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

Executives

David Tacelli - CEO and President

Mark Gallenberger - VP and CFO

Analysts

Mehdi Hosseini - FBR

Dave Duley - Merriman Curhan Ford& Co.

Dave Egan - Lehman Brothers

Patrick Ho - Stifel Nicolaus

Mike Crawford - Riley InvestmentManagement

LTX Corp. (LTXX) F1Q08 (Qtr End 10/31/07) EarningsCall November 20, 2007 4:30 PM ET

Operator

Good afternoon, and welcome toLTX Corporation's First Quarter Analyst Conference Call. During thepresentation, all panelists will be in a listen-only mode. Afterwards, we willconduct a question-and-answer session. (Operator Instructions) At the requestof LTX, this conference is being recorded. Speakers today for the call will beDavid Tacelli, Chief Executive Officer and President and Mark Gallenberger,Vice President and Chief Financial Officer.

At this time, I would like toturn the conference over to Mr. Mark Gallenberger. Sir, you may begin.

Mark Gallenberger

Thank you, Stacey. Welcome to LTXCorporation's first quarter fiscal year 2008 conference call for the periodended October 31, 2007. Joining me on today's call is Dave Tacelli, CEO andPresident. After my introductory comments, Dave will discuss the company'sperformance for the first quarter and discuss the business outlook. Then, Iwill provide further detail on the company's financial performance during the firstquarter of fiscal year 2008 as well as provide guidance for LTX's secondquarter of fiscal year 2008. We will take your questions after our preparedremarks.

Today's call will lastapproximately one hour. A replay of this call will be made available through December19th by dialing 888-286-8010, and the passcode is 12766938, or you can visitour website at www.ltx.com. As a reminder, the only authorized spokespeople forthe company are Dave Tacelli and myself.

Now, for our Safe Harborstatement. During the course of this conference call, we may make projectionsor other forward-looking statements regarding LTX's business outlook or thefuture financial performance of the company. We wish to caution you that thesestatements such as projected revenues, earnings per share, operating expensesand gross margin are only predictions and that actual events or results maydiffer materially.

The guidance provided during thiscall represents the company's estimates as of this day, and the company assumesno obligations to update this guidance. Please refer to our Safe Harborstatement in our earnings release for more information on important factorsthat could cause actual results to differ.

Now, on to the call. Dave?

David Tacelli

Thank you, Mark, and goodafternoon, everyone. Our first quarter results met our revenue expectations,and our business model performed better than expected. Product orders are upslightly, which further supports our view that the industry has reached thebottom, but no significant inflection point has been achieved.

During trough periods, ourcustomers focused on extending the utilization of their existing capital whileholding off spending until there is clear evidence that business levels willincrease. As a result, our second quarter guidance suggests that we see atleast one more quarter at trough level. Utilization remained high, but ourcustomers are waiting for order patterns in their end markets to increase. Whenthat happens, capacity buying will return.

Our first quarter business mostlyconsisted of additional engineering development purchases, especially as newX-Series instruments broaden our addressable market. In fact, we will be introducingthree significant new products this quarter with all three already purchased bymultiple customers.

Fiscal year 2008 will be the mostimportant year for new product introductions at LTX since the launch of theX-Series. From an operational perspective, we continue to lower our breakevendue to good cost controls, favorable product mix and better margins, even as weselectively hire and expand at the geography close to our growing customerbase.

Among our accomplishments for thefirst fiscal quarter were the following: We won a next generation RF decisionfor a major division of a European IDM. This followed a win at the same companyin a different division about one year ago. We established a direct sales andsupport office in Shanghai,a growing and important market for LTX, especially for low cost RF, mixedsignal and power devices.

We completed the next step in ourinfrastructure reorganization by moving our Silicon Valley R&D center from San Jose to Milpitas.This will save the company over $1 million annually. We paid off the finalinstallment of our $150 million convertible debt leaving the company with only$20 million of bank debt, our lowest debt level in years. And we won asignificant decision inside our largest customer, providing us with anopportunity to expand share into that customers' high performance analogdivision.

Now, I'll review the firstquarter. Revenue was $29.6 million in line with our original guidance of $28million to $32 million. Even with revenue at the lower end of the guidancerange, our business model delivered better than expected gross margin ofapproximately 49%, resulting in a net operating loss of $0.06 per share, whichwas better than expected at this level of revenue.

The business model is performingvery well, and our expectation is that as business conditions improve during2008, the leverage of additional revenue will drive very good profitability andsubstantial positive cash flow.

Bookings for the quarter were $30million, with product orders up 3% sequentially. Historically, any sequentialgrowth in product orders in our first quarter over our fourth quarter has hadpositive implications for the balance of the fiscal year.

On the manufacturing front, ourtransition of Jabil manufacturing operations from Massachusettsto Jabil's facility in Malaysiacontinues to be on track with boards manufactured in Malaysia now part of our productionline.

We expect to be on plan with allX-series products shipping directly from Jabil, Malaysia byAugust of 2008. While our business model has been solid at these low revenuelevels, the real question is how LTX will generate significant top line growthso that the business model can deliver the leverage and profitability it'scapable of.

I see three drivers of top linegrowth in the next cyclical recovery in our industry. The first driver will bea production ramp with our existing customers won over the last two years.These customers have been adding significant engineering capacity but are justnow at the early stages of bringing most of these products to production.

One particular customer has over80 new devices planned for release in 2008 on the X-Series. Another major IDMis in a similar position where new product development is focused on theX-Series leading to a continuous stream of product releases during 2008 thatwill drive capacity requirements.

We would expect that these twocompanies alone are capable of driving over 50 production tests during calendar2008, which is incremental to any expansion of business at our largestcustomer. The second driver of top line growth will be fueled by recent andcoming introduction of key new instruments for the X-Series. These newinstruments deliver performance enhancements to our industry leading low costRF test solutions, create new power options for the power management automotivemarkets and offer new digital pin options that deliver high-speed testcapability for digital technology such as USB 2.0 and DDR-2.

In fact, we have already receivedmultiple orders from new and existing customers for these products totalingseveral million dollars. And as with any new instrument that we introduce, it'simmediately available on all X-Series configurations because of our strategy ofmaintaining a consistent architecture throughout the product line. The thirddriver of top line growth will come from new customers recognizing thetechnology differentiation of our current and future test solutions.

One new technology, inparticular, which I can only briefly mention since we are in the process ofapplying for several patents, won us a major decision at our largest customer.The technology we demonstrated was clearly ahead of any competitive offeringsand as a result, opened up a major new market for LTX in an area where we had noprior business. This new capability has also been purchased by several othercompanies where we won technical benchmarks against the number of incumbentcompetitors. I will expand more on this new instrumentation in futureconference calls.

Recent enhancements to our RFtest capability for the X-Series are having a positive impact on our ability todramatically lower the cost of tests and improve the test performance for RFdevices. We firmly believe that no other vendor can approach the performance orcost to test model we are now delivering to the RF market. As many of ourcompetitors look to launch new and unproven RF solutions, LTX continues toexpand on our technological lead in the market by enhancing both theperformance and cost to test build off our leading-edge test solutions, whichare already adopted in the marketplace.

In recent benchmarks, we continueto demonstrate superior performance, lower test times and a significant through-putadvantage, even against recent product introductions by our competitors. Theresults have been several customers switching test platforms from competitors'testers to the X-Series. When you consider the entire package of technology incost to test, the LTX solution consistently outperforms the competition.

So to summarize, our top linegrowth, which we expect to accelerate during year 2008, will be driven byexisting customers transitioning from engineering development into volumeproduction, new instruments and capabilities driving broader marketpenetration, and new customers recognizing the leading technology and cost totest benefits the X-Series can provide them.

As for the overall businessdirection for the industry, we believe that a sustainable growth cycle shouldbegin during calendar 2008. Although it's too difficult to predict with anyconfidence of exactly when this inflection point will occur, we are optimisticthat as business conditions improve, LTX will deliver above average top linegrowth.

For LTX, we will continue tofocus on three things, directing our efforts on customers that can add the mostto our top line growth, developing the products and delivering the applicationsthat these customers require, and continuing to drive a lean business modelthat can deliver profits cross cycle.

In summary, we have an excitingmix of new products that we will introduce in the coming months, and we areconfident that these instruments will create new market opportunities for LTX.We expect several major customers to begin deploying multiple production testersin the coming quarters, which should provide a boost to our top line. And wecontinue to develop leading-edge technology that directly leads to new businessopportunities, like the one that I mentioned in our larger customer.

In short, our product strategyhas great momentum in the marketplace. Our operations are efficient, and ourbalance sheet is sound.

I would now like to turn the callover to Mark for his detailed comments on the quarter. Mark?

Mark Gallenberger

Thanks, Dave. Total incoming orderswere $30 million, which is up 20% from last quarter. Revenue for the quarterwas $29.6 million, which is slightly down from last quarter's revenue of $30.1million. Gross margin was 48.8%, which is up sequentially by 230 basis pointsdue to favorable product mix. Operating expenses were down from last quarter aswe maintained tight controls over all expense items.

R&D spending was $11.6million, which includes $280,000 in stock-based compensation expense and wasdown $350,000 from last quarter.

SG&A was $6.5 million, whichincludes $666,000 in stock-based compensation expense and was essentially flatfrom last quarter.

Net loss for the quarter was$224,000 or $0.00 per share on a GAAP basis. Excluding a one-time benefit of$3.3 million from the reversal of a tax reserve, the net loss for the quarterwas $3.5 million or $0.06 loss per share on a non-GAAP basis.

EBITDA was a positive $380,000for the quarter. The EBITDA calculation excludes depreciation and amortizationof $3.1 million, net interest income of $216,000, stock-based compensationexpense of $972,000 and the one-time gain of $3.3 million for the reversal ofthe tax liability.

Based on Q2 guidance, we expectEBITDA to break even for the January quarter, which would be the 11th quarterin a row for EBITDA to be break even or better.

Next, I'll provide a breakdown ofbookings and revenue for the quarter. 81% of bookings were from IDMs, while 19%came from subcontract test and fables companies. 81% of bookings for thequarter were for product and 19% for service.

In terms of revenue, 84% camefrom IDMs while 16% came from subcontract test and fables companies. 77% ofrevenue was for product, 23% for service.

Now, onto the balance sheet. Weended the quarter with gross cash of $61.7 million and net cash of $41.7million, which is down approximately $9.6 million from last quarter. Thereduction in total cash was primarily driven by the pay down of our remainingconvertible debt and accrued interest of $29 million on August 15.

So, our remaining debt now standsat $20 million of bank debt, which is scheduled to be paid down over the nextthree years.

Net cash declined more thanplanned due to an increase in accounts receivable of approximately $4.6million. As a result, DSOs was 82 days versus 67 days last quarter.

While the increase in AR wasdriven by payment delays by certain customers, these receivables have alreadybeen collected this quarter, and as a result, we expect DSO to improve thisquarter and expect net cash to be flat or up in our fiscal Q2. Inventorydecreased from $27.1 million last quarter to $25.9 million this quarter due totight controls over the manufacturing build plan.

Net capital expenditures were$3.3 million for the quarter, primarily driven by the build out of our new Milpitas facility. Thisnew location is expected to save the company about $1 million annuallyaffective immediately. Depreciation and amortization expense was $3.1 millionfor the quarter. Accounts payable was down $700,000, to end the quarter with abalance of $14.6 million.

Stockholders equity increased by$1 million to end the quarter with total equity of $114 million. Now, ourbacklog summary. We started the quarter with a backlog balance of $29.4million. During the quarter, we added $30 million in new orders and shipped $29.6million to customers. There were no significant customer cancellations. Therefore,our ending backlog is approximately $30 million, with about 50% to 60%shippable over the next six months.

Guidance for Q2 is as follows: Weexpect revenue to be in the range of $28 million to $32 million. Gross marginis expected to be 47.5%, the GAAP reported loss per share is projected to be inthe range of $0.04 to $0.07, assuming 62.5 million shares. We expect net cashto be flat or up, driven by reduction in accounts receivable.

Our theoretical GAAP break-evenfor Q1 was $36 million, which is $2 million better than expected, and we expectQ2 to be about the same at $36 million. EBITDA break-even is also expected tobe about $29 million for the quarter.

In summary, our business model isperforming well during this continued period of weakness, and we continue tooperate at or above EBITDA break-even through this cycle, a key objective forLTX.

This concludes our preparedremarks, and at this time, we would like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Yourfirst question comes from the line of Mehdi Hosseini with FBR. Please proceed.

Mehdi Hosseini - FBR

Yes, thankyou. I want to better understand your prepared commentary regarding new wins,next generation RF. Does this have anything to do with the that theseEuropean IDM is trying to market?

David Tacelli

Mehdi, not to go into anyproducts, specifically. But this win could lead to us being able to test forthis specific customer, their single-chip, whether it's an SOC, or an SiP insingle package.

Mehdi Hosseini - FBR

And was that realized becauseobviously you must have replaced an incumbent, correct?

David Tacelli

That is correct.

Mehdi Hosseini - FBR

Okay. And can you help meunderstand what lead to that other than pricing, just help me understand from abig picture point of view?

David Tacelli

Again, as I stated in theprepared remarks, it's a combination of things. When you looked at thetechnology that we offered, our ability to provide a lower cost architecturalsolution for that company, our ability to test not only their RF products, butdown the road, either their power or baseband products in one single package.

And if you wrap all thattogether, our ability to do it cost effectively. So, I think this customerlooked at all three of those elements and decided that they would choose ustoday for RF solutions and, potentially, down the road, for other solutions.It's not a guarantee that they will choose us for that, but I am sure that hadsomething to do with their decisions.

Mehdi Hosseini - FBR

If you want to extend thisplatform to baseband, would you need to adjust some instruments or would thatrequire more significant upgrade to the platform?

David Tacelli

Instruments, only.

Mehdi Hosseini - FBR

Okay. And just one follow-up.When you said bookings were expected to remain at the top level, you werereferring to $30 million in the January quarter, correct?

David Tacelli

That's correct. And that's ourguidance -- our guidance of $28 million to $32 million is basically the sameguidance we gave for the October quarter.

Mehdi Hosseini - FBR

Okay, thank you.

David Tacelli

Okay.

Operator

Your next question comes from theline of Dave Duley, representing Merriman Curhan Ford. Please proceed.

Dave Duley - Merriman Curhan Ford & Co.

Yes, good afternoon.

David Tacelli

Hi, Dave.

Dave Duley - Merriman Curhan Ford & Co.

Couple of questions for me. Justremind us, when did you introduce the X-Series?

David Tacelli

The original X-Series product theCX was introduced in late calendar 2002; and the next generation, the EX whichis the extended pin count version, was introduced in 2004. And then, the MX andthe LX were introduced in the last 12 months, so some time in the, say, mid '06to late '06 timeframe.

Dave Duley - Merriman Curhan Ford & Co.

Okay. So, why ask that as youmade a reference to the new products that we're introducing this year shoulddrive significant upgrade cycle similar to when we introduced the X-Series ofproducts?

David Tacelli

Yeah. What we are talking abouthere, and I specifically mentioned today with the instruments that address thetarget markets we're going after, so instruments that relate to specific analogtypes of testing, enhancement to RF or combination of things like power, [dataconverge] things like that.

Dave Duley - Merriman Curhan Ford & Co.

Okay. I don't think you disclosedit on a quarterly basis, but did you have any 10% customers in this currentquarter? And could you remind us what the percentages of your largest customerswere for last fiscal year?

David Tacelli

Yeah, we had two customers thatwere greater than 10% in the quarter, both for revenues as well as for bookings.We don't disclose those names on a quarterly basis, but we do share thatinformation on an annual basis. In last fiscal year, we had one customer thatwas greater than 10%, and that was our largest customer, and they were 38% ofrevenues.

And one of our goals that we hadstated several months ago, was to grow--that or diversify--our base beyond ourlargest customer, and to have two additional greater-than-10% customers forfiscal '08. And, Dave, our goal is not only at quarter, but on a consistent basis that we have three customers greaterthan 10%, two new ones, plus our largest customer.

Dave Duley - Merriman Curhan Ford & Co.

Okay. I noticed I am just lookingat historical revenue patterns here. And for the last five quarters revenueshave gone down and the previous five quarters before that, they went straightup. So, I am kind of wondering if it's with the pattern of five quarters up andthen five quarters down, and your current guidance is somewhat flattish. Isthere a pattern that we can discern from this revenue? And is that one of thereasons why you are thinking that this year will be up as far as revenue goes?

David Tacelli

Dave, if I try to map out thelast three to four cycles, whether they be up or down period, I don't thinkthere will be any trend that I would see. If I go back to late '99 and 2000, wesaw a three quarters of down and then we saw about eight quarters of up cycles,then we saw a two and half years of down cycles, followed by four quarters ofup cycles.

So, I don't think there is anydiscernible pattern. Every cycle has its own characteristics. What I do see is,this cycle the bottom, it looks like for LTX is kind of trough that a littlebit higher than the last cycle percentage with our top customer has come down. Sotherefore, our revenue dispersion with other customers has gone up through thecycle. And what I expect, and the way we look at it here is, when you takecross cycles--so up cycle, down cycle over each period--that the next time youtake a snapshot of a cross cycle, that will go up in the next cross cycle overthe last. That's the way we kind of measure; we don't look at the next five upor the next previous five down at cross cycle over cross cycle we are expectingto increase.

Dave Duley - Merriman Curhan Ford & Co.

Okay. May be you could talk alittle bit about the win at your large customer. It seems like penetrate becomeanother vendor of choice in their high performance analog business. If you talka little bit about what you expect from that win over the next 12 months, let’ssay, and then also, could you address when would you -- did you mention one ofthe drivers to your growth in fiscal 2008 was having the large customer returnto historical levels--or I must have missed that--could you maybe give us someclarity as to?

David Tacelli

Let me first talk about the win,because we did in our press release. The first thing I would say with our topcustomers, they are very diligent about the process that they go through, sothis was not a situation where it was six months of trying to qualify, we’vebeen working on this opportunity for about 15 months to 18 months, and anytimethis customer makes a decision, they don't make it as piecemeal decision, theyreally make it, as I'll call it a broad based decision across multipleapplications. And what they may do, is they may pick a specific product or agroup of products to qualify you and to really see if you have a technologicaladvantage, because what they want long-term is they want broad deployment becauseit gives them the best operational efficiency.

So, we weren’t broadened for onespecific product, although, we had a technical advantage on the product that wequalified on. We had to prove capability and that was not only throughtechnological advancements, to solve problems that also cost to test. The otherthing that I would say when I look at my top customers, that we're probably oneof only two suppliers that exist today that can cover their full spectrum ofproducts--everything from advance digital, RF, broad based analog, and evensome are called low-end analog, all doing that in a low cost architecturalfootprint.

So, another thing that I'd pointto is, if you look at a macro level and go backwards in time, if I take you allthe way back to 1999, the pattern is very similar to the first when we had withthe number one customer. The same dynamic existed. They wanted a broad basedsolution, we provided a technical specification, we would broaden for aspecific product. We had to execute and based on all of those things, and againa lot of that base is based on the technical advancements of the product andthose executing, that you are given opportunities to get into other productgroups.

Now, their high performanceanalog group is little different because there are far more product groups thatwe can attack, that we don’t sell through today. But what I think will happenovertime as time passes, I think the situation will gain more clarity andpeople will see different opportunities we have at this account. And trying toaddress your 2008 question, the comments that I made on 2008 were related toother customers outside of the top customer. And I didn’t make any comment atall on their business for 2008. If this follows the same pattern as the previousone we've had there, I don’t expect to see significant revenue for a period oftime. What I expect to see is, like, we have been brought in for a productgroup. We’ll demonstrate our capability in that product group, and then it willtake a period of time to grow into other devices, or other device families,inside the high performance analog group.

Dave Duley - Merriman Curhan Ford & Co.

So, are your commentary regardingcalendar 2008 was really not relationship to your largest customer; was other customersramping, they are engineering, just the prototypes to production?

David Tacelli

All right. I think the commentthat I used is in the two examples that I have given: the two customerexamples. One was a diversified manufacturer out of Europe, the other was thediversified manufacturer out of North America, and the quantity that I use, asI expect that both of those in combination, not individually--but incombination--will drive somewhere in the order of 50 production machines overthe course of calendar 2008 because of the amount of devices that they have indevelopment right now on the X-Series. That does not count any expansion that Iwill make into my largest customer. And then also, the way I look at 2008 rightnow is I haven't assumed any massive ramp with my number one customer gettingback to historical level. I've assumed the slow ramp back because I think theywill be far more diligent about how they buy, how they transition and alsoabout their focus. If you listen to my number one customer, a lot of that focusrecently has been on the high performance analog organization and growthpattern.

Dave Duley - Merriman Curhan Ford & Co.

So, that makes you a little bitmore hesitant to predict an uptick on the DSP side?

David Tacelli

That's exactly correct. And likeI said, I think there is a little bit more, I'll call, muted growth, on thatside, but that could change. They are an excellent company, and they continueto win socket. So, as they continue to win sockets, I still will capture all ofthat business on that side of the house.

Dave Duley - Merriman Curhan Ford & Co.

Okay. Final question from me,I'll turn it over to somebody else and Mark as far as R&D level go, itsbasically kind have been $12 million to last three quarters, which equates towhat 37% to 39% of revenue. It sounds like you got a lot of new products spendcoming to. Would we see this level of R&D moderate or are you keeping itflat on a dollar basis?

Mark Gallenberger

I would say you got to look at itmore or less flat on a dollar basis. At this point in time I think we have gotthe right level of R&D spend across in entire cycle. When we are at thesetrough levels for revenue on a percent basis, it does look pretty high, butthen you get the significant leverage during peak periods.

But cross cycle, we wereobviously planning to make money cross cycle on a GAAP basis, as well as theEBITDA. And we think we got the right product strategy and the right level ofR&D spend to service that product roadmap that we have in place. So, I wantto see significant changes whether that be up or down on the R&D line.

David Duley- Merriman Curhan Ford & Co.

Okay, thank you.

Mark Gallenberger

Thanks, Dave.

Operator

Your next question comes from theline of Dave Egan with Lehman Brothers. Please proceed.

Dave Egan -Lehman Brothers

Hi, guys, thanks for taking myquestion.

Mark Gallenberger

Sure.

Dave Egan -Lehman Brothers

I didn't hear the gross margin; Iam sorry. What did you say it was, Mark, for the guidance?

Mark Gallenberger

For the guidance, it was 47.5%.For guidance, actuals for this quarter was 48.8%. This quarter is actually morefavorable than what we originally guided to ,which was 46%, and so next quarterwe think that business model is probably going to be moving more towards ourtarget model.

Dave Egan -Lehman Brothers

And it's benefiting from thelower breakeven, is that basically if were calculate it, figured it out thatway?

Mark Gallenberger

It's really benefiting from thefact that we had more favorable product mix or more favorable configurationsgoing out the door better than the target model that we've got in place. Sothat was the real driver. The other driver was the fact that OpEx is going tobe a little bit better in Q2.

Dave Egan -Lehman Brothers

Okay. So you think that thebreakeven was $36 million in 1Q,-2Q, I think, if I remember correctly, that wasthe target number for 18 in July, or the end in this fiscal year. Is that stillthe number?

Mark Gallenberger

Right now, I think that's stillthe number because right now we are seeing some more favorable product mixversus our target model. So, I can't really say whether this is going to besustainable or not. So, we are not going to reset that $36 million target,although we've put that out there and it looks like we've actually achievedthat without getting the full benefit of the outsourcing to Jabil Penang. If Ikeep this favorable product mix in place and, it's indeed, that sustainable,that breakeven level of $36 million would naturally come down a couple milliondollars.

Dave Egan -Lehman Brothers

Is that more favorable productmix result of selling more testers in the different end markets, or is it justmore instrumentation per tester?

David Tacelli

Yeah, it's a combination ofthings Dave. I think as we make more penetration into the automotive market andsome of the power management markets, we are seeing more favorable productmargins. I also think that we're selling additional upgrades or instrumentsinto some of the markets and customers we've sold to in the past and those bydefault come with higher product margins as well.

Dave Egan -Lehman Brothers

Right. And since you have lowertesters' shipments right now, that's having a larger impact on the gross marginperhaps?

David Tacelli

That's correct.

Dave Egan -Lehman Brothers

In terms of the timing of theramp for the two customers that you highlighted, which I imagine are the sameones you highlighted back at the Analyst Day, six months ago, right?

David Tacelli

Yes.

Dave Egan -Lehman Brothers

Okay. The timing, would you saythat that's more back half weighted to the calendar '08?

David Tacelli

This is a tough call because Ithink I've said in the last conference call as well, there has been no slowdownin the introduction of new products on their behalf, sockets into theircatalog. I think it really all depends on as they introduce those sockets, howwell they are sold in the marketplace, and any one of those products that we'redeveloping could in and out itself generate significant volume for LTX.

So, it's hard for me to calltiming. It could be sooner than later. It really depends on how successful theyare as they introduce these products. So, the good news for us is, they keeplooking to put more and more products, train more engineers and ask for more ofmy application support to release these to the market.

Dave Egan -Lehman Brothers

Okay. Do you think though that itis fair to wait more towards the back half of the year or is it…?

David Tacelli

The conservative nature says,yes, it's easy to wait for the back half. It's easier to wait these into theback half. It could turn around that April is a better quarter than weanticipate.

Dave Egan -Lehman Brothers

Okay. Would you just circle backa little bit to the question that Mehdi was asking about, the European IDM. Iwouldn't quite certain I understood exactly what you guys were saying that youhad won some business and that could lead to more business. How did youcharacterize that exactly?

David Tacelli

Yes, the way I described it inthe prepared remarks is about a year ago, we had one RF decision for a majorEuropean IDM at one of its division. Recently, another division that alsoproduces a different suite of RF devices also chose the X-Series. And I thinkwhere Mehdi was headed is, could that lead to, or does that link up with,single-chip cell phone. And what I said was, it could lead to that becausewe're also in qualification on the power devices for that customers, and we arealso in qualification long-term for the baseband devices for the customer onthe same platform. So, we could test SOC and we could test system-in-package SiPwith the same product. And I am sure that was somewhere down in their thinkingof why they chose us for multiple divisions for RF. I also said that, I ampretty sure I said, that I am not guaranteeing that its going to get us thesingle-chip cell phone business but I am sure it was a factor and how theydecided to petition their capital. I hope that's clear.

Dave Egan -Lehman Brothers

No, that's very clear. Just onefollow-up on that. Unfortunately, I don’t know exactly how that customer breaksup the business that specifically, but this is not a cell phone-relatedapplication that you are talking about right now that--?

David Tacelli

This one was not a cellphone-related application for RF.

Dave Egan -Lehman Brothers

Okay, perfect. Thank you so much.

David Tacelli

Okay.

Operator

Your next question comes from theline of Patrick Ho with Stifel Nicolaus. Please proceed.

Patrick Ho - Stifel Nicolaus

Thanks a lot. Dave, I know you'vementioned in the past in our discussion regarding, how the test companiesincluding yourself are much more customer driven than in the past. What givesyou the confidence that they are going to ramp up their production either forthese new devices, considering the current uncertainty in the markets? What'sgiving you, I guess, the confidence that this ramp will occur in 2008?

David Tacelli

Well, Patrick, let me give youone piece of data. I would say in the last four to six weeks, one of themarkets that started to heat up with an alcohol activity has been the RFmarket. We're generating a lot more applications solutions, a lot more requestfor engineering deliverables, not only for some of the instrumentation thatwill be delivered in the next quarter.

But, also for the applicationssolution deliverables. So, I would say in general the RF market seems to beheating up for us in a wide range of areas. It's not just cell phone-related,also the RF market seems to be heating up for us in the China market with the TD-SCDMAstandard with the introduction of major number of cell phones are going intothat market for the Beijing Olympics.

So, one area that's giving us alittle bit more confidence and, again, because we are so dominant in the marketis the RF space.

Another piece of the marketthat's giving us some confidence is in the automotive side of the house. Wecontinue to make penetration in the automotive side and for all of us in thetest space. The deal in automotive, it takes a long time to get qualified andto win a specific socket. And we've been in development on several devices forcouple of different companies now for well in excess of six to nine months andwe are finally starting to reach the end point of qualification. So, once weare qualified, I am assuming that that's going to go into production for futureautomobiles and again that's another positive sign when we look out into thenext six to nine months, it gives us a little bit of optimism. So those are twoexamples.

Patrick Ho - Stifel Nicolaus

Okay, great. I know you don'tgive up specific gross margins in terms of your products? But, would it be fairto assume or characterize that the instrumentations that you are introducingover the next 12 months that's at least or potentially better than thecorporate average in terms of your current X-Series of products and systemsthemselves.

David Tacelli

That's a very valid assumption tomake.

Patrick Ho - Stifel Nicolaus

Okay, Mark, I know you've been incharge of this whole transition to Malaysiain terms of the outsourcing in Asia. Can yougive us what the next benchmarks or what we should be looking for at the end ofthe January quarter?

Mark Gallenberger

Well, at the end of January, lasttime we talk, we laid out basically four different phases to the outsourcingplans. First piece, was to get some of the boards offshore that we currentlydoing some of the high volume runners, set up the supply chain, start workingon the mechanical infrastructure, the mechanical enclosures if you will, cableassemblies and so forth, and then ultimately do the final system integrationand testing. So, from that perspective so what you should be looking at if turnout the calendar year, first calendar quarter of next year, you should belooking at supply chain completely setup, the vast majority of the boards interms of volume, fully transitioned, as well as, starting the mechanicalenclosures as well. So, a lot of that should be complete and then as we getinto calendar Q2, of Next Year, you'll start to see the system integration andthe final assembly and test being completed.

Patrick Ho - Stifel Nicolaus

Great. Thanks a lot, guys.

David Tacelli

Yeah, thank you.

Operator

(Operator Instructions). Yournext question comes from the line of (inaudible) with State of New Jersey. Pleaseproceed.

Unidentified Analyst

Thank you. Dave, do you have asense of when the sub counts will start constraining spending, given how highutilization levels are? I mean, you guys been out at a long time; do you get asense at this stage of the cycle?

David Tacelli

I look at the subcons the sameway, I look at lot of the IDMs and through this fall--I will call troughperiod--the subcons from my perspective have been buying based on market needand equipment availability on their floor. So, they've continued to buy. Ithink they are not constraining it artificially, I think they are just lookingto gain better utilization just like the IDMs are. So, they've continued to buybased on what's available. If you look at utilization, I think it varies bysubcons and it varies by market segment quite dramatically.

Unidentified Analyst

Could there be stretch a littlebit?

David Tacelli

I don't think they're going togive up revenue dollar sense.

Unidentified Analyst

Okay.

David Tacelli

So, I think what they're going todo is, they are going to look for ways to gain additional throughput,additional productivity like all customers were. They're going to look testtime improvement. They're going to look for what I call computer upgrade thatwould enhance the throughput as well. So, nothing different from normal IDM.

Unidentified Analyst

Okay. And then one last question,where do you guys stand in terms of testing HPA with other OEMs besides yourtop customer?

David Tacelli

If you snap a truck line back toFebruary of '05 when we really kind of turned the company into more of a mixedsignal company versus coupled pure digital play. Since that time, the amount ofcustomers we won have been in high performance analog circuits service.

So, any of the announcements thatwe've made that people have seen over time, one of the most recentannouncements is for austriamicrosystems. Those are all comparable devices toHPA. Now you can go to austriamicrosystems, companies that I have done businesswithin Europe that I have not announced, companies that I have done businesswithin North America that I have not announced, other companies I haveannounced Silicon Labs, RF Micro Devices, a whole series of companies areconsidered competitors for some pieces of business inside the high-performanceanalog group. So, it's basically been 95% of my wins over the past two yearshave been in that kind of domain.

Unidentified Analyst

In this quarter, TI was whatpercentage of the revenue?

David Tacelli

We don't disclose it on thequarterly basis, but if I go back to fiscal '07, we did about 38% of revenue.One thing that I can tell you is that top five customers on a revenue andbookings standpoint quarter-over-quarter remained about constant.

Unidentified Analyst

Okay.

David Tacelli

Roughly about 68% -70%. Now, thatmix may have changed; it's about 68% - 70%.

Unidentified Analyst

Thank you.

David Tacelli

Okay.

Operator

Your next question is a follow-upquestion with Mehdi Hosseini with FBR. Please proceed.

Mehdi Hosseini - FBR

Thank you.

David Tacelli

Hey, Mehdi.

Mehdi Hosseini - FBR

Regarding your January quarter,your services usually is the strongest quarter, so off to $30 million, how doesthe services mix will look like compared to product?

David Tacelli

It's a strong quarter for ourbookings or orders, Mehdi, but from a revenue standpoint, we spread the revenueto the whole year, so I don't expect any major change on the revenue line andservices. Bookings though, we booked the majority of the contracts this year,just like lot of our competitors do. So, orders will spike up, but revenueshould remain consistent.

Mehdi Hosseini - FBR

So would product bookings declineby 20% - 25%?

David Tacelli

We don't give product guidance orproduct order guidance. Product orders will all depend on how customers -- whenthey leave this calendar year., how inventories look, and what they see for theMarch through May time period.

Mehdi Hosseini - FBR

Okay. Thanks

David Tacelli

Okay.

Operator

Your final question comes fromthe line Mike Crawford with Riley Investment Management. Please proceed.

MikeCrawford - Riley Investment Management

Thanks. Riley InvestmentManagement. CapEx does that go down for the rest of the year?

Mark Gallenberger

Yes, it does Mike. We had thisone bubbled because of the Milpitasbuild out and so within the $3.3 million in CapEx, the build out was about halfof that number, and so for the balance of the year. You should expect to see inthe $1.5 million per quarter range.

MikeCrawford - Riley Investment Management

Okay. And similar for next yearyou think?

David Tacelli

Yeah. I don't see next year beingmaterially different versus '08, that is 12 months from now. But right now, Idon't see any substantial investments beyond that current run rate, which isrunning around $6 million - $7 million per year, excluding this leaseholdimprovement that we have with the build out of Milpitas.

MikeCrawford - Riley Investment Management

Okay, and just further, I guessto the last questionnaires line. So, it's, like, 50% - 60% of your servicebookings are in the January quarters is that?

David Tacelli

Yeah, that's about right. If youlook back in history, you will always see a pretty large spike in serviceorders in our January quarter. On an absolute dollar number, it's typicallyaround the $14 million to $16 million -, $17 million range in any given year.Last year, I think service orders last year in January were about $15 million -$16 million. So, I would expect to see something around that zip code.

MikeCrawford - Riley Investment Management

Okay, great. And then onautomotive, is that RF pressure sensors for tires?

David Tacelli

No. I have not included the RF ortire pressure sensors in the automotive category the way I described itearlier.

MikeCrawford - Riley Investment Management

Can you be more specific on whatit is further?

David Tacelli

I prefer not to discuss thespecific devices in the customers that we're dealing with right now…

MikeCrawford - Riley Investment Management

Okay.

David Tacelli

…because there are lot ofcompetitive situations that exist in the marketplace.

MikeCrawford - Riley Investment Management

Okay, thanks. Last question, isif you can, seem to see me important goal over some more about this capabilitythat you are applying patents for, and has helped you win further business that,I think you said that your largest customer, which is Texas Instruments,because that was in your 10-K?

David Tacelli

The best way for me to describethat, if you want some more clarity on the instrument and the type ofmarket…it's in the precision analog section of their business, and it is acapability that my competitors do not offer in cost effective packages the wayI do. So, it is a technological advancement, it's an advancement that we'veapplied for patent 4, and I must say that I’m pretty proud of the LTX team forbeing able to deliver that instrument and meet the requirements of not onlythat customer, the number one and on top customer but it's also helped me winseveral other benchmarks in the same field. I prefer not to get into any deeperthan talking about precision analog and I will talk about the instrument moreas we get into future conference call.

MikeCrawford - Riley Investment Management

Okay. Thank you.

David Tacelli

Thank you.

Operator

There are no further questions inthe queue. I would now like to turn the presentation back over to your host Mr.Mark Gallenberger, for closing remarks.

Mark Gallenberger

Okay. Well, thank you very muchfor joining us today. And I'll look forward to seeing you on the road over thenext couple of months. And enjoy the holiday week.

David Tacelli

Enjoy the holiday.

Operator

Thank you for your participationin today's conference, so this concludes your presentation. You may nowdisconnect and 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 F1Q08 (Qtr End 10/31/07) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts