LTX F1Q08 (Qtr End 10/31/07) Earnings Call Transcript

LTX Corp. (LTXX)

F1Q08 (Qtr End 10/31/07) Earnings Call

November 20, 2007 4:30 pm ET

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 Investment Management

Presentation

Operator

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

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

Mark Gallenberger

Thank you, Stacey. Welcome to LTX Corporation's first quarter fiscal year 2008 conference call for the period ended October 31, 2007. Joining me on today's call is Dave Tacelli, CEO and President. After my introductory comments, Dave will discuss the company's performance for the first quarter and discuss the business outlook. Then, I will provide further detail on the company's financial performance during the first quarter of fiscal year 2008 as well as provide guidance for LTX's second quarter of fiscal year 2008. We will take your questions after our prepared remarks.

Today's call will last approximately one hour. A replay of this call will be made available through December 19th by dialing 888-286-8010, and the passcode is 12766938, or you can visit our website at www.ltx.com. As a reminder, the only authorized spokespeople for the company are Dave Tacelli and myself.

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

The guidance provided during this call represents the company's estimates as of this day, and the company assumes no obligations to update this guidance. Please refer to our Safe Harbor statement in our earnings release for more information on important factors that could cause actual results to differ.

Now, on to the call. Dave?

David Tacelli

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

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

Our first quarter business mostly consisted of additional engineering development purchases, especially as new X-Series instruments broaden our addressable market. In fact, we will be introducing three significant new products this quarter with all three already purchased by multiple customers.

Fiscal year 2008 will be the most important year for new product introductions at LTX since the launch of the X-Series. From an operational perspective, we continue to lower our breakeven due to good cost controls, favorable product mix and better margins, even as we selectively hire and expand at the geography close to our growing customer base.

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

We completed the next step in our infrastructure 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 final installment 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 a significant decision inside our largest customer, providing us with an opportunity to expand share into that customers' high performance analog division.

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

The business model is performing very well, and our expectation is that as business conditions improve during 2008, the leverage of additional revenue will drive very good profitability and substantial positive cash flow.

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

On the manufacturing front, our transition of Jabil manufacturing operations from Massachusetts to Jabil's facility in Malaysia continues to be on track with boards manufactured in Malaysia now part of our production line.

We expect to be on plan with all X-series products shipping directly from Jabil, Malaysia by August of 2008. While our business model has been solid at these low revenue levels, the real question is how LTX will generate significant top line growth so that the business model can deliver the leverage and profitability it's capable of.

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

One particular customer has over 80 new devices planned for release in 2008 on the X-Series. Another major IDM is in a similar position where new product development is focused on the X-Series leading to a continuous stream of product releases during 2008 that will drive capacity requirements.

We would expect that these two companies alone are capable of driving over 50 production tests during calendar 2008, which is incremental to any expansion of business at our largest customer. The second driver of top line growth will be fueled by recent and coming introduction of key new instruments for the X-Series. These new instruments deliver performance enhancements to our industry leading low cost RF test solutions, create new power options for the power management automotive markets and offer new digital pin options that deliver high-speed test capability for digital technology such as USB 2.0 and DDR-2.

In fact, we have already received multiple orders from new and existing customers for these products totaling several million dollars. And as with any new instrument that we introduce, it's immediately available on all X-Series configurations because of our strategy of maintaining a consistent architecture throughout the product line. The third driver of top line growth will come from new customers recognizing the technology differentiation of our current and future test solutions.

One new technology, in particular, which I can only briefly mention since we are in the process of applying for several patents, won us a major decision at our largest customer. The technology we demonstrated was clearly ahead of any competitive offerings and as a result, opened up a major new market for LTX in an area where we had no prior business. This new capability has also been purchased by several other companies where we won technical benchmarks against the number of incumbent competitors. I will expand more on this new instrumentation in future conference calls.

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

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

So to summarize, our top line growth, which we expect to accelerate during year 2008, will be driven by existing customers transitioning from engineering development into volume production, new instruments and capabilities driving broader market penetration, and new customers recognizing the leading technology and cost to test benefits the X-Series can provide them.

As for the overall business direction for the industry, we believe that a sustainable growth cycle should begin during calendar 2008. Although it's too difficult to predict with any confidence of exactly when this inflection point will occur, we are optimistic that as business conditions improve, LTX will deliver above average top line growth.

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

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

In short, our product strategy has great momentum in the marketplace. Our operations are efficient, and our balance sheet is sound.

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

Mark Gallenberger

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

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

SG&A was $6.5 million, which includes $666,000 in stock-based compensation expense and was essentially flat from 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 quarter was $3.5 million or $0.06 loss per share on a non-GAAP basis.

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

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

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

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

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

So, our remaining debt now stands at $20 million of bank debt, which is scheduled to be paid down over the next three years.

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

While the increase in AR was driven by payment delays by certain customers, these receivables have already been collected this quarter, and as a result, we expect DSO to improve this quarter and expect net cash to be flat or up in our fiscal Q2. Inventory decreased from $27.1 million last quarter to $25.9 million this quarter due to tight 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. This new location is expected to save the company about $1 million annually affective immediately. Depreciation and amortization expense was $3.1 million for the quarter. Accounts payable was down $700,000, to end the quarter with a balance of $14.6 million.

Stockholders equity increased by $1 million to end the quarter with total equity of $114 million. Now, our backlog summary. We started the quarter with a backlog balance of $29.4 million. During the quarter, we added $30 million in new orders and shipped $29.6 million 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: We expect revenue to be in the range of $28 million to $32 million. Gross margin is expected to be 47.5%, the GAAP reported loss per share is projected to be in the range of $0.04 to $0.07, assuming 62.5 million shares. We expect net cash to be flat or up, driven by reduction in accounts receivable.

Our theoretical GAAP break-even for Q1 was $36 million, which is $2 million better than expected, and we expect Q2 to be about the same at $36 million. EBITDA break-even is also expected to be about $29 million for the quarter.

In summary, our business model is performing well during this continued period of weakness, and we continue to operate at or above EBITDA break-even through this cycle, a key objective for LTX.

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

Question-and-Answer Session

Operator

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

Mehdi Hosseini - FBR

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

David Tacelli

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

Mehdi Hosseini - FBR

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

David Tacelli

That is correct.

Mehdi Hosseini - FBR

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

David Tacelli

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

And if you wrap all that together, our ability to do it cost effectively. So, I think this customer looked at all three of those elements and decided that they would choose us today 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 had something to do with their decisions.

Mehdi Hosseini - FBR

If you want to extend this platform to baseband, would you need to adjust some instruments or would that require 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 were referring to $30 million in the January quarter, correct?

David Tacelli

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

Mehdi Hosseini - FBR

Okay, thank you.

David Tacelli

Okay.

Operator

Your next question comes from the line 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. Just remind us, when did you introduce the X-Series?

David Tacelli

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

Dave Duley - Merriman Curhan Ford & Co.

Okay. So, why ask that as you made a reference to the new products that we're introducing this year should drive significant upgrade cycle similar to when we introduced the X-Series of products?

David Tacelli

Yeah. What we are talking about here, and I specifically mentioned today with the instruments that address the target markets we're going after, so instruments that relate to specific analog types of testing, enhancement to RF or combination of things like power, [data converge] things like that.

Dave Duley - Merriman Curhan Ford & Co.

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

David Tacelli

Yeah, we had two customers that were 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 that information on an annual basis. In last fiscal year, we had one customer that was greater than 10%, and that was our largest customer, and they were 38% of revenues.

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

Dave Duley - Merriman Curhan Ford & Co.

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

David Tacelli

Dave, if I try to map out the last three to four cycles, whether they be up or down period, I don't think there will be any trend that I would see. If I go back to late '99 and 2000, we saw 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 of up cycles.

So, I don't think there is any discernible 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 little bit higher than the last cycle percentage with our top customer has come down. So therefore, our revenue dispersion with other customers has gone up through the cycle. And what I expect, and the way we look at it here is, when you take cross cycles--so up cycle, down cycle over each period--that the next time you take a snapshot of a cross cycle, that will go up in the next cross cycle over the last. That's the way we kind of measure; we don't look at the next five up or the next previous five down at cross cycle over cross cycle we are expecting to increase.

Dave Duley - Merriman Curhan Ford & Co.

Okay. May be you could talk a little bit about the win at your large customer. It seems like penetrate become another vendor of choice in their high performance analog business. If you talk a little bit about what you expect from that win over the next 12 months, let’s say, and then also, could you address when would you -- did you mention one of the drivers to your growth in fiscal 2008 was having the large customer return to historical levels--or I must have missed that--could you maybe give us some clarity 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 top customers, they are very diligent about the process that they go through, so this was not a situation where it was six months of trying to qualify, we’ve been working on this opportunity for about 15 months to 18 months, and anytime this customer makes a decision, they don't make it as piecemeal decision, they really make it, as I'll call it a broad based decision across multiple applications. And what they may do, is they may pick a specific product or a group of products to qualify you and to really see if you have a technological advantage, because what they want long-term is they want broad deployment because it gives them the best operational efficiency.

So, we weren’t broadened for one specific product, although, we had a technical advantage on the product that we qualified on. We had to prove capability and that was not only through technological advancements, to solve problems that also cost to test. The other thing that I would say when I look at my top customers, that we're probably one of only two suppliers that exist today that can cover their full spectrum of products--everything from advance digital, RF, broad based analog, and even some are called low-end analog, all doing that in a low cost architectural footprint.

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

Now, their high performance analog group is little different because there are far more product groups that we can attack, that we don’t sell through today. But what I think will happen overtime as time passes, I think the situation will gain more clarity and people will see different opportunities we have at this account. And trying to address your 2008 question, the comments that I made on 2008 were related to other customers outside of the top customer. And I didn’t make any comment at all on their business for 2008. If this follows the same pattern as the previous one we've had there, I don’t expect to see significant revenue for a period of time. What I expect to see is, like, we have been brought in for a product group. We’ll demonstrate our capability in that product group, and then it will take 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 regarding calendar 2008 was really not relationship to your largest customer; was other customers ramping, they are engineering, just the prototypes to production?

David Tacelli

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

Dave Duley - Merriman Curhan Ford & Co.

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

David Tacelli

That's exactly correct. And like I said, I think there is a little bit more, I'll call, muted growth, on that side, but that could change. They are an excellent company, and they continue to win socket. So, as they continue to win sockets, I still will capture all of that 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, its basically kind have been $12 million to last three quarters, which equates to what 37% to 39% of revenue. It sounds like you got a lot of new products spend coming to. Would we see this level of R&D moderate or are you keeping it flat on a dollar basis?

Mark Gallenberger

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

But cross cycle, we were obviously planning to make money cross cycle on a GAAP basis, as well as the EBITDA. And we think we got the right product strategy and the right level of R&D spend to service that product roadmap that we have in place. So, I want to 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 the line of Dave Egan with Lehman Brothers. Please proceed.

Dave Egan - Lehman Brothers

Hi, guys, thanks for taking my question.

Mark Gallenberger

Sure.

Dave Egan - Lehman Brothers

I didn't hear the gross margin; I am 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 more favorable than what we originally guided to ,which was 46%, and so next quarter we think that business model is probably going to be moving more towards our target model.

Dave Egan - Lehman Brothers

And it's benefiting from the lower breakeven, is that basically if were calculate it, figured it out that way?

Mark Gallenberger

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

Dave Egan - Lehman Brothers

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

Mark Gallenberger

Right now, I think that's still the number because right now we are seeing some more favorable product mix versus our target model. So, I can't really say whether this is going to be sustainable 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 achieved that without getting the full benefit of the outsourcing to Jabil Penang. If I keep this favorable product mix in place and, it's indeed, that sustainable, that breakeven level of $36 million would naturally come down a couple million dollars.

Dave Egan - Lehman Brothers

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

David Tacelli

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

Dave Egan - Lehman Brothers

Right. And since you have lower testers' shipments right now, that's having a larger impact on the gross margin perhaps?

David Tacelli

That's correct.

Dave Egan - Lehman Brothers

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

David Tacelli

Yes.

Dave Egan - Lehman Brothers

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

David Tacelli

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

So, it's hard for me to call timing. It could be sooner than later. It really depends on how successful they are as they introduce these products. So, the good news for us is, they keep looking to put more and more products, train more engineers and ask for more of my application support to release these to the market.

Dave Egan - Lehman Brothers

Okay. Do you think though that it is 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 the back half. It could turn around that April is a better quarter than we anticipate.

Dave Egan - Lehman Brothers

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

David Tacelli

Yes, the way I described it in the prepared remarks is about a year ago, we had one RF decision for a major European IDM at one of its division. Recently, another division that also produces a different suite of RF devices also chose the X-Series. And I think where 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 because we're also in qualification on the power devices for that customers, and we are also in qualification long-term for the baseband devices for the customer on the same platform. So, we could test SOC and we could test system-in-package SiP with the same product. And I am sure that was somewhere down in their thinking of why they chose us for multiple divisions for RF. I also said that, I am pretty sure I said, that I am not guaranteeing that its going to get us the single-chip cell phone business but I am sure it was a factor and how they decided to petition their capital. I hope that's clear.

Dave Egan - Lehman Brothers

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

David Tacelli

This one was not a cell phone-related application for RF.

Dave Egan - Lehman Brothers

Okay, perfect. Thank you so much.

David Tacelli

Okay.

Operator

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

Patrick Ho - Stifel Nicolaus

Thanks a lot. Dave, I know you've mentioned in the past in our discussion regarding, how the test companies including yourself are much more customer driven than in the past. What gives you the confidence that they are going to ramp up their production either for these new devices, considering the current uncertainty in the markets? What's giving you, I guess, the confidence that this ramp will occur in 2008?

David Tacelli

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

But, also for the applications solution deliverables. So, I would say in general the RF market seems to be heating 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-SCDMA standard with the introduction of major number of cell phones are going into that market for the Beijing Olympics.

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

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

Patrick Ho - Stifel Nicolaus

Okay, great. I know you don't give up specific gross margins in terms of your products? But, would it be fair to assume or characterize that the instrumentations that you are introducing over the next 12 months that's at least or potentially better than the corporate average in terms of your current X-Series of products and systems themselves.

David Tacelli

That's a very valid assumption to make.

Patrick Ho - Stifel Nicolaus

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

Mark Gallenberger

Well, at the end of January, last time we talk, we laid out basically four different phases to the outsourcing plans. First piece, was to get some of the boards offshore that we currently doing some of the high volume runners, set up the supply chain, start working on the mechanical infrastructure, the mechanical enclosures if you will, cable assemblies and so forth, and then ultimately do the final system integration and testing. So, from that perspective so what you should be looking at if turn out the calendar year, first calendar quarter of next year, you should be looking at supply chain completely setup, the vast majority of the boards in terms of volume, fully transitioned, as well as, starting the mechanical enclosures as well. So, a lot of that should be complete and then as we get into calendar Q2, of Next Year, you'll start to see the system integration and the final assembly and test being completed.

Patrick Ho - Stifel Nicolaus

Great. Thanks a lot, guys.

David Tacelli

Yeah, thank you.

Operator

(Operator Instructions). Your next question comes from the line of (inaudible) with State of New Jersey. Please proceed.

Unidentified Analyst

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

David Tacelli

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

Unidentified Analyst

Could there be stretch a little bit?

David Tacelli

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

Unidentified Analyst

Okay.

David Tacelli

So, I think what they're going to do is, they are going to look for ways to gain additional throughput, additional productivity like all customers were. They're going to look test time improvement. They're going to look for what I call computer upgrade that would 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 your top customer?

David Tacelli

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

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

Unidentified Analyst

In this quarter, TI was what percentage of the revenue?

David Tacelli

We don't disclose it on the quarterly 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 and bookings standpoint quarter-over-quarter remained about constant.

Unidentified Analyst

Okay.

David Tacelli

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

Unidentified Analyst

Thank you.

David Tacelli

Okay.

Operator

Your next question is a follow-up question 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 does the services mix will look like compared to product?

David Tacelli

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

Mehdi Hosseini - FBR

So would product bookings decline by 20% - 25%?

David Tacelli

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

Mehdi Hosseini - FBR

Okay. Thanks

David Tacelli

Okay.

Operator

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

Mike Crawford - Riley Investment Management

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

Mark Gallenberger

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

Mike Crawford - Riley Investment Management

Okay. And similar for next year you think?

David Tacelli

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

Mike Crawford - Riley Investment Management

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

David Tacelli

Yeah, that's about right. If you look back in history, you will always see a pretty large spike in service orders in our January quarter. On an absolute dollar number, it's typically around 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.

Mike Crawford - Riley Investment Management

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

David Tacelli

No. I have not included the RF or tire pressure sensors in the automotive category the way I described it earlier.

Mike Crawford - Riley Investment Management

Can you be more specific on what it is further?

David Tacelli

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

Mike Crawford - Riley Investment Management

Okay.

David Tacelli

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

Mike Crawford - Riley Investment Management

Okay, thanks. Last question, is if you can, seem to see me important goal over some more about this capability that 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 describe that, if you want some more clarity on the instrument and the type of market…it's in the precision analog section of their business, and it is a capability that my competitors do not offer in cost effective packages the way I do. So, it is a technological advancement, it's an advancement that we've applied for patent 4, and I must say that I’m pretty proud of the LTX team for being able to deliver that instrument and meet the requirements of not only that customer, the number one and on top customer but it's also helped me win several other benchmarks in the same field. I prefer not to get into any deeper than talking about precision analog and I will talk about the instrument more as we get into future conference call.

Mike Crawford - Riley Investment Management

Okay. Thank you.

David Tacelli

Thank you.

Operator

There are no further questions in the 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 much for joining us today. And I'll look forward to seeing you on the road over the next couple of months. And enjoy the holiday week.

David Tacelli

Enjoy the holiday.

Operator

Thank you for your participation in today's conference, so this concludes your presentation. You may now disconnect and have a good day.

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