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Executives

Brenda Ropoulos – Investor Relations

Lavi Lev – President and Chief Executive Officer

KC Eichler – Chief Financial Officer

Mukund Srinivasan – VP Finance

Analysts

Chris Blansett – JP Morgan

Timothy Arcuri – Citigroup

[Vespa Luri] – Credit Suisse

[Akeeth Kavarski] – Goldman Sachs

Patrick Ho – Stifel Nicolaus

Mark Fitzgerald – Banc of America Securities

Credence Systems Corporation (CMOS) Q4 2007 Earnings Call January 8, 2008 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter and fiscal year 2007 Credence Systems Corporation earnings conference call. [Operator Instructions] I would now like to turn the call over to Ms. Brenda Ropoulos, Investor Relations.

Brenda Ropoulos

Good morning everyone and welcome to our discussion of the Credence fourth quarter fiscal 2007 results. With me today are Lavi Lev, President and Chief Executive Officer, I would also like to introduce to KC Eichler our newly appointed CFO. The press release announcing KC’s appointment is on our website under Investor Relations. In addition, Mukund Srinivasan, VP of Finance joins us for today’s call.

Before we begin our prepared remarks I’d like to cover some guidelines for the call. It is our objective that this call will comply with the requirements of SEC Regulation FD. This call also includes and constitutes the company’s official guidance for the first quarter fiscal 2008. If at any time after this call we communicate any material changes to this guidance we intend that such updates will be done using a public forum such as a press release or publicly announced conference call.

Investors should note that only the Chief Executive Officer and the Chief Financial Officer are authorized to supply company guidance. The matters that we discuss today, other than historical information include forward looking statements relating to our future financial performance and other performance expectations. Investors are cautioned that forward looking statements are neither promises nor guarantees but involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward looking statements.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission including our Form 10K filed in January 2007 and our quarterly reports on Form 10Q. The company disclaims any obligation to publicly update or revise any such forward looking statements to reflect events or circumstances that occur after this call.

In addition we want to make clear to investors that our prepared remarks will be presented within the requirement of the SEC Regulation G regarding generally accepted accounting principles or GAAP. Some financial information presented by us during the call will be provided on both a GAAP and Non-GAAP basis. By disclosing certain Non-GAAP information which may include certain charges and credits management intends to provide investors with additional information to permit further analysis of the company’s performance, core results and underlying trends.

Management uses Non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for nor superior to data prepared in accordance with GAAP and is not necessarily comparable to financial metrics used by other companies. If we use any Non-GAAP financial measures during the call you will find the required presentation of and reconciliation to the most directly comparable GAAP financial measure on the company’s website at www.credence.com by clicking on Investors, Fundamental Data and then selecting the Non-GAAP Reconciliation tab.

Finally, this call is being simultaneously webcast on our website. A telephone replay and webcast link will be available approximately one hour following the conclusion of today’s call. Now it’s my pleasure to turn the call over to Lavi.

Lavi Lev

Good morning and welcome. I’m delighted to welcome our new CFO KC Eichler to the company. I worked with KC for many years inthe past and I’m looking forward to having him on the team. He will provide the financial commentary for the quarter and fiscal year 2007 and be available for questions as well as Macoon Trinidathon our VP of Finance.

We have a lot to cover today so let me briefly outline the agenda for this call. I will start with a commentary on the AT industry in general and how the cyclicality of the semi-conductor industry has affected companies like ours. 2007 was a difficult year for the AT industry and there are mixed predictions about when the up turn in this market will occur. The current down turn has impacted the majority of the players in the ATE as has been reported in the respective earnings calls over the last two quarters.

Credence has been impacted even more significantly during this down turn because of our historical concentration of revenues in the MPU markets in our limited customer base in the segment. These markets have been volatile in recent history and all indications are that the volatility will continue. You will see that our concorda business and next quarter guidance have been impacted by these events.

Although we cannot control the markets themselves we can control the impact of fluctuations in these markets on Credence. That would be the topic of the second half my call with you today is strategy to position Credence for growth through industry cycles in markets where our success will not be dependent on the success of any single customer or market segment.

Before I cover the strategy let me first cover the key points for the fourth quarter and fiscal 2007. Revenue for the quarter were lower than our $101 to $105 million guidance and came in at $97.7 million with gross margins of 49.2%. Incoming orders for the quarter were $54.4 million resulting in a corresponding book to bill ratio of .55. This is one of the areas where the volatility of the MPU market in our concentrated customer base, as noted earlier, has had a direct impact on our business for the second consecutive quarter.

Despite the lower revenue we overachieved our break even guidance and are reporting a net profit of $5.6 million for the quarter due primarily to aggressive cost cutting efforts. As a result we reached a break even level of $95 million for the quarter even while excluding one time credits of $8 million. With this break even we have met our end of fiscal 2008 goal one year in advance.

We began drop shipping testers from Asia one quarter ahead of our schedule and by this time next year close to 80% of our products will be shipped and fully supported from Asia. Our cash position improved significantly at $242 million we have more than doubled cash position from a year ago. I’m also pleased to announce that for the first time in six years Credence is reporting an annual net profit. Our net profit for fiscal 2007 was $12.5 million.

In summary, we delivered on our aggressive financial plans by lowering our cost structure, improving the bottom line and strengthening our balance sheet. Additionally, 2007 was a good year for our products and technology. In 2007 ASL surpassed 3,000 installations, reinforcing its position as the most widely deployed commercial platform in the industry. ASL has more than 175 customers worldwide and in Q4 we added six new customers for this platform.

Diamond revenue grew 69% in 2007 over 2006. This platform is steadily gaining acceptance and in Q4 we added 17 new customers, bringing our total Diamond customer base to over 50 with 200 systems deployed worldwide.

In 2007 Sapphire performed well in the high end consumer space and exited the year with 50% market share in testing high definition multi-media interface or HDMI devices. However as previously noted our business from the MPU market for this platform declined in the last two quarters of fiscal 2007.

Concluding my comments on the highlights for this year we have demonstrated that we can achieve our goals and deliver on our commitments. Now we are moving forward to the next phase on our road to success, namely focus, growth and sustained profitability. While optimizing our cost structure in 2007 we analyzed the markets we serve, communicated extensively with our customers and took a serious inventory of our technology portfolio, our resource deployments and our core competencies.

The goal was clear, look beyond cost optimization and identify the markets and growth engines for the long term. We are doing too many things in too many markets and we needed to define a narrower focus where we could excel and set standards in our industry. Our guidelines for deciding the next steps are to focus on rapidly growing markets where we could deploy differentiated ATE solutions to multiple customer testing high volume devices and do it all profitably.

As a result we have concluded that revenues growth and sustained profitability for Credence will come from sharpening our focus on the consumer semi-conductor markets which will expand for years to come where the customer pool is rich, the application space is deep and a growth engines Diamond, ASL and Sapphire are positioned extremely well.

I would like to define for you what consumer business looks like from our point of view. This market is broad and includes electronic components that are used in personal entertainment, navigation, broadcasting, digital content distribution as well as communications. These products end up in our homes, our cars, our pockets and our computers. We can divide these markets into two segments; the main stream consumer market is characterized by high volume products that qualify for impulse buy, like MP3 players, cell phones and hand held gaming systems. The low ASP of semi-conductor devices for these products make the cost of tests a key requirements closely followed by ease of use, rapid deployment and proximity to service and repair personnel.

The high end consumer market is characterized by products that can cost up to several thousand dollars, like high definition television, high end gaming systems, the core semi-conductor devices in these products are high performance and high bandwidth. The ability test these complex devices at speed is a primary requirement followed by cost of tests.

The capability of our testers match to hundreds of specific components in these combined markets present us with nearly $1 billion of addressable ATE market opportunities. Specifically Diamond is targeting approximately $600 million ATE opportunity in the cost sensitive main stream consumer semi-conductor markets. These devices in this markets are increasingly being tested by OSAT in Asia with additional requirements for optimized factory space and tester flexibility to serve multiple customers across multiple applications.

Diamond, with its modularity, small footprint and attractive cost profile is ideal for the digital mixed signed in RF devices for the mainstream consumer products. Sapphire with its current MPU configuration is also addressing approximately $110 million ATE opportunity in the high end consumer semi-conductor market. The growth in this market is coming primarily from HDTV and similar products where high performance and high bandwidth devices account for large part of the semi-conductor content. Sapphire knows how to test this class of devices and it can do it at the consumer price point.

ASL is targeting approximately $255 million ATE opportunities for discrete power management and analog device components found in both the mainstream and high end consumer products. These devices, which cost pennies, have the most extreme cost of tests and ease of use requirements. We are in an enviable position with ASL with over 3,000 installations and more than 6,000 engineers trained worldwide.

The decision to focus on the consumer semi-conductor market has resulted in the following actions. We are doubling our resources in investment in Diamond and ASL platforms. We are shifting future investment in Sapphire to build on our strong position in the high end consumer semi-conductor market while doubling our repair, order fulfillment and service resources in Asia by the end of 2008. This is in addition to our ongoing manufacturing outsourcing initiative.

We are resizing our service organization to align it with our consumer market focus. Focusing on consumer markets means a defocus from other non-consumer businesses. Specifically, we will stop new development on Sapphire DPI the custom micro-processor engineering debug solution that was recently completed to customer satisfaction. A significant percentage of our Sapphire investment was associated with a custom engineering program.

We will also significantly shrink maintenance or sell our diagnostics and characterization business. In general, our mindset will be to heavily scrutinize and reduce investment in product configurations that do not address the requirements of the consumer semi-conductor market or meet our previously stated guidelines.

As a result of actions we are taking, Credence will restructure its operations over the next two quarters. We expect to hire approximately 100 resources, primarily in R&D and customer facing functions like repair and sales support, these hires will be mostly in Armenia and Asia. We also intend to eliminate approximately 500 positions or 36% of our current workforce, mostly in Europe and North America. As a result a net reduction in headcount will be approximately 400. The net impact of the reduction in force on our R&D organization for ATE will be less than 10%.

We expect to take the majority of the charge approximately $16 million in the first quarter of fiscal 2008 to account for severance benefits and other costs associated with the restructuring. The restructuring process will continue into the second fiscal quarter at the end of which time our company will have completed its transition.

We are modifying our financial model to comprehend significantly lower revenue from our MPU business, continued increase of revenue from our consumer business and increased profitability overall, based on exiting businesses or product lines that are not core to our new focus or have been unprofitable. We have devised a business model on which Credence’s success is not predicated on the success of any particular customer.

This model which will be covered in more detail by KC later call for break even revenue of $70 to $73 million inthe second quarter fiscal 2008 and $50 to $55 million inthe fourth quarter. We expect to exit the year with a net profit margin in the fourth quarter between 12% to 15%.

In closing, Credence will become a company that will put more energy into fewer things. By taking these steps also impacts our loyal employees and that were tough decisions to make. However, we are determined to complete the path to growth and profitability that we embarked on a year ago. By the second half of 2008 we will have transformed into a focused and nimble company and we will then resume growth and profitability on a much lower cost structure.

I’ve consistently said that our number one goal is profitability; the changes we are making today will enable us to achieve these goals to industry cycles. I’d like now to turn the call over to KC who will cover the financial details with you.

KC Eichler

I will cover the current quarter financial results, the results for fiscal 2007 as well as provide guidance for the first quarter of fiscal 2008. The highlights of the quarter consist of revenue of $97.7 million, net income of $5.6 million or $.05 per fully diluted share. Incoming orders were $54.4 million yielding a book to bill ratio of .55. We also reduced our backlog by $20 million as a result of our quarterly review of orders that no longer satisfy our internal criteria on shipment within six months.

At the end of fiscal 2007 total assets on the balance sheet were $589 million compared to $596 million in the previous quarter. Fourth quarter revenue was below the guidance provided in our third quarter earnings conference call while earnings per share were above our break even guidance.

Revenue for the fourth quarter reflects a sequential decline of 21% and a 23% decreased compared to the fourth quarter fiscal 2006. Strong revenue results in ASL 1000 and Diamond were offset by declines in the Sapphire and Diagnostics product lines. Revenue for the fourth quarter were comprised of product revenue of $72.8 million or 75% and service and applications revenue of $24.9 million or 25%. Product revenue for the quarter decreased by $27 million sequentially or 27% and service and application revenue increased $800,000 or 3%.

From a product mix perspective the revenue from our Sapphire high performance platform decreased $39.3 million or 66% sequentially primarily driven by the slow down in deliveries to one of our large IDM customers. Product revenue for our Analog Mix Signal products grew 51% from the previous quarter to $42.7 million with especially strong demand for the ASL 100 and Diamond platforms. We saw decline in our diagnostics business as revenues decreased $1.7 million or 15% sequentially to $9.5 million. On a geographic basis North America accounts for 33% of revenue, Europe 13% and Asia 54%.

For the quarter the top 10 customers represented 64% of our revenue with one customer contributing greater than 10% of revenue. IDM and [Inaudible] customers account for 80% of revenues with the remaining 20% coming from OSATS. Gross margin the fourth quarter was 49.2% reflecting a decline of 2% compared to the third quarter. One percent of this decrease was due to a one time benefit in the third quarter from the reclaim of VAT on freight expenses. The remaining 1% was a combination of the quarter on quarter drop in volume and product mix.

Operating expenses as a percentage of revenue decreased overall. Total operating expenses were down 12% to $44.4 million compared to the third quarter. The operating expenses include $700,000 of stock option compensation expense, $4.4 million of acquisition related amortization expense and a $600,000 credit to restructuring expense. Research and development expenses were $16.9 million or 17.3% as a percentage of total revenue down $1.8 million or 10% sequentially.

SG&A expenses were $23.5 million or 24% as a percent of total revenue a sequential decline of $3.5 million or 13% compared to last quarter. Other income expense was down $950,000 or 81% from the prior quarter due to favorable interest income as well as foreign exchange valuation. Income tax expense for the fourth quarter was a credit of $2.1 million as compared to $1.6 million expense in the third quarter. The income tax benefit primarily relates to the one time release of existing tax contingencies.

Net income for the fourth quarter was $5.6 million or $.05 on a fully diluted share basis. The fourth quarter results include $750,000 for stock option compensation expense under PHAS 123-R. Revenue for the fiscal year 2007 was $461 million reflecting a decline of $32.2 million or 6.5% from fiscal 2006. Gross margins for fiscal 2007 increased to $47.3 million from $37.4 million in fiscal 2006. Gross margins were impacted in fiscal 2006 from the $36.1 million inventory write down due to decreased demand for memory and Legacy products.

Net income for the fiscal year was $12.5 million or $.12 on a per share fully diluted basis compared to a 2006 loss of $482 million or $4.82 per fully diluted share. A loss largely associated with one time write off of $424 million in impaired goodwill.

Now moving on to our balance sheet. Cash, cash equivalents and marketable securities were $242 million, up 27% over the prior quarter and 136% from fourth quarter fiscal 2006. The increase in cash is a direct result of strong cash collections and lower expenses. The cash does not include $6.9 million of restricted cash that primarily consists of $5.3 million associated with the sale of our Milpitas property in the second quarter of fiscal 2007.

The net accounts receivable of $64 million is down 41% in the fourth quarter and gross DSO’s were 60 days down 20 days compared to the prior quarter. Net inventory decreased to $62.5 million down $5 million or 7.4% from the third quarter primarily due to consumption of inventory on hand and cost containment measures. Capital expenditures were $1.2 million for the quarter down $1.6 million or 58% when compared with the prior quarter and deprecation and amortization expenses were flat with the previous quarter. Our full time temporary head count at the end of the fourth quarter was 1,400 employees.

Before I take you to our forward guidance I’d like to remind you that our guidance and financial model targets are based on current expectations, these statements are forward looking and actual results may differ materially based on the number of factors as stated at the beginning of this call.

Here is the guidance for the first quarter of fiscal 2008. Revenue in the first quarter is expected to be in the range of $58 to $62 million down roughly 40% sequentially from the quarter we just reported. Gross margins in the first quarter are anticipated to be approximately 38% to 39% and reflect lower revenues, the product mix as well as approximately $4 million of restructuring expenses associated with the changes and strategy announced today.

Operating expenses are expected to be flat to slightly lower in the first quarter as compared to the fourth quarter. We expect to incur additional restructuring expenses of approximately $12 million as a result of the strategic changes outlined today. We will also incur an additional $3 million loss in conjunction with the sale lease back of our Hillsboro facility that is expected to be completed by the end of the first quarter.

Net loss for the quarter is expected to be between $37 and $39 million or a loss of $.37 and $.39 per fully diluted share. These numbers do not include the affect of a possible sale of our diagnostics product line as discussed earlier in the call.

I am now planning to move from the first quarter guidance to an outline of our operational plan. In the fourth quarter of fiscal 2007 our break even revenue was $87 million. On a run rate basis removing one time credits our break even revenue at the end of fiscal 2007 was $95 million, which is what we had originally committed to achieve by the end of fiscal 2008. Our break even revenue for the second quarter fiscal 2008 are expected to be in the range of $70 to $73 million. By the end of the fourth quarter break even will be in the $50 to $55 million range at which time we expect to achieve gross margins of 53% to 55% and net income between 12% and 15%.

These targets are expected to be achieved through outsourcing manufacturing discussed in the previous conference calls; the strategic changes outlined earlier by Lavi and targeted cost measures that implemented successfully over the last two quarters. We feel that this is achievable and that the results of the last two quarter are a good indicator of our ability to attain our goals.

Now I’d like to turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Blansett from JP Morgan.

Chris Blansett – JP Morgan

Your guidance for the first quarter, that’s your GAAP guidance, I was wondering what your pro forma or Non-GAAP would be?

KC Eichler

That is our GAAP guidance. The pro forma reconciliation you’d have to add back amortization of $4 million and that would basically be the difference.

Chris Blansett – JP Morgan

So you’re really not going to provide what its going to be. I’m trying to understand, you have a lot of moving parts here so I’m trying to basically find out what your operational pro-forma is going to be after all the restructuring?

KC Eichler

Really on a pro-forma basis we really don’t have much difference at this point between GAAP. At the end of the quarter we’re going to tell you what the actual restructuring charges are and those restructuring charges are going to get called out. Right now, as you say, there are a lot of moving parts and so we’re trying to go through the process of isolating the difference between pro-forma and GAAP. It’s mainly going to be the restructuring charge.

Chris Blansett – JP Morgan

We can just basically, as you said, just go along the lines of $4 million in the manufacturing side and the $12 million or so in the opex side?

KC Eichler

Right.

Chris Blansett – JP Morgan

Do you have a tax rate for next year?

KC Eichler

Our tax rate in the US is around 2% and the rest of the world is about 35%. As you commented we are changing a lot of moving parts and so I would expect it to be around 30% for the year. We’re going to be working through that but I would model with 30%.

Chris Blansett – JP Morgan

Your revenue guidance was down a bit; I think the commentary coming from Lavi basically implied MPU stuff will be down. Is the future outlook currently showing a lot of weakness in certain areas like MPU or is it broad based, along those lines, what are your utilization rates of your equipment in the field?

Lavi Lev

What we modeled is a significant decline in our MPU business and we are expecting a steady growth in our consumer business, the non-related MPU business and our utilization is anywhere between if our equipment in the field is around 75% to 80% roughly.

Chris Blansett – JP Morgan

Why are you exiting the diagnostics and characterization business, most test companies usually like to have this because it’s pretty good margin and then you usually get to work with leading edge customers?

Lavi Lev

I’d like to reemphasize we applied a very strict filter for our growth engines going forward where the markets have to be rapidly growing and the diagnostics and characterizations, these markets are pulsating up around process no change and then settle for a while. In the case we are now the process no change is taking very long so these markets are not constantly growing and we have our general filter is to have differentiated AT solutions we think we can do that multiple customers there are not a whole lot of customers to this product we were looking for products that we can shift in high volume and this is the same for this, we cannot shift into high volumes and do it profitability. This is something that only around process no change we can do it and then between those changes we can’t and we decided that we need sustainable growth engines for years to come it didn’t pass the filter and therefore we announced the changes today.

Operator

Your next question comes from the line of Timothy Arcuri from Citigroup.

Timothy Arcuri – Citigroup

Can you again highlight what your largest customer was as a percent of revenues I know you said that it was greater than 10%; can you give us a little more granularity?

Lavi Lev

We can’t provide the name of that customer this quarter.

Timothy Arcuri – Citigroup

I don’t want the name; I want what the percentage was.

Lavi Lev

We just reported it was larger than 10%.

Timothy Arcuri – Citigroup

If I look at the numbers it looks like your business at that large customer, obviously its declining significantly. Was there something significant that changed on your last call in August when you were asked about that customer whether you were losing that business you suggested that you weren’t losing that business and high volume? I’m wondering was there a competitive loss in the meantime that changed the picture, what exactly happened there?

Lavi Lev

We are still plan of record for that account, no competitive loss, no other competitors in there, exactly the same story. What you see here is the volatility of this market, the price wars in this market and just continuation of more of the same. When we analyze this after two quarters of going through this we decided to take steps to practically eliminate, at the minimum very significantly reduce our dependency on customers on this type of dynamics.

Timothy Arcuri – Citigroup

Even though you’re still the process of record at that customer and it’s a pretty big spender, albeit cutting capex, you would walk away from that business?

Lavi Lev

We are not walking away from that business. There are two things; our existing Sapphire configuration that is deployed into this customer is perfectly capable as is to test high end consumer markets. We are just benefiting from the same thing, what we did do with this customer is dialed the revenue that we project to bring in our corresponding infrastructure to support this revenue way down. Sapphire is a very mature reliable and successful product that this customer does not require the significant level of R&D that we put in all over those years to bring it to this level.

Right now what we have is we have a much lighter R&D and supporting structure associated with it which will enable us to continue to support it. We are consolidating our R&D infrastructure of Sapphire into North America, its right now in multiple offices around the world and will allow us to sustain very significant decline in revenues coming from this market, which basically bringing in line the sensitivity of the revenue of this specific market into our business plan.

Timothy Arcuri – Citigroup

Was there any other greater than 10% customer in the quarter? When you guys gave those break even targets I assume that those are GAAP, is that right?

Lavi Lev

The break even targets are GAAP. We had only one more than 10% customer this quarter.

Operator

Your next questions comes from the line of Satya Kumar from Credit Suisse

[Vespa Luri] – Credit Suisse

Following up on the previous one a little bit more. Does this imply that the doors are opening for your computer getting into the MPU business if your focus isn’t just not be customer?

Lavi Lev

As I said before, right now the current configuration of Sapphire that is very successfully defended its position in this customer over the years is as is applicable to the high end consumer market. Right now we do not see any feature that we need to support or develop that we cannot take as is into the high end consumer market and therefore we don’t see it as diverting us from our sharp focus on the consumer market. We do not believe that it will open the door for any competitors more than the door was open before and it was pretty closed.

[Vespa Luri] – Credit Suisse

Focusing on your consumer market, going forward I understand that diverse platforms you have any plans in order to consolidate is it possible to consolidate into your platforms?

Lavi Lev

Right now we are focusing, the consumer market, the customers are pretty picky as to the segment that they are servicing so what we did is we looked at our Sapphire, ASL and Diamond, which by the way, when you look at the consumer market the revenues that they bring from OSATS are in Diamond we have over 75% of revenue comes from OSATS and ASL and Sapphire over 50% of our revenue come from OSATS.

We just saw this was a recognition that these platforms are well accepted; doing the job right and what we are focusing on moving forward is addressing our customers needs if the customers will pay more attention to consolidation of platforms than what the platforms are actually doing for them we will react accordingly. Right now we analyzed 100’s and 100’s components and all of those markets and we saw that these platforms are positioned extremely well and we can take the focus into this market and currently that’s what we are focused on.

Operator

Your next question comes from the line of [Akeeth Kavarski] from Goldman Sachs.

[Akeeth Kavarski] – Goldman Sachs

I wanted to get your thoughts on consolidation in the sector. Do you feel like the market is more receptive today perhaps toward consolidation in the SOC segment or do you think things sort of as they were?

Lavi Lev

I’m assuming that your question is a consolidation in our, in the ATE market, or at least I’ll assume this was your question. There was some announcement on some consolidations and acquisitions not necessarily in the SOC market. We see the same dynamics as before; ATE companies are having challenges to stay profitable through the cycle and what is considered to be more or less a flat year ahead. We don’t see any, at least from our point of view, significant change in the dynamic as we saw it until now.

[Akeeth Kavarski] – Goldman Sachs

A follow up question on the commitment to your micro processor customer. Just a question in terms of why it took so long to be able to reduce the infrastructure and the commitment you have to that segment. You are saying you’re not walking away from the business but yet you’re able to significantly reduce some of the infrastructure. Why is it possible today and why wasn’t it possible a couple of quarters ago or a couple of years ago?

Lavi Lev

There are a few components to this answer. The first goal was to address the cost infrastructure of Credence, first and foremost, almost like low hanging fruit, get the company profitable right away and this took basically from the day we announced it we are only the second quarter after that announcement and we achieved quite a lot.

It was obvious to us that getting profitable is only step one and we do need to analyze what our growth engines for years to come and this does take some time. We spoke to a whole lot of customers, we learned what we can be, as they say, the best in the world at and what are things that are bringing money but not on a consistent basis or not consistently profitable. This process does take time.

In the meantime, Sapphire matured to a platform that does not take the same level of investment to support and in addition, obviously, we all got to analyze and see what happens in the MPU market and I think that quite a lot of people, including your group pointed out that this for a company our size to be concentrated to that degree on a single volatile market is a risk. We analyzed it, we reached a conclusion that we need to act upon it and now is the time. We are profitable, we know our business well, our customers, employees and shareholders were consulted with and as soon as we got the information we took the action which we are announcing today.

[Akeeth Kavarski] – Goldman Sachs

One more clarification, it sounds like you are reducing your exposure to the micro processor segment, at the same time you feel like you can maintain your share there, you don’t feel like there’s threats of your competitor taking some share away from you. I guess I wanted to get a little more clarification, are you actively trying to reduce your exposure to the micro processor market or is it just simply you becoming more efficient there in how you service your customer?

Lavi Lev

We are reducing our exposure to the micro processor market significantly. The way we do it is significantly reducing the R&D infrastructure that supports it because of its maturity. In our business plan we dialed its revenue way down as you can see from our guidance to Q1. As I said in my comments our business plan for 2008 contemplates a healthy growth in our consumer products and a very significant decline in the micro processor product. We’ve put infrastructure would be 12% to 15% net profitable with these assumptions and therefore we think we completed a very, very significant decline in our business, be profitable there and therefore we believe that we brought into the right zone our dependency on this market.

Operator

Your next question comes from the line of Patrick Ho from Stifel Nicolaus

Patrick Ho – Stifel Nicolaus

Can you explain, or give a little more color, in terms of how you are going to rationalize spreading of costs to build up Asia along with your outsourcing and cost reduction plan. How are you going to manage that process over the next few quarters to get to those break even targets you’ve outlined?

Lavi Lev

What you see is we announced that we’ll have a net reduction of about 400 positions in the company. We are affecting about 500 employees worldwide this quarter and beginning of next quarter with announcements are going today and tomorrow, consolidating offices. What you see here is a cost reduction associated with less employees, consolidation of offices and if you see where we hire, we have a very strong R&D team in Armenia, we are beefing this team up and the cost there is significantly lower. Also in Asia we are beefing up our resources, the cost structure there is slightly lower, we already have office in both places so we are just increasing the size of the personnel.

Basically the cost cutting comes from a net reduction of 400 people, closure and consolidation of multiple offices worldwide. Significant simplification of our logistical deployment around the world. All of these things were modeled conservatively into our model to yield the business plan that we presented today.

Patrick Ho – Stifel Nicolaus

Basically this shouldn’t have any impact on the outsourcing model you guys set obviously about a year ago?

Lavi Lev

No, we reported today that we are actually one quarter ahead of schedule and the numbers that net 400 people decline comprehends also the outsourcing personnel to the jobs that are being outsourced to Asia. We are on track and this is one of the cores to the success of this strategy to have our outsourcing where all the action and consumer market is taking place. This is definitely not affecting it.

Patrick Ho – Stifel Nicolaus

Obviously I see the path you are taking, we’ve discussed this in the past, you’re moving on to the next stage of growing the company, or gaining market share, now that you’ve got the market focus. What are you going to do, or what are some of the early measures you are taking to grow market share in this consumer semi-conductor market?

Lavi Lev

What we do is we are measuring ourselves internally at least, and we’ll report some of it externally on the continuous traction that we get with Diamond, ASL and Sapphire. As we reported today Diamond revenue grew about 70% during 2007 and ASL is just continuing to be the household test platform with really staggering numbers, 6,000 engineers trained on it and Sapphire is expected to grow with a high end consumer market with high definition televisions. So our measures will be our traction in Taiwan in the OSATS, we gave ourselves some targets of key consumer driving customers that we want to increase our presence with. We identified some customers that are still not our customers that we want to win. We have a very specific measurable goals for traction in those three platforms in the consumer space.

Operator

Your next question comes from the line of Mark Fitzgerald from Banc of America Securities.

Mark Fitzgerald – Banc of America Securities

Can you give us any idea on the breakout here by product segment that company is right now, Diamond, Sapphire and ASL?

Lavi Lev

Can you provide more details for your question?

Mark Fitzgerald – Banc of America Securities

What’s the revenue split on the system side between Diamond, Sapphire and ASL?

Lavi Lev

The only breakdown that I can give you right now is Diamond, Sapphire and ASL provided us with 53% of our revenue came from the consumer related applications of those and 47% this quarter came from the MPU market. I’m sorry, it’s 2007 numbers, for 2007 53% of our revenue came from the consumer markets for these three platforms and 47% came from the micro processor market. That’s roughly the level of details I can provide.

Mark Fitzgerald – Banc of America Securities

The pursuit of these new opportunities, I assume you’ve got to break into new accounts, do you have to build out the sales force to do this or do you have to build out the sales force on a global basis?

Lavi Lev

What we articulated today that sales applications, order fulfillment, these are a big part of the 100 new hires that we are bringing in that would be located in our offices in Asia, close to our customers. Absolutely, this was dialed in and we are making very sure that we’ll be in close proximity to where all the action is taking place.

Mark Fitzgerald – Banc of America Securities

Can you give me the 2007 revenues for the diagnostics and characterization group?

Lavi Lev

It was $35 million.

Operator

[Operator Instructions] Your next question is a follow up question from the line of Chris Blansett from JP Morgan.

Chris Blansett – JP Morgan

I had a quick question about your break even models, is it possible to get a little more detail on potential product margin targets, how much of your outsourcing at the end of fiscal ’08 will be completed to get to those numbers?

Lavi Lev

I can give you details only regarding the outsourcing. As we stated before we expect that at least 80% of our products will be manufactured, drop shipped from Asia. We keep the same goal as we reported this quarter; we are one quarter ahead of our schedule so we are doing very well there. On the rest we cannot give you more details.

Chris Blansett – JP Morgan

Even for the end of fiscal ’08 break even estimates?

Lavi Lev

The combined break even revenue we gave of $50 to $55 million with gross margins of 53% to 55% and that’s the level that we can disclose right now. KC said there a lot of moving parts and we feel comfortable that we can reach these goals.

Chris Blansett – JP Morgan

Regarding headcount reduction and those type of activities, when will they be completed in calendar Q1 or calendar Q2?

Lavi Lev

The announcement, these people know about it basically in the next couple of days. We have, due to the fact that the employees impacted are world wide, labor laws associated with our employees in the Europe and therefore we expect that everything to be completed before the end of Q2.

Chris Blansett – JP Morgan

From that point on we should expect a fairly stable employee count.

Lavi Lev

Yes.

Chris Blansett – JP Morgan

Will there be any facility closures as well?

Lavi Lev

Yes, we are expecting to consolidate offices, and as I said to simplify logistical deployment which will contribute to part of this saving plan.

Operator

I show no further questions at this time. I’d like to turn the call back over to management for closing remarks.

Brenda Ropoulos

I want to thank everyone for joining us today. The Credence press release announcing the financial results for the fourth quarter fiscal 2007 was sent by market wire and is posted on our website on the homepage and under Investor Relations prior to the opening of market today. If you do not have access to the internet and would like a copy of the press release please contact me. A replay of the call will be provided on our site later this morning. You can also access an audio replay of the call.

Additionally I’d like to let you know that Lavi and KC will be presenting at theNeedham conference later this week. Their presentation is scheduled for 3pm ET on Thursday, January 10th and will be available on our website under Investor Relations. They will also be available for one on one meetings Thursday and Friday atthe conference and will be visiting investors and analysts inNew York and Bostonthe following week.

Lavi Lev

Thank you everyone for joining us today, we’ve just been through a major announcement, we are definitely looking forward to sharing with you the progress of our strategy through the course of the year and please don’t hesitate to contact us for additional questions. Thank you very much for joining us today.

Operator

Thank you for your participation in today’s conference, this concludes the presentation you may now disconnect.

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Source: Credence Systems Q4 2007 Earnings Call Transcript
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