LeCroy F2Q08 (Qtr End 11/30/07) Earnings Call Transcript

Jan.16.08 | About: Teledyne Technologies (TDY)

LeCroy Corp. (LCRY) F2Q08 Earnings Call January 16, 2008 10:00 AM ET

Executives

David Calusdian – Sharon Merrill Associates

Thomas Reslewic – President, CEO

Sean O’Connor – Vice President, CFO

Analysts

Mark Moskowitz – JP Morgan

John Harmon – Needham & Co.

Ajit Pai – Thomas Weisel Partners

Raj Seth – Cowen & Co.

Operator

Good day everyone and welcome to LeCroy Corporation’s second quarter fiscal 2008 financial results conference call. Today’s call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) At this time, for opening remarks and introductions, I’d like to turn the call over to Mr. David Calusdian of Sharon Merrill Associates.

David Calusdian – Sharon Merrill Associates

Good morning everyone and welcome. In connection with this conference call, LeCroy wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward looking under the act.

All such forward looking statements are only estimates of future results and there can be no assurance that actual results will not materially differ from those expectations. Information on all of the potential factors that could affect LeCroy Corporation’s business are described in the company’s reports on file with the Securities and Exchange Commission. Any forward looking statements only represent the company’s views as of today, January 16, 2008. While LeCroy may choose to update these forward looking statements at a later date, the company specifically disclaims any duty to do so.

On the call with me this morning are LeCroy’s President and Chief Executive Officer, Tom Reslewic and Vice President and Chief Financial Officer, Sean O’Connor. I’ll now turn the call over to Tom. Tom.

Thomas Reslewic

Thank you David and good morning everyone and thanks for joining us on today’s call. This was another very good quarter for LeCroy, both operationally and financially, we remained right on track. There were no extraordinary events, orders were strong and ahead of our linearity targets and we generated solid profits and significant cash.

Our total sales increased 6% year on year and our orders were up 13% compared to a year ago. The steps we’ve taken in the past few quarters to reduce our cost structure are paying off as we completed our second consecutive quarter of double digit operating margins.

The market traction we’re seeing in our oscilloscope business demonstrates that our distribution channel is much stronger and more effective than it was a year ago. Our new product pipeline including both scopes and protocol analyzers will position us better than we have ever been positioned in some time to capitalize on longer term growth opportunities.

Let me run through the financial highlights for the quarter. Total sales for the quarter were $40.6 million an increase of 6% compared to about $38 million a year ago. Total orders grew 13% to $41.5 million compared to the same quarter a year ago and we’re up about 8% compared to the summer quarter. Overall adjusted gross margin improved from 58.7% last year and last quarter to 59.2%. We generated $4.1 million of operating income which represented about 10.1% of sales. We also generated $7.7 million cash from operations and reduced our net debt by $6.7 million as well.

Now Sean will take you through the financials in more detail and after that I’ll discuss our business operations. Sean.

Sean O’Connor

Thank you Tom and good morning everyone. In my discussion I’ll occasionally be referring to adjusted non-GAAP operating results. We use non-GAAP as a supplement to our results based upon GAAP because we believe this provides additional insight and can enhance the understanding of the company’s ongoing business. The press release we issued this morning contains a reconciliation of the non-GAAP results to their most closely related GAAP results.

The non-GAAP adjustments for the second quarter include the following special charges. First, non-cash share based compensation expense of approximately $1.5 million. Second, approximately $229,000 for the amortization of the acquired Catalyst intangible assets. Third, $65,000 of incremental cost of sales related to the purchase accounting fair value adjustment for Catalyst inventory that was sold in Q2. And fourth, restructuring severance charges of $18,000.

With that, let’s turn to the second quarter results. Revenue for the second quarter increased 6.4% to $40.6 million from $38.1 million for the year earlier quarter. Sequentially, revenue grew 4.8%. Our cost of sales in the second quarter was $16.9 million. This includes special charges of first, $229,000 of amortization of acquired intangible assets, second, $65,000 for the purchase accounting fair value adjustment related to the inventory sale in Q2 and finally $8,000 for restricting costs.

Excluding those items, non-GAAP gross margin for the second quarter of 2008 was 59.2% compared with 58.7% non-GAAP gross margin for the same period last year as well as for the sequential first quarter of fiscal 2008. Gross margins have largely improved over prior year due to operational overhead expense reductions as well as positive effect of increased volume.

Total operating expense for the second quarter were $21.4 million. This included $1.5 million of non-cash share based compensation expenses charges, of which approximately $1.3 million was charged to SG&A and $143,000 was charged to R&D and approximately $10,000 of restructuring charges, which was charged to SG&A.

Excluding those charges, non-GAAP R&D expense was $7.5 million or 18.5% of revenues. This is lower from R&D expense of $8.2 million or 21.4% of revenues for Q2 of last year. Excluding the charges I just mentioned, non-GAAP SG&A expense in the second quarter was $12.4 million or 30.7% of revenues compared with $13.5 million or 35.4% of revenues in the same period last year. The decreases in our SG&A and R&D expense ratios were primarily due to our sales base as well as benefits derived from prior year’s cost cutting and business realignment efforts.

Turning to operating income on a GAAP basis, including the realignment costs and other charges I previously noted, we generated a second quarter profit of $2.3 million compared with a loss of $7.7 million for Q2 last year. As a reminder, during Q2 of fiscal 2007, we acquired Catalyst Enterprises which had several significant non-cash purchase accounting charges that principally generated the GAAP loss. Those adjustments are detailed in this morning’s press release. Excluding the pro forma charges, our Q2 fiscal 2008 non-GAAP operating income was $4.1 million or 10.1% non-GAAP operating margin. This compares with $700,000 or 1.8% non-GAAP operating margin in the second quarter of last year.

Other expense was $1.2 million for the second quarter comprised of $1.1 million of net interest expense and $100,000 of net foreign exchange losses. In the corresponding quarter last year, we reported other expense o $1.7 million, which included $1.2 million net interest expense and $446,000 non-cash charge associated with the extinguishment of the company’s bank term debt. Excluding the Q2 ’07 extinguishment charge, our other expense remained substantially unchanged.

Our effective tax rate on a GAAP basis for the second quarter was approximately 10.2% compared with 18.6% for the same period last year. The lower tax rate for Q2 of this year is a result of a change in the company’s geographic earnings mix as well as the current quarter’s discreet tax benefit of approximately $485,000 for the final true up associated with certain corporate tax return filings. Excluding the impact of FAS 123R’s share based compensation expense, the normalized tax rate for the quarter was approximately 31.5% compared to 28% in the year ago period.

Net income for the second quarter of 2008, we recorded $1.2 million or $0.10 per diluted share. This includes after tax effects of the restructuring non-cash charges previously noted. Excluding those charges, our non-GAAP net income was $2.4 million or $0.20 per diluted share. This compares with non-GAAP net loss of $251,000 or $0.02 per share in the same period last year. The number of shares outstanding used to compute our second quarter GAAP EPS was 12.1 million shares. This compares with 11.5 million shares in the same period last year.

Now turning to our balance sheet, our cash position was approximately $12.1 million at quarter end and we had $117.3 million in total stockholder’s equity. Our Q2 accounts receivable balance was substantially unchanged compared to the first quarter of fiscal 2008, at $33.9 million. Inventory decreased by approximately $2.5 million during the quarter to $34.3 million from $36.8 million at the end of the sequential first quarter. This was driven primarily from the sale of approximately $3.3 million of demonstration units.

As a result, cash generated from operations for the second quarter was $7.7 million. With this very strong operating free cash flow, we were able to pay down $3.4 million of our revolving line of credit, resulting in a bank debt at December 31 of $6 million compared to $9.4 million from the sequential first quarter. During the second quarter, our net debt position improved by $6.7 million.

Capital expenditures in Q2 were approximately $800,000 and during the quarter we repurchased approximately 78,000 shares of company stock, paying approximately $691,000 at an average price of $8.80.

The company currently has 434 employees, about 65% are in the United States, 20% in Europe and 15% in Asia-Pacific. Our headcount is down 41 employees or 8.6% compared with 475 employees one year ago. Our annualized revenue per employee was $373,000 in the second quarter of fiscal 2008, up from $321,000 a year ago.

So to sum up, as Tom mentioned, our results are right on track with our expectations. Our goal was to achieve respectable levels of profitability at current sales levels and we have achieved that. We’re also pleased with the improved working capital management and cash generation we achieved this quarter. With that said, there is still room for improvement in working capital. We believe that our efforts to streamline our operations and improve distribution channel effectiveness position us to deliver consistent profitability, working capital management and cash generation for the remainder of fiscal 2008. I’ll now turn the call back to Tom.

Thomas Reslewic

Okay, thanks Sean. Let’s begin with orders for the second quarter. We received 64% of our orders in the first nine weeks of the second quarter, which is significantly better than our target of 61% and sharply up from 58% linearity we posted in the sequential first quarter. Now the other important metric that is tied to order linearity is the comparative strength of orders in the first two weeks of the new quarter, so after two weeks of the current quarter, orders of 13% ahead of last quarter and 16% of the first two weeks of January last year. Now this is primarily driven by the oscilloscope business track which is significantly up compared to these prior periods.

Now the main even in our strong order story continues to be the performance of our European region. We posted record orders in the European region during the second quarter with positive results from all products and sub-geographies. In the United States, we’re continuing to see positive results from our distribution channel restructuring, which took place in the second half of fiscal 2007. Prior to that time, we were selling both protocol analyzers and oscilloscope products to customers in the United States through a shared direct sales force. Now we have a dedicated direct sales force for each of our product lines with the oscilloscope sales force augmented by a nationwide network of manufacturers, reps and distributors, which are selling our low to mid range scopes.

As we expected, orders from our Japanese distributor Iwatsu were very soft during the December quarter, which is typically seasonally low. While we expect the Japanese market to remain somewhat soft, we’re beginning to see positive results from our partnership with Iwatsu, the local organization is stable now for many months and the sales funnel and local demand forecasts are starting to rise. We anticipate an improved order picture with a typically stronger March quarter in Japan.

Across the rest of Asia, we had a pretty good quarter in fact showing good order growth sequentially and year on year. While Korea was down compared to last year, all other regions grew with a particularly strong showing from Southeast Asia, led by India.

To summarize our geographic order distribution, the Americas were up 12% compared to last quarter and 17% compared to last year. Europe grew 10% compared to a year ago and more than 20% from the summer quarter. Asia grew 16% year on year and 7% sequentially and these gains were somewhat offset by Japan which contracted 24% compared to a year ago and 32% down from the summer quarter.

While we launched a couple of exciting new products at the beginning of the second quarter, a 13 gigahertz high end digital oscilloscope and two new 1 gigahertz models. All of these products have done very well in the quarter, generating good year on year order growth at both the high end and the low end of our scope product line. As we look ahead to our pipeline of new products, we believe that we now have the right sales model in place to fully capitalize on the new as well as our existing suite of products.

Sales for protocol analysis products were very strong this quarter also, up 15% compared to last year and 17% compared to the summer quarter. Growth in protocol was primarily driven by stronger adoption of 6 gigabit SAF standards by the data storage industry. You might remember on the last call I mentioned that silicon for 6 gigabit SAF had been pushed into early 2008 and that as we expected, early adopters would make serious purchases a few months prior and that’s what we started to see in the second quarter.

Looking ahead, we expect that the storage demand for 6 gigabit solutions will continue, our PCI express demand remains steady but the adoption of UWB based protocols like Y media and wireless USB continues to fall short of our expectations. On the bright side, the emergence of USB 3.0 during upcoming 2008 promises to be an exciting opportunity for our protocol group. USB was our first and most important protocol product and we have a commanding position in that market today, with data rates on the order of 10 times faster than USB 2.0 and a well accepted palette of applications, we plan to lead the race in this important new standard.

Now turning to sales by segments, computers, semiconductor and consumer electronics remained our largest sector, contributing about 32% of total orders, up from 30% last quarter. Automotive segment orders were 23%, compared to 24% last quarter. Data storage orders improved in fact and increased to 17% of total compared to 14% in the summer. Our military government segment and telecom segment were 10% and 6% respectively.

Now let’s wrap up and provide a little guidance going forward. So to sum up we’re seeing good growth, steady orders and sales and we’ve been able to translate that growth into improved profitability. SG&A expenses were right in line with plan for Q2 and our gross margins are up for the second quarter in a row. It was also a very good quarter in terms of our working capital and balance sheet, largely as a result of our demo selloff, our inventories were down $2.5 million. We reduced our net debt by $6.7 million, repurchased about $700,000 worth of LeCroy stock and looking forward with our lean cost structure and strong distribution channel, we think we’re in good position to realize the long term profitability potential in our product pipeline.

Now with that as a background, we’re right on track for our plan for the year. We’re reiterating our guidance for fiscal 2008 with revenues for the fiscal year in the range of $155-$165 million and adjusted operating income expected to be in the range of $12-$17 million. Now having said that, it seems clear that we’re well on our way towards the high end of the earnings range for the year.

We still think that sales will likely end up in the middle of the range but earnings are on track to do a little better and still it’s unlikely that we’ll exceed the range. While we have been aiming for double digit operating margins, there remain some inviting opportunities for increased investment and product development and if we can maintain our current earnings trend we will like endeavor to capitalize on one or two of these opportunities in order to improve our growth prospects in future quarters.

So, with that, we concluded our prepared remarks and ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Mark Moskowitz with JP Morgan, please state your question.

Mark Moskowitz – JP Morgan

Yes good morning. A couple questions if I may. Tom can you just maybe give us a little more context around Europe in terms of how much of the strength presently is driven by broad customer demand versus more of just LeCroy’s improved sales funnel as well as product footprint?

Thomas Reslewic

Well, you know, so for, we obviously had a good currency tailwind in Europe for some time, so certainly some degree of this steady continuous double digit improvement in Europe is coming from currency gains, but taking that out, Europe has been growing for us particularly in oscilloscope business, at an almost a steady 5% year on year improvement in every quarter for like the past eight quarters. So we are just in a very good groove there.

The economic environments that we’re in still seem very good, the segments that we’re particularly involved in, automotive, electronics and industrial electronics are very strong segments and are still doing well. A lot of innovation in those parts of the economy and so good fit to the applications, a very, very good competitive product offering, a very mature and well developed set of distribution players, both our own people and third parties and a strong market share compared to the rest of the world. So we have a lot of forces in our favor in Europe and once again this quarter we just saw that all come together and do a little better than we thought we would do.

Mark Moskowitz – JP Morgan

Okay and shifting gears to Japan, obviously the sequential downdraft was pretty significant, but what gives you confidence that a bottom has been reached, what are you picking up from either your distributors or your sales folks or just your customers in general?

Thomas Reslewic

Yeah, it’s very, it’s relatively simple arithmetic in fact. When you move to a complete reliance on one distributor as we’ve done, so all of the orders that we get from Japan are orders for Iwatsu placed on LeCroy and Iwatsu orders from us and we ship to Iwatsu and at the beginning of the relationship that started last March, actually initially in April in fact, we saw some early orders for Iwatsu, getting into position to be able to have inventory to take care of customer needs.

But over a period of time I think Iwatsu built up a little more inventory than they had seen in demand and in this particular quarter, we’re pretty committed not to let too much inventory buildup in Iwatsu, so we saw customer demand actually measuring the orders that are placed by customers on Iwatsu far exceed what Iwatsu placed on us. So we’re pretty confident that the underlying demand is going to improve, in fact we’re not totally disappointed with that figure, but the amount of business that Iwatsu placed on us was just very, very small and really reflected the fact that they had gotten a little bit ahead inventory wise and we just saw that get trued up this quarter, so I’m pretty confident that we’re going to start to see some benefits related to improved customer demand and Iwatsu in a better position to buy from us to satisfy that demand as we go forward.

Mark Moskowitz – JP Morgan

Okay, thank you and just one question for Sean. Nice balance sheet the last of in cash flow metrics this quarter but just wanted to get a little bit more color if we could about the non-GAAP op-ex, it did pick up a little more than revenues sequentially, how much of that is related to the ongoing investments in your new product pipeline versus other?

Sean O’Connor

Yeah I mean the increase is primarily due to significant investments in R&D and as we get closer to the tail end of product development cycle you need to have these incremental costs, maybe I could let Tom elaborate a little bit more on some of the specifics…

Thomas Reslewic

Sure you know one of the things we mentioned in the summer quarter if you remember is that we thought that the operating income in the summer quarter was a little bit hotter than we had expected and a lot of that was expenses that we had anticipated but really didn’t materialize in the first quarter and really became Q2 expenses so we saw some expense bump up from Q1 to Q2, more related to timing than anything else in R&D and that relates to as you’re moving new products through the pipeline as you’re getting closer to the end stage, you get a lot of discreet non-labor non-people related expenses related to new product development. So we saw a bunch of that in the second quarter.

Also, I should say that we see typically in the second fiscal quarter, higher selling expense particularly as we have a lot more promotion activity, a lot more trade shows, particularly in Europe, we see bigger commission expense, bigger selling expenses relating to volume and we saw a fair amount of that as well as we had expected. So Q2 tends to be typically our strongest orders quarter and as a result typically our highest expense quarter as well.

Mark Moskowitz – JP Morgan

Thank you.

Operator

Our next question is coming from John Harmon with Needham & Co., please state your question.

John Harmon – Needham & Co.

Hi good morning, two questions, first of all these really pertain to some comments you made at our conference last week. First Tom, you said you plan to regain some market share in the high end on oscilloscopes, so I was wondering what weapons you have to accomplish that, whether it’s performance or price or a combination of both and my second question is I think before for a while you were talking about diversifying the company with probably an acquisition into a third area, so at the conference again and you touched on it, talking about operating expenses that there’s so adjacent opportunities that you can exploit organically. Anything you can add there would help, thank you.

Thomas Reslewic

Yeah, so let’s start with scopes and market share performance versus pricing question. It’s not clear to me exactly what happened in terms of the market growth in calendar 2007. I think most likely the scope market is relatively flat in calendar 2007. We definitely in the second half of the year really started to see some year on year gains in scopes, I think that’s entirely related to what we’ve done in distribution. We did launch a high end product in the second quarter, a 13 gigahertz product, but it’s still really a product that’s based on our existing technologies suite. You know, well targeted and a good product but not really reflecting our next generation and I think that the gains that we’ve made so far have largely been related to improved distribution effectiveness and certainly some competitive pricing and so forth on the products side.

As we go forward, as we start to look towards our new product pipeline, I’ve been working hard not to transmit details of the products or of the timing and I’m going to continue along that line. But I will say that it is certainly our expectation that we will come out strong in the performance side and that we will be really looking to improve our position as a function of really improved product performance for the customer is really focused on kinds of needs and activity that we see our customers involved in. So I’m anticipating that we will be able to do a good job in launching products at the mid to high end of our range in the future and that those launches will translate into share gains.

The second question that you asked related to would we consider acquiring or diversifying the company further into a third product area. Of course the core business of scopes now our protocol business is 25% of total, so it’s a significant and meaningful part o the company. I think that we all feel, especially if we look at the market that protocol is serving and if we look at the markets and applications that the scope business is serving, that if we wanted to add product segments, we think that organically we can develop products that are very closely related to our existing products but help us round out our solutions in the applications that we’re currently facing.

So in other words, without getting into details of what kinds of products and when and so forth, I think I would say that we see a number of opportunities for some organic development to augment our existing products and as we get closer to launching new products and seeing our overall financial picture improve, we’ll certainly be looking to make some investments, I would think organically in some product development to augment our other offerings.

John Harmon – Needham & Co.

Okay, thank you.

Operator

Our next question is coming from Ajit Pai with Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Yeah good morning. A couple of quick questions, I think the first one is more to get some color on the competitive landscape. So, two of your largest competitors in your primary business, the oscilloscope business, have introduced a significant number of products over the past two years. Your results right now seem to be showing slightly higher growth, you haven’t announced a recent results but seems to be showing some pretty robust growth, so could you give us some color as to whether the pricing environment, I think you alluded to it a couple of times, right now is not too favorable but is it getting intense. And also, not in terms of demonstrated share gains, but do you see any kind of change in competitive behavior from Techtronics after the acquisition?

Thomas Reslewic

First of all, I’ll take the end of your question first. I haven’t seen any particular change in Techtronics’ competitive behavior as a function of acquisition. I had not anticipated any, I think that our view of Techtronics is Techtronics is still Techtronics and they’re a very strong scope company in Beaverton and we treat them the way we always have with plenty of respect and so it’s business as usual from our perspective, competing on a day to day basis against Tech.

Back to the first part of your question, you’re right I think our results the past couple of quarters have been stronger and we are facing a large number of products that both of our competitors have launched over the past couple of years. But as I’ve said for some time, our, what I would describe as kind of 1 gigahertz to 2 gigahertz and below, that product segment of LeCroy, is a very, very competitive product offering and it’s a very deep and rich product offering and as customers starts to appreciate the products more as we get it to our newer customers with these products and they start to apply the products into the depths of their debug applications, I think they generally appreciate the real LeCroy differentiators which are extremely well embodied in those products.

So we’ve said for some time that mid range and below product lines are extraordinarily competitive and that even against a lot of the new products that have been launched in the past couple of years. And we’re doing very well with those product lines, we launched two new 1 gigahertz products in the December quarter, one based on the WaveRunner platform and one based on the WaveSurfer platform and we have seen an enormous year on year growth in the 1 gigahertz space. So, it’s a combination of the market needing products in that space and us having very good underling competitive capabilities and having freshened and augmented that product line as well.

On the high end, I have not made any secret about the fact that we have been at more of a competitive disadvantage and that we’ve been working hard to mitigate that. So one of the ways we mitigate that is by engaging in and using actually some of our more advanced technology that we end up having to price more competitively to get the job done. That has as much impact on our margins as anything else. We’re still actually able to compete and win in a lot of orders even in the high end and when we do it’s almost always because the customers tend to prefer our analytical strengths and our wave shape analysis capabilities that we’ve long used to differentiate ourselves.

So we feel like despite the competitive environment our differentiators are alive and well and we’ve been working very hard to make sure that our sales channels are highly focused on productivity at the low end and competitiveness at the high end while we await our next generation products.

Ajit Pai – Thomas Weisel Partners

Okay and then the second question would be, sort of revisiting the fundamental demand question in Europe and in Japan I think you did respond to a question on that earlier, but on Japan specifically I think you mentioned that you were seeing the sales that you’re making to Iwatsu, the new sales, are actually not as robust as the actually sell through that you’re seeing, did I hear that right?

Thomas Reslewic

Yeah and I think that’s really more of a timing phenomenon. So we started off with Iwatsu and very, very early in the relationship Iwatsu tried to speculate what product they’d need for their market and what they needed to buy from us and by the time we go into Q2, December quarter, we really wanted to make sure that there wasn’t any excess inventory building up back in that channel so we saw a somewhat of a disparate balance between what Iwatsu bought from LeCroy and we shipped to LeCroy versus what the end users bought.

So in other words Iwatsu was able during the December quarter to fulfill a lot of customer demand from inventory that they had. We thought that was a good thing, we thought the timing for that was okay. You know December quarter is typically when Europe is very strong for us so we felt that just letting nature take its course a little bit in Japan was the right thing to do.

Still, the end market demand in Japan, we don’t see as tremendously robust, we don’t see it as really long term growth, but I think it’s generally better than I thought it might be at this point in time and starting to show signs of getting to where we’d like it to be. And certainly now with Iwatsu having really depleted a lot of its own inventory I think we should be now a little bit closer to 1:1 customer demand to sell through.

Ajit Pai – Thomas Weisel Partners

Got it and when you’re looking at both geographies, when you’re looking at Europe and you’re looking at Japan and you’re looking at the demand for your products and the growth that you’re seeing, how much of the growth do you attribute to sort of end market growth and how much of your growth would be attributed to your new products, better trading again and increasing your penetration and also basically share gain.

Thomas Reslewic

It’s a very hard question to answer really but I do not perceive that the oscilloscope market has grown in calendar ’07. I could be wrong about that but I don’t perceive that the scope market is, I think it’s at a high point, I don’t think it’s soft or slowing down or declining, but I don’t think it grew very much in calendar ’07. So I believe that particularly in Asia and in the United States where we’ve done so much channel reengineering that it’s probably more of some of the benefits of what we’re doing than the market.

And in Europe as I mentioned before we just have so many things in our favor. We have high market share to begin with. We have very, very seasoned and tenured managers and sales people. We have a well developed distribution channels, we have a currency tailwind, we have products that are well suited to applications. Probably the most competitive part of our product line, which is the WaveRunner space is really the most popular and most demanded products in the European theatre, particularly in automotive and industrial electronic applications. So we just have a lot of very good things going our way in Europe.

Thomas Reslewic

Okay, thank you.

Operator

Once again ladies and gentlemen if you would like to ask a question, please press star one on your telephone keypad. Our next question is coming from Raj Seth with Cowen & Co.

Raj Seth – Cowen & Co

Hi, thanks. Just a clarification first. You may have mentioned it but can you remind me what the percentage of bookings by geography, I got the growth rates, was this quarter?

Thomas Reslewic

Yes, have to flip a couple of pages. Yeah okay so we usually talk about what the growth rates by geography, I don’t actually have a breakout and report the precise distribution by geography, but in general I can say that Europe, and when I say Europe we really mean Europe, Middle East and Africa, and that area was by far the largest region. And then the full Asian area was probably overall, a little next and a little bit ahead of the US. The US generally running third at around somewhere in the neighborhood of 30% of total.

Raj Seth – Cowen & Co

Right and Tom, obviously a lot of concern about the economy here. There are a number of signs that semi’s are slowing et cetera, I wonder as you think back in pervious cycles, how has this space done in downturns, what are the things you’re looking at as you look forward as potential indicators for your business, where are you focused and is there indeed no change in the feedback you’re getting from customers at this point in the US in particular?

Thomas Reslewic

Yeah a couple elements there. So you know there’s sort of three pieces. One is, what would we consider the worst case scenario and how would our business fare if there were a downturn. And then secondly, what kind of indicators are we seeing, actual real indicators from our business. And then third is generally how are we positioned, what’s our game plan?

So, first, I would say if I go back to certainly what felt like the worst technology slowdown that I can remember was in the 2001-2 timeframe and our business at that point in time compared to a lot of others fare better. We saw about a 15% decline in the top line directly related to the contraction. And I think that that’s typical for our case because so much of our business is in R&D, we’re relatively little business in manufacturing applications and almost nothing in semiconductor test per se. So we tend to be a bit more isolated. When things get really bad from a cash front perspective of course we feel it too but we think that about 15% on the top line is kind of really represents a pretty bad scenario.

If I look at what we’re seeing right now I have to say that just the indicators of our business, orders, funnel, demand indicators, all the things that we look at in our dashboards, if that was the only thing I would be looking at, I wouldn’t see any signs of trouble at all. None, in fact, with the only exception being what I said about the Japan environment and I’ve been saying that for really quite a long time, a year.

So, you know, inside our business I don’t see any indications right now of trouble but we all read the same stuff so it’s worthwhile being a little prudent. I think I would say that if a year ago someone had predicted that we would head into a slowdown and asked me to prescribe what sort of actions we would take, they would in fact have been all the actions we have taken, which have been substantial reduction in our cost structure, we really lowered our breakeven point. So to be kind of at the end of a lot of that pretty hardcore tuning up, to be running at double digit operating margins without really seeing the benefit of what’s going to come out of our new product pipeline and feeling like we can sustain this at current business levels, I feel that that is above the best position you can be in if in fact we do see something more material in the way of a downturn.

So we’re going to stay cautious and we’re not going to let our expenses get away from us but we weren’t anyway. Our game plan was maintain this kind of level of performance until we really start to unleash the new product pipeline and so if we see downturn between here and there, okay I’d say we’re as prepared as anyone could be.

Raj Seth – Cowen & Co

Right that’s very helpful. One last one if I might. Can you talk a little bit about the relative growth between the protocol business and the scope business, what are you seeing and if it’s possible to comment on relative profitability that would also be interesting, thanks.

Thomas Reslewic

Yeah we obviously don’t break out the segments so I’ll make a couple of relatively general comments. Definitely, we have seen a period of contraction to even flatness in the scope business going back a year. And the trend that we’re on today, we seem to have improved the scope business overall by a relatively steady 6-8% and I think that 6-8% growth that we’re seeing on the scope business is largely a function of the good efforts in distribution and improving our focus on the business. And so I don’t see that as step functioning up on its basis, I see it continuing to get traction in distribution and I would expect any meaningful growth in the scope business to really come as a function of new products which are still out there in the future.

The protocol business is spotty. The quarter that we just had was a good example. We saw 17 kind of percent growth year on year and quarter to quarter, we actually had a positive book to bill there so from an orders perspective it was even better than that in excess of 20% and that’s what happens. We had our next generation 6 gigabit storage product ready for some time, in fact we had it ready as far back as the springtime and we waited two quarters to see some meaningful adoption begin and those two quarters were not overly impressive, then bang this quarter this really took off. I expect we’ll continue to see that in the current quarter. PCI express is kind of steady, in fact if you look at PCI express gen 1 and gen 2, both of those things together, we had our best quarter ever, but we have also been banking on the fact that the wireless technologies, Y media and wireless USB would really be starting to kick in right now and that has not materialized and you know it doesn’t look promising that in the next couple of quarters those technologies are really going to contribute a lot.

So you get these lumps and spikes, but on the other hand we look into the future and see in 2008 potential some real traction on USB 3.0, that wasn’t even something that was in our plan 12 months ago and yet that could prove to be a really significant bump. So, it’s just a lot lumpier in the protocol business. But in general the protocol business should grow about twice as fast as the scope business unless the scope business really gets a lift from new products and also in general the protocol business is more profitable on a percentage basis than the scope business.

Raj Seth – Cowen & Co

Right, last one if I might, any 10% customers in the quarter?

Thomas Reslewic

Nope. You can’t even get a 5%-er.

Raj Seth – Cowen & Co

Okay thank you that’s very helpful.

Thomas Reslewic

You don’t see anything that’s even above 2-3%.

Raj Seth – Cowen & Co

Thank you.

Operator

At this time we’ve reached the end of the Q&A session. I will now turn the conference back over to Mr. Tom Reslewic for any closing or additional remarks.

Thomas Reslewic

Okay well I think we’ve covered about everything we need to and thanks for all of your interest and we look forward to updating you again when we reach the end of this quarter in the April timeframe. Thanks very much.

Operator

That does conclude our conference call. Thank you for joining us today.

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