39.4% of net revenue, an increase of $470,000 whencompared to the $7.7 million, or 20.9% of net revenues, for the same quarterlast year. About $720,000 of this increase is related to sales, sales supportand application engineering, personnel cost, added in both domestic and foreignoffice locations from the prior year period.

Additional subcontract services of approximately $170,000were related to Sarbanes-Oxley testing and auditing for the current yearcompliance requirement that were not required in the year ago period. Theseincreases were offset by approximately $970,000 in lower incentives and commissionsdue to lower operating performance in the current year. A majority of theremaining changes in SG&A was driven by a recovery of $500,000 from doubtfulaccounting in last year's fourth quarter. The reversal of this reserved itemlast year caused a change in the overall SG&A expense line item.

SG&A for the September 2007 quarter was sequentiallyflat from the June quarter, overall an increase in our reserve for doubtfulaccounts of about $170,000 based upon our year-end analysis, and an increase inlegal fees of approximately $130,000, principally for foreign office employmentand compliance consulting. And an increase of approximately $140,000 in foreignoffice sales and application engineering costs. These increases were offset inpart by approximately $400,000 in lower warranty accruals, primarily driven byadditional warranty reserves made in the June quarter, which werenon-reoccurring in nature.

R&D expenses for the September quarter were $2.4 million,or 11.4% of net revenue, and remained unchanged from the same period in theprior year. Increased employee costs of $170,000 were offset by lowerprototyping expenses and R&D equipment related costs. R&D cost for theSeptember 2007 quarter also remained sequentially flat from the June 2007quarter. Increased employee cost of approximately $150,000, were also offset bylower material and prototyping expense.

Stock-based compensation recorded under FASB 123(NYSE:R) in thecurrent quarter was $222,000, thus not significant in the quarter. As such ithas not been broken out separately in our results.

Other income for the quarter was $1.4 million compared to$814,000 in the same quarter of last year and is principally due to investmentincome on cash and marketable securities available and invested. The increasein investment income was due to having more cash available for investments fromthe net proceeds of our secondary offering completed in September 2006 and cashgenerated from operations over the last year.

Our interest expense for the quarter was a credit of$247,000. And this credit and interest expenses primarily related to a reversalof $250,000 interest provision, related to a favorable ruling received on thetreatment of deferred revenues for income tax purposes. If you recall, in theMarch quarter we booked an interest accrual for a tax position the IRS wasreviewing, based upon the preliminary position on tax treatment of deferredrevenues, which was unfavorable at that time.

However, based upon our IRS conference, the Company'sposition on deferring revenue for tax purposes on systems not accepted by ourcustomers, has now been accepted by the IRS. The interest accrual for the IRSas a preliminary position was reversed in the September quarter, based uponthis favorable outcome to us.

Warrant expense was recorded in last year's financialstatements. However, since the warrants were retired in conjunction with ourinitial public offering, there is no longer a mark-to-market adjustmentrequired in the current year or quarter period. The prior year, year-to-dateperiod reflects a mark-to-market adjustment required under generally acceptedaccounting principles for the warrants, which led to a charge of $5.5 millionin fiscal 2006.

Our income tax expense was $876,000 in this Septemberquarter, reflecting a current annualized tax rate of 30.9%. The currentquarter's effective tax rate was 22.6%. Both the year-to-date and currentquarter tax rates reflect tax benefits and tax advantage interest income. This impactsthe Company and we will be able to utilize it in the current fiscal year taxreturn. The effective tax rate will vary based upon how significant thosepermanent differences are to our total taxable income.

For fiscal 2007, tax exempt interest reduced our tax rate by4.5%, and business tax benefits available to us reduced our tax rate by 3.5%.

Our quarter ending headcount was 351 total employeesworldwide, up from 345 reported in our June quarter. On a geographic basis, ourover 10% ship to countries in the September 2007 quarter were of the US, wehad shipments of 18.3% of our sales. Shipments to Malaysiarepresented 21.6% of our September 30, 2007 quarter sales, and Chinarepresented 13.3% of our September 30, 2007 shipments. The rest of the worldrepresented 46.8% of our shipments.

We are required to report significant customers who make upover 10% of our revenues. During the September quarter, we had three customersthat fell into that category. Texas Instruments added 31.3% of net revenue, IntersilCorp. added 12.8% of net revenues and STMicroelectronics added 10.6% of netrevenue.

While 10% of our customers represented 54.7% of our revenuesin the current quarter, this concentration of these 10% customers is down from lastyear and we only had one 10% customer that made up 56.3% of our net revenues.This quarter had a nice spread of revenues across customers, and so our firstdimension of STMicro made up just over 10% of our net revenues this quarter.

Our focus continues to be on diversifying our revenueconcentration. We continue to be pleased with our progress to diversify ourcustomer base signified by a variety in our 10% customer categories that madeup our 10% customers range.

On a fiscal year basis, we had only one 10% plus customerand that was Texas Instruments at 30.7% for fiscal 2007 and 52.9% for fiscal2006. The top five customers represented 58.3% of our net revenues in fiscal2007. And in fiscal 2006, our top five customers represented 76.7% of ourrevenues. Our dependence on our top five customers has been greatly reduced ascan be seen with the trend of increasing revenues from the non-top fivecustomers on a year-over-year basis.

For fiscal 2007, 41.7%, or $35.8 million of our revenue,came from non-top five customers, versus 23.3% or $28.9 million in revenue infiscal 2006. This is an increase of 24% in absolute dollars of revenuesgenerated from non-top five customers over the last year, thus demonstratingour progress and improving our customer diversity in very difficult marketconditions.

Moving to the balance sheet, we ended the fourth quarterwith cash and marketable securities of $112.5 million. This is down $200,000from the $112.7 million on June 30, 2007. This slight decrease resulted fromcash generated from operations of $772,000 in the quarter, which was offset bycapital expenditures in the quarter of $975,000.

The cash from operations for the quarter primarily reflectsthe net income generated from operations of $3 million plus depreciationexpense of $930,000 and $220,000 of stock-option expense, which are bothnon-cash items.

These operating cash increases were offset by use of cash todecrease taxes payable due to tax deposits made during the quarter ofapproximately $2 million, and an increase in accounts receivable net ofdeferred revenue and related to deferred taxes, which also used cash of $1.4million during the quarter.

CapEx during the quarter used approximately $975,000, asstated earlier, which primarily were used for the purchase of capital equipmentused by application engineers and production and R&D functional areas.

Accounts receivable represents 55 days sales outstanding,which is down from 64 days sales outstanding at the end of the June quarter.This decrease was attributable to a more evenly spread to system shipmentsthroughout the quarter versus the higher concentration of shipments thatoccurred during the end of the last month of the June quarter.

We ended the quarter with inventory of $22.2 million or 1.5turns. Net amount invested in inventory is up $2.3 million from the end of ourJune quarter. This increase in inventory is principally attributable to a $1.6million increase in goods shipped but not accepted at the end of the quarter,i.e., cost of goods sold related to the increase in our deferred revenue. Theremainder of the increase relates to the increased purchases for anticipatedsales of tester systems.

I will now move over to and offer some guidance for ourfirst fiscal quarter of fiscal 2008 and December 31, 2007. We estimate netrevenues will be between $25 million and $27 million for the quarter endingDecember 31, 2007.

The company estimates that earnings per share will bebetween $0.11 and $0.15 per fully diluted common share based on estimatedweighted average shares outstanding of 23,300,000 diluted common shares.

Our first quarter guidance assumes a continued normal systemconfiguration and instrumentation mix of product shipments and gross margins.SG&A spending should continue to reflect increased investments inapplications engineers, driven by a greater demand for sales and salesterritories for technical support resources.

R&D spending, which has been flat for last threequarters, will increase to reflect additional engineering resources andcontract engineering resources engaged to assist on projects. These additionalresources will likely drive prototyping costs and research materialexpenditures which will be higher than in the prior three quarters.

Our estimates also assume an annualized income tax rate of35%. Our guiding policy is to only comment on the current quarter based uponthe information available to us at the time we released our guidance. We do notprovide backlog or sales order information for the quarter completed, sincethis snapshot type information can rapidly change and we do not believe it is agood barometer for our business performance or the outlook for our company'sfuture performance, nor does the company anticipate updating its guidance priorto the next earnings release. However, if we do have any communications forpublic dissemination, our intent is to do so simultaneously to all investors tothe best of our ability.

We anticipate our next earnings conference call to be afterour auditors have completed their first quarter review and we have reviewedthose results with our audit committee. We currently anticipate that our firstquarter fiscal 2008 earnings announcement will be made around January 29, 2008.I will now turn the call back over to Len for some additional comments on ourbusiness before we open it up to your questions. Thanks. Len?

Len Foxman

Thanks, Steve. I am very pleased that Eagle remainsprofitable through the fourth and final fiscal quarter of 2007. Eagle has onceagain demonstrated the strength and reliability of its business model bydelivering four consecutive profitable fiscal quarters throughout this pastyear. Most importantly, we have been able to maintain profitability whileconsistently investing further in our customer expansion efforts and newproduct development.

As Steve already mentioned during the call, Eagle hascontinued to make notable progress with our customer expansion efforts and ourstrategy to broaden our product reach into other growth areas in the markets weaddress. Throughout the quarter, the company continued to invest in importantpersonnel and product expansion in order to support ongoing and anticipatedneeds of Eagle's growth.

Automotive, Power Management, high-performance analog deviceapplications, discretes and Power MOSFETs continue to be the main drivers of ourproduct sales. The company's products continue to gain momentum with customersthroughout the world and particularly in major new customers within Europe.

Our new high-power resources targeting the automotiveapplications, continues to proliferate the market and allow us to penetratethis focused market for more effective results. The enhanced features andcapabilities of this product enable Eagle to address the less volatile andincreasing growth areas within the automotive industry, which is an importantpart of our company's strategy to offset its exposure to volatile markets.

We have also continued to make positive progress, with thenew data converter testing products in production environments. We believe thatthis product condition will begin to contribute positively as soon as the nextfew quarters. We continue to remain confident about our potential for growth inall markets we participate in today, based on the continued acceptance of ourproducts at important large IDM customers, as well as the introduction ofmultiple new products with the capability to retrofit into our existinginstalled base.

Most importantly, the emergence of STMicroelectronics has asignificant 10% customer this past quarter. It demonstrates not only ourpotential for significant future growth, but also Eagle's ability to target andsuccessfully demonstrate valuable results for the largest manufacturers in theworld.

We believe that our largest customers' performance in theareas we serve provides continued strong potential for growth and we continueto invest in improving our service of this extremely important customer. Weremain cautiously optimistic about the conditions of the specific markets Eagleremains largely focused on for the last few quarters.

Although Eagle cannot control customer spending or generalindustry conditions, Eagle has remained focused on improving things within itscontrol, such as developing new products, to remain competitively ahead of thecompetition, and increasing and improving personnel to serve our customers.

These efforts have continued to serve us well to continue tocapture share of these markets. In spite of the extended period of conservativemarket conditions, Eagle posted another profitable quarter and continues todemonstrate the value we deliver to both our customers and our shareholders.

As our official guidance given by Steve earlier indicates,I'm very optimistic about the trend of Eagle's business. In spite of theuncertainties that prevail in our industry, we expect to see significant topline revenue growth in the upcoming quarter, and we believe that this is a goodsignal of positive things to come in fiscal 2008. We are committed to remainfocused on developing products that will help us expand and diversify ourcustomer base in those areas that will bring the highest growth potential. Ourconfidence is high, and we believe that Eagle is well positioned for growth asthe industry continues to move forward.

Ladies and gentlemen, if you would like to ask questions atthis time, I'm going to have Nikita give us the instructions, please.

Question-and-AnswerSession

Operator

(Operator Instructions) And you first question comes fromthe line of Dave Eagan of Lehman Brothers. Please proceed.

Dave Eagan - LehmanBrothers

Hey guys. Congratulations on the quarter. I guess firstquestion is, in terms of the increase in business, which is kind of differentfrom what some of the other guys have reported, where should we expect thatincrease is coming from?

Len Foxman

Well the increase is coming both from some of ourtraditional customers, as well as, what you saw indicated here with STMicroelectronics.As I think many of the people who watch us have [seemingly] talked about ourattempts to gain some traction within that company, and although we are alwaysslower than we don’t like to see, that’s begun to happen and you can see thatin the form of some of the revenue that we have started to built. The otherthing is of course our customers are primarily involved in various productareas that are, I think less susceptible to a fad if you will. Power managementis found in every product, and so we don’t have to rely on certain focusedsuccesses in the market if you will that I think some of the other people aremore sensitive to. So, what I would say is behind all of this.

Dave Eagan - LehmanBrothers

Okay. Your number one customer is planning to spend quite abit of money starting next year on a facility in the Philippines. How important do youthink that will be for you guys? Do you think that you'll have any exposure tothat?

Len Foxman

Based on what we’ve discussed with them and the businessthat we’ve made at our new location, I’m quite optimistic about our growingpresence in that area.

Dave Eagan - LehmanBrothers

Okay, fantastic. In terms of the cash balance that you guyshave right now, right now your stock is about 30% below the IPO price. Iwondered if you could discuss what you are thinking about doing with the cash,obviously you could do a buyback, which probably would have some positiveimpact on the stock, but are there other uses for the cash, say as going outand buying some digital technology that you could integrate with your testers,is there something like that that you might consider doing in the near term?

Len Foxman

Well, in terms of buying technology that would integratewith our existing products, for those people that have seen that attempt madeby other people over the years, it’s a very difficult process to go and buyspecific capability there. Traditionally, Eagle has done that developmentinternally, and you can rely on the fact that we're using the cash that we haveand the visibility we have through the benefits of marketplace to improve ourdigital performance.

More generally there are other potential technology addsthat could come in, that are more what I will call a free standing to theparticular product's platforms that we have and might be applied over a widerbase of customers. And we are keeping our eyes open for those opportunities thatare out there that have that characteristic [demand]. So, while the market isgoing through some of the contractions that its gone through, that makes someof these potential purchases all that much more inviting.

Dave Eagan - LehmanBrothers

Alright, great. I would think that you would find some veryattractive prices on things.

Steve Hawrysz

Yes. Dave, I've got to just add on, the Board in carryingout its duties have discussed the potential uses of cash. At this time thecompany believes that it's not fully evaluated all the variable strategicopportunities that we have in front of us. We believe that the cash affords thecompany a great deal of flexibility for potential investments or acquisitionsor complimentary additions to the products and technology. Should we not findthe adequate opportunities we know that the cash can be used in new stockbuybacks or cash dividends or whatever. But we don’t feel that we've evaluatedall those specific opportunities this point in time to comment specifically outof that. But we do think that its' a little bit premature to [add on] stockbuyback program at this point in time.

Dave Eagan - LehmanBrothers

Okay. Well I will just say that, I think there is probably alot of people that would welcome some type of actions to use the cash to createsome value.

Steve Hawrysz

No. We understand that. We are discussing that with ourBoard.

Dave Eagan - LehmanBrothers

Okay, guys. Thank you.

Len Foxman

Thank you.

Operator

And your next question comes from the line of Dennis Wassungof Canaccord Adams. Please proceed.

Dennis Wassung -Canaccord Adams

Thank you. Good afternoon and congratulations on theimproved outlook.

Len Foxman

Thanks, Dennis.

Steve Hawrysz

Thanks, Dennis.

Dennis Wassung -Canaccord Adams

I guess there are two questions. The first, at what point Iguess, when you look at the increased activity levels that you have herepointing to the sequential revenue growth next quarter, was that something thatyou were expecting? Was there a specific step-up in activity with your existingcustomers or was this really just progression of customer activities you hadongoing like ST?

Steve Hawrysz

It was a mix of both of those things. The announcements thatour largest customer made back in May of this year about the fact that theywanted to be growing market share and they are making financial commitmentsthrough engagement and that kind of thing. Time has passed since thatstatement. And as they do that and they position themselves to serve a larger marketshare, from my perspective, it was fairly predictable that we would see thepurchase level come up.

But the thing that we couldn't be certain of at that timewas exactly at what point would we start to see some of these revenuerealizations from ST. And so, the thing that should be most interesting wasthat these other companies came in above the 10% level, even though our largestcustomer during that same time was also growing in absolute dollars.

So, that will be my answer to you. The thing clear to usback in the summer that there was certainly the opportunity to this to happen.We never can predict it with a 100% certainty. The other thing is, of course,the automotive part of the market continues to be very strong and we do a goodjob of serving them.

Dennis Wassung -Canaccord Adams

Okay. That's helpful. When you look at ST specifically,obviously we had a nice increase here in the quarter, and first time at 10%.Can you say anything about the plan looking forward, as we look towards thisimprovement in your revenue line next quarter, is there a big component of STinvolved there as well? I mean should we expect them to remain in the 10%revenue level?

Len Foxman

I guess, without hedging it too much, we never know exactlywhat the other players are going to do. So, exactly where they might come upwith is, what I can say is that we believe we will be able to grow our revenuefrom this point with ST and we're putting a big effort into that plan. And so,how well is P&L related to the 10% number, I can't give you an absolutestatement about it. But, we are trying to grow them all, Dennis, and tellingyou exactly which one will come up faster than the other, it's a little morecrystal ball than we've got.

Dennis Wassung -Canaccord Adams

So, it's a good problem to have.

Len Foxman

Yeah. So, it’s a good problem.

Dennis Wassung -Canaccord Adams

I guess, last question for me, visibility in this industryis always a challenge, and I'm just wondering what your thoughts are beyond toDecember quarter at this point? We obviously seeing a nice move up with yournext quarter, when you look at the comments about investment that TI wants tomake, your strength at ST, is this the first data point in a positive directionor what can you say about that given the characteristics of the industry?

Len Foxman

Well, I think we started to get good indication of thepotential here really this last summer. And I still see that a lot of thatoptimism in those particular product areas is still present at our customers.And so, providing nothing comes along that would be out of our control,politically otherwise, as long as the economy can manage to hang in there, Ithink the projections that Steve has given you for this coming quarter, we feelquite confident in, and this should be a good and growing year for us.

Operator

And your next question comes from the line of Kim Peter of Deutsche Bank. Please proceed.

Steve Hawrysz

Hello, Peter.

Kim Peter - Deutsche Bank

Hi, Steve. So, my first question isbased on your revenue and EPS guidance, it looks like your operating expensesare going to go up pretty significantly in the next quarter. I was wondering ifyou could give us some color as to exactly where that increase is coming fromand will that increase be ongoing?

Steve Hawrysz

Yeah. I think you guys chanced to belistening to the conference call, there is a couple of things that ended up,was of having better EPS this quarter that were not normal items, one I had apick of interest income of about $250,000.

Tim Peter - Deutsche Bank

Are you saying that your operating expense is not going togo up significantly next quarter?

Len Foxman

I did not say that.

Tim Peter - Deutsche Bank

Okay.

Len Foxman

I'll get there. R&D expense, if you look at the lastthree or four quarters, our R&D has been flat, I've always been saying it'sgoing to be increasing. We've done a couple of things recently to bring in somecontracts, people to help us stay on track with some of our projects. So, wewould see some additional spend if I alluded to in my comments in theconference call in R&D. We will continue to invest in sales and marketingand application engineers, we expect that we need to for the growing parts ofour organization or we need to put people to service our revenue growth.

The other thing that happened this quarter was that I didnot have incentive accruals that I normally would have when I'm growing. Sotherefore, as I indicated in my comments, I was lower than my prior year byabout $900,000 on incentive accruals in both SG&A, R&D and in my grossmargin line as well.

So there will be additional incentive accruals that expectto hit our numbers and we achieve the numbers that we think we're going to doso. I mean those are kind of the main areas, those areas in the operatingexpenses as well as my tax rate, I don't anticipate my tax rate being what itis this quarter, a little over 20% effective tax rate. I expect that to be at afully tax rate of 35%.

So, there's number of things that, while it may not looklike I'm getting leverage out of my operating model, the operating model hasn'tchanged and that leverage is still there when we grow that money will fallright to our operating income line.

Tim Peter - Deutsche Bank

Great, thanks for that clearing up of detailed information.Next, I wanted to ask about your competitive position, maybe which are underthe third quarter. One of your competitors talked about gaining someopportunities in the high performance analog, get your largest customer. Couldyou speak to how that might have implications on your outlook?

Len Foxman

Well, at the present time it actually doesn't have anyparticular effect on our outlook here. The competitive situations are alwaysinteresting and, I think, as time passes, I think the situation will gain moreclarity.

Tim Peter - Deutsche Bank

Okay. Andlastly, I wanted to ask about the status update on your RF efforts. Are youmaking progress, are you satisfied with the progress that you are making in thatarea?

Len Foxman

I am not satisfied with the progress that we are making inthat area. However, it was really back in the September timeframe that we justadded a person to lead the RF marketing and sales effort. We have done someinitial customer contacts and presentations. Without exception we've gotten verypositive response from that and we are now pursuing those opportunities.

Let's say that the incubation period for the RF is probablya four to six month type of incubation period and tons of revenue that puts itout further than the six month area. But, we are gaining now some attraction inthis area. So following on that, I am pleased with the progress we made to-date,I think we are certainly looking at having better results in the coming severalquarters.

Tim Peter - Deutsche Bank

Great, thanks very much.

Len Foxman

Sure.

Operator

Your next question comes from the line of Chris Cynkar of Bancof America Securities. Please proceed.

Chris Cynkar - Bancof AmericaSecurities

Hi, Steve. Just to touch up on the guidance question again.Is the EPS number weakness mainly as it relates to OpEx and tax rates or is theresomething going on in the gross margin line?

Steve Hawrysz

Gross margins would be -- no, there isnothing on the gross margin line.

Chris Cynkar - Bancof AmericaSecurities

Okay. And more thing, I saw your accountreceivables in the quarter went up from 64 to 80, is there a reason for that?

Steve Hawrysz

Yeah. I point to the increase in our deferred revenues, sowe build the systems. However, it hasn't been recognized in the revenue yet. So,we had an additional deferred revenue of about $5 million. So, those would noteven begin to be collected and those will carry over into next quarter.

Chris Cynkar - Bancof AmericaSecurities

Okay. Alright. Thank you.

Steve Hawrysz

While receivables were up.

Operator

Your next question comes from the line of Alec Berman of SilvusCapital. Please proceed.

Alec Berman - SilvusCapital

Hey, how are you doing? Question, just generally, speakingobviously there is a lot of things that move your business up and down, butgenerally speaking, is there any real seasonality to it sometimes, in maybe theMarch quarter or something, where customers found their business or sort of aslowdown sometimes seasonally or is it just sort of irrelevant to what you see?

Len Foxman

If there is any quarter that tends to be the slowest, Iwould say, it's probably the third calendar quarter, not fiscal quarter, butthe third calendar quarter that tends to be the slowest. Although on a relativebasis, I'm not sure that it's all that significant. Years ago when the industryand the product, the semiconductor product was a much narrower type of product,there was a lot more seasonality, with every year that passes that's getting a[ameliorated], and its tending more towards no particular seasonality.

Alec Berman - SilvusCapital

Okay, great, thanks. Also just thinking about the operating expense again, doyou sort of see it as sort of spendings here? Because you are supporting morecustomers industry sort of link seeds for kind of growth in future quarters.Is that the way you sort of see the OpEx or sort of look back to maybe lastyear or maybe that quarters where you've had pretty big revenues and the OpExwas fairly low? So how do you sort of look in terms that it may be differentnow because you have more customers you are looking at or how do you lookingfrom a strategic standpoint or bigger 30,000 plus standpoint?

Steve Hawrysz

Yeah. I'll start off and I'll let Len comment following frommy comments. In the SG&A area, primarily in the sales and marketing area,when we go in and targeting area like Germany and Italy, we'll put a couple ofresource, we'll put a sales person out there with a couple of technical salesresources. As we start to get revenue in those areas, we'll end up having toexpand the amount of technical presence we have out there, so that we would endup doing more, spend in those areas.

Now, we just started going into those areas about a year anda half ago and now we are starting to see some successes in those areas, so wehad to add resources in those areas. So the way we do it is we target an areaspecifically that has customers so that we can get high concentrations of therevenue off. We'll put some resources out there and as we show success in thoseareas, we'll add more resources. So that's kind of how we've built our businessmodel over the years, so we just don't put people out there and say we'll putthem out there and the revenue will come. We put them out there strategically,then they have to build the revenue and then we will add more resource in orderto support that revenue. Does that make sense?

Alec Berman - SilvusCapital

Yeah, it makes a lot of sense. I guess because how you modelit, do you think in terms of like hey if we get $40 million in revenues, we'llneed to spend this much or does that sacrifice some place if we look at it or…?

Len Foxman

Yeah, we don't really modeled it that way, but I would saythat you look at your revenue and obviously now we are spending like over 30%,something over 30%, about 39% on SG&A and that is too high based upon therevenues we now have. So we have spent ahead of some of the revenue that willcome from some of the effort. We haven't spent way out of line with where wethink those will eventually come out. To bring it more in line with typicalSG&A like 28%-29%, 25% to 28% is more a typical level. So we don't try toloose sight of that, but we don't really build our business looking at thepercentages because of the cyclicality of revenue that we have.

Alec Berman - SilvusCapital

Right, you got to sort of you are proceeding newopportunities.

Steve Hawrysz

Exactly.

Alec Berman - SilvusCapital

Got it, okay. So one last question and I'll move on. Justalso say that along the idea of the use of the cash certainly would, yeah Ireally think you should look at dividend, I think it would be a way todifferentiate maybe you and people's mind versus maybe some other companies whotend to lose money in that periods. I think so you could have the ability topay dividend and make we want to look, but anyway just?

Steve Hawrysz

Yeah, this is a follow-on comment there. I mean we raisedthe money just over a year ago. So, we don't want to -- we don't want to shiftfrom hip too quickly and kind of use that cash for something other than what weintended when we raised it. But at some point in time, there will be decisionwe'll have to make and it will have to, if we don't spend it on strategicthings within the company, it will have to go back to our shareholders.

Alec Berman - SilvusCapital

Got you. Thanks a lot.

Operator

(Operator Instructions). Your next question comes from theline of Jonathan Robohm of Gagnon Securities. Please proceed.

Len Foxman

Jonathan?

Operator

Jon Robohm, please proceed.

Jonathan Robohm -Gagnon Securities

Hi, this is Jonathan Robohm from Gagnon Securities.

Len Foxman

Hi, Jonathan.

Jonathan Robohm -Gagnon Securities

Hi. I'm going to [pin on to] that last comment there. Ithink a dividend would be the exact long thing, your growth company, so usingmoney for a dividend at this level would be probably the worst mistake you canmake. So please take that into mind. As it relates to uses of cash, can youkind of scope for the market as to how many of these individual standaloneproducts and testers, either product with inside of an existing company orstandalone individual venture backed type testing companies are there out thereavailable for you to purchase?

Steve Hawrysz

I'll just comment about the dividends considering the numberof shares I personally own Jonathan. I don't know if dividend started soundmight be good.

Jonathan Robohm -Gagnon Securities

I think you've made a pretty good chunk of money over thetimeframe.

Len Foxman

No, none. The thing is, in terms of the venture-backedpeople today interestingly enough there is more of that available in thesoftware area than there is in the hardware area. And we may well see anopportunity to try to take advantage of some software technology that some ofthese companies have, that would enhance the feature set that we offer, theefficiency of the product in terms of development work that our customers do,or something that would allow them to get better access to the data in a very friendlyform that could help them pinpoint opportunities to be more efficient in theirown operation.

From a hardware standpoint, the integration of otherhardware is a pretty different situation and much more difficult to dosuccessfully, because other than just flat out buying a product and adding itinto the product line, its very difficult to see a hardware technology that wearen’t capable of developing in a timely manner here. And if we try to do thatwith other people's hardware, every piece of hardware carries along with it thesoftware question, which you then have to integrate into your own softwarebase. So, I'd say, that the opportunities in the software area actually,outstrip those in the hardware area.

Jonathan Robohm -Gagnon Securities

Fair enough. Going back to the OpEx, what should we assume agood leverage on the business, I mean, when you think about your businesslong-term, I'd say, previous peak revenue numbers, which were 125 in '06, what sort ofoperating income should we expect for this company going forward?

Steve Hawrysz

Well, I haven't actually given out a company business modelon that. I think it's at high-end of our operating model, least we saw uspushing 40% operating income. With the investments we made, I don't think, wewould have to grow our revenue beyond that to achieve those kinds of levels.But that leverage still does exists in our model at various points on thegrowth curve. I'd say amore typical operating income would be in either the high 20's or low to mid-30's,is kind of an operating income model that we think is definitely doable.

Jonathan Robohm -Gagnon Securities

And what kind of revenue number is it that you currently seetoday as indicative of that high20's, low 30's operating number?

Steve Hawrysz

Jonathan, I have been giving you projections and my revenuesand my expenses at the same time and I don't do that in a call.

Jonathan Robohm -Gagnon Securities

Fair enough. Thank you very much.

Len Foxman

Thanks.

Operator

And your last question comes from the line of [Chris Cynkar]of Banc of America Securities. Please proceed.

Len Foxman

Hi, Chris.

Chris Cynkar- Banc ofAmericaSecurities

Hey, Len. I had a question for you with analog guysincreasing backend spending, what in your view would be, if you can quantify itbackend analog CapEx in '08 versus '07?

Len Foxman

I'm sorry. I didn't catch the last part of that question?

Chris Sinclair - Bancof AmericaSecurities

What do you think will be analog CapEx for backend in '08versus '07?

Len Foxman

I think from our perspective that's going to go up. I see alot of drivers right now, that are going on and the thing that happens here andit's easy to lose track of it. Our customer base sells products that areconstantly under price pressure, but the reality is that while they are doingeverything they can to trim back the CapEx, the capacity demand is expanding,because the products are proliferating into a lot more areas than they did justa few years ago.

So, the thing is we saw testers based on the unit count thatthey need to process in their revenue stream. And so we still see plenty ofgrowth available in the backend. The other thing I would tell you is, while weoften talk about the IDMs in these discussions, we are going to be making asignificant effort to improve our presence and breadth in the subcon area. Wehave quite a number of subcons already but we're going to take a more activerole in trying to increase our selection and participation in that part of thebusiness.

And traditionally, this will bear out, some of our IDMs alsowanted to go into he subcons as well. So, there is plenty of opportunity hereto expand the business level on activity and the subcons still are enjoyingquite a bit of business based on the very high proliferation on differentpackages that need to be dealt.

Chris Cynkar - Bancof AmericaSecurities

Is the focus on subcons going to be happening pretty soon oris it going to be like a long-term plan?

Len Foxman

Well, it's something that we are going to begin doing herein a very short-term. How it will actually play out into the revenue stream,nobody can give any guarantees on this But we are doing more to have technicalsupport for those customers as well as more direct sales contact with thosecustomers and working with the semiconductor fables elements and so forth tobring more of that products on to Eagle platforms.

Chris Cynkar - Bancof AmericaSecurities

Is it fair to assume your subcon revenues are under 10%right now?

Len Foxman

Yes, it's under 10%.

Chris Cynkar - Bancof AmericaSecurities

Thank you.

Steve Hawrysz

Yeah, the other important part to point out there is that,there was an announcement that went out by White Mountain Labs that they arebuying one of our testers and they do a lot of work for the fables guys.

Len Foxman

But we've gained traction on a number of places. We just hada very nice customer added in Koreathat is primarily funded through the Korean government. We wants to get moreinvolved in the power management product areas and developments and they endedup selecting a platform for that. So, you can look around and we are doing ourbest to put more dealers out into these areas and broaden our customer base.

Operator

There are no further questions at this time. I would nowlike to turn the call back over to Mr. Len Foxman for closing remarks.

Len Foxman

Thanks very much. I'd like to take the opportunity to thankall of you for attending and participating in our fourth quarter earningsconference call for fiscal 2007. We are pleased to give you the results of ouroperations for the quarter and answer your questions and we remain committed toaddressing our opportunity in the ATE market with the differentiated technologythat we bring to our targeted customers, key products markets and geographicregions that we are aggressively pursuing.

As Steve stated earlier, we'll endeavor to communicate anyadditional information simultaneously to all investors to the best of ourability. However, it should also be noted that we are under no obligation toprovide an update to the information presented in this call. Thanks once againto all.

Operator

Thank you for your participation in today's conference. Thisconcludes the presentation. You may now disconnect. Have a great day.

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