LTX-Credence Corporation (LTXC) Barclays Capital Global Technology, Media and Telecommunications May 23, 2012 4:15 PM ET
Rich Yerganian - VP, IR
C.J. Muse - Barclays Capital
Thank you, all for coming. My name is C.J. Muse with Barclays. I am a semiconductor analyst. It's my pleasure to have LTX-Credence with us today. We have Rich Yerganian, VP of Investor Relations. We have roughly 25 minutes. We will have brief presentation, move to Q&A, and then after that, we will have a breakout session in Liberty 5.
With that, let me turn it over to Rich.
Thank you, C.J.
Just to start out with, in case you are not aware this morning, we announced our fiscal Q3 results for the quarter ended April 30, we announced revenues of just shy of $31 million. Midpoint of our guidance was $30 million, and we had a loss per share of $0.10 per share on a non-GAAP basis.
Our guidance for our fourth quarter, which ends the end of July, was significantly up in terms of revenues with the guidance being between $42 million and $46 million in revenues, and EPS, from breakeven at the low end, to $0.04 a share profit that’s behind the guidance. So certainly heading in the right direction in terms of the overall business cycles represent two quarters in a row of sequential growth. We believe that the bottom of the cycle certainly is behind us as we enter this new phase of growth.
For the company, we are in the semiconductor test equipment market, which you can breakdown into two major segments, the standalone memory devices and everything else or what we refer to as the SoC space. The SoC space in 2011, which is the area that we focus on as a company, represented approximately $1.8 million in product revenues, so it's the last calendar year. Again, we don't really talk much about the memory space, because we don't participate in it and have no plans to participate in it.
Within the SoC space, we target about 70% of the overall market size there. SoC represents everything from purely analog devices to all the way through purely digital devices along the RF and power and various capabilities in between.
We don't focus on the high end digital or the microprocessor or graphics processor part of the market that represents typically about 30% of the overall SoC space. We instead focus on what we believe to be the higher growth, more opportunities to differentiating your solutions part of the market, which are the application-specific or ASSP market, microcontrollers, data converters, RF, frontend devices, such as power amplifiers and transceivers, as well as power management devices. Again, that represents about 70% of the overall market which is what we view as our addressable market of about $1.2 billion in calendar year 2011.
Looking at those target markets in a bit more granular way. On this slide here, you can see that the various sizes of the IC market both, for 2011 and expected growth into 2012, but most important column on this chart is probably the third column or fourth column, which is the unit volume compound annual growth rate. Our business is driven by unit volume expansion in the semiconductors, because the more units that are created the more units that need to be tested on equipment. So that's a very key metric for our business' unit volumes.
You can see from each of the various market segments, our estimate of share in each of those spaces and while we are the smallest of the three remaining semiconductor test equipment manufacturers in this space, we have pretty health share positions in our target markets.
The one market that we felt we needed to address that we didn't have a very good position yet we included as part of our addressable market was what we refer to as a digitally-centric application-specific market segment. These are devices that have, many of them are found in the mobility space although not exclusively, but these are devices that have high digital content, but also have requirements for RF or certain power requirements and the like. This is capabilities that we had in one of our product lines, some of those capabilities one of our product lines and some of the other capabilities in another product line, but we didn't have one that brought it all together in a solution that could really target these devices effectively and be consistent with our position in the marketplace which is to deliver the lowest cost solution for our customers.
The most important markets out of these three, the application-specific market is the single largest, so certainly very important in order of importance, the power and microcontroller markets come next and then the RF power amplifier market, one where we have a dominant position, it's an important market for us, but it's not necessarily one of high growth, because we already have such a dominant share position there, but all these other market segments do represent significant opportunities for growth from a share position and that's what we are focused on achieving.
We have a series of four major product lines within the company. We will start with the ASL product, which is focused on the low end or low complexity analog in power management space. This is a product that's been around, in its initial form, for over 10 or 12 years or so, has a very, very large installed base, especially throughout Asia, somewhere north of 4,000 units installed and it's been a workhorse in that particular marketplace.
We introduced ASLx, which is an extension of the ASL just about a year ago and it extends the capabilities. It actually takes a subset of our X-Series product line and gives users of the ASL a path forward for increasing the number of devices they can test in parallel as well as the ability to test more complex devices than they were originally able to test with just the ASL. That is going extremely well and customers that were originally with the ASL are moving to the ASLx as a path forward. So that's going well.
The X-Series is our dominant mixed-signal platform. That is the one that has a rich mix of RF instrumentation, power instruments, data converter testing capabilities, a whole range of mixed-signal oriented instruments and techniques that are built into that particular test system. It's focused primarily on the data converter, the high end or more complex power management or integrated power management devices as well as the RF space in the application-specific products that are more analog-centric. For example, devices that are found in the automotive space, many of them don't necessarily have a complex digital component, but they have quite a mix of analog capabilities or requirements and that's where the X-Series is really focused on.
I will skip the Diamondx and go right to the top, which is the Diamond. The Diamond product for us has been our primary microcontroller tester. It has a very high number of digital resources along with a component of the analog capability as well, but certainly not to the extent to X-Series. For the application-specific market that is more digitally-centric, the Diamond product line had a very strong digital capability that was well suited to that marketplace. The X-Series had all the RF in mixed-signal instrumentation, but we didn't have a product that combined the two, because in that space, in that digitally-centric applications specific area, you do need a test system that has a combination of high digital resources around RF and power and so on so forth.
We recognized that not long after we merged with Credence and started down the path of developing a product that we introduced officially just a month or so ago called the Diamondx, which does take, if you will, the best of both worlds, the best of Diamond then the best of the X-Series and combines into this new product that we are very excited about its initial reception, very well received. It's been adopted by multiple customers already. We have nearly half a dozen installations at various companies throughout the world and we are very confident that this is going to be a very important product for our future moving forward.
What the Diamondx does for us is, it opens up about $400 million market segment that we really didn't have a product to address very well before, and we are very confident that this product along with some management additions that we made to the company that joined us from Verigy, one of our previous competitors, is going to position us very well moving forward in terms of building our share in this particular market segment.
We have a two-phase rollout for the strategy of the Diamondx initially focusing on customers that we already do business with, but don't test products in the certain product areas that the Diamondx can now address, so now we're positioned to go after those product areas and then Phase 2, we will be going after companies that we don't currently do business with, or haven't done business with recently that we could now grow into and provide a real valuable solution.
Again, the common theme to all this is we are looking at how do we attack a market segment. We deliver to our customers a solution that delivers the lowest cost of test and that lowest cost of test is delivered through several major components, capital price, throughput and ongoing operating cost. We take all those three things into consideration for designing a new product and bringing it to market and that's where we have staked out our position in the market.
From a business model perspective all of these products, even our newest Diamondx that we introduced will reached corporate margins right out of the gate and all of them are roughly the same in terms of margin contribution for the company, so we are not relying on any kind of product mix in a particular quarter to reach our goals in the business model.
Just a little bit more on the Diamondx. Again, we have architected it for the lowest cost of test, but I don't want anyone to not think is that there isn't a whole lot of engineering innovation that goes into designing and developing this product. Everything from designing very high speed buses to move data around within the test system, again to speed up test time to supporting certain capabilities, a technique called concurrent test now, which means as you have a complex device that has various technology cores built into that device being able to test each of them concurrently rather than serially and again a way of speeding up the time to test a particular device and having the ability to have very high pin count machines.
We have a technology that is fairly unique in terms of how it works called IMA technology, integrated multi-system architecture. What that allows you to do is take a lowest common denominator test system, so a very small test system and open together almost Lego style to create, in essence, a larger test system and that has value for customers. Number one providing flexibility on the manufacturing floor, but number two they don't have to invest in a very large test system that at times maybe underutilized when they are trying to test more simpler devices. They can invest in a test system that is matched more efficiently to the types of products that they are testing and therefore have higher utilizations as well as match the cost of test to the device actually trying to test.
All-in-all, this leads to a very broad mix of customers, some of the leading IDMs in fabless and OSAT customers in the world use our equipment. Certainly companies like Atmel, TI, STMicroelectronics, Maxim, Renesas, are always near the top of our list in terms of customers for the company, but you add to that a very broad mix of fabless companies like an NSTAR or MediaTek or Entropic or TriQuint or Skyworks, a broad range of end markets geographic locations in Taiwan, China, Japan, Europe, very broad representation given the market segments that we are trying to target.
Typically about 30% of our revenues come from OSATs, or subcontract test companies mainly over in Asia. This quarter that we just finished it was slightly different percentages, about 45% came from OSATs and the balance from IDMs and that will move around on a quarterly basis, but that's what it was this quarter.
Moving on, to look at the financials. This chart shows our revenue progression since we merged with Credence in August of '08. So the first column there represents the first quarter of our merger and you can see the whole last cycle playing out as it bottomed into Q3 of fiscal year 2009, coming all the way back around again to the bottom of fiscal Q2 of '12. That represents approximately about a three-year period which is, if there is such a thing in average cycle in our industry, that's about the length of an average cycle. Usually it takes seven or eight quarters to get to the peak and then it comes down a little bit quicker unfortunately in two or three quarters to get to the bottom.
We do believe that our January quarter, at that $24 million did represent the bottom of the last cycle. We have now had one quarter up and a second quarter's guidance of up revenues, and you can see a pretty significant jump in our Q4 guidance over our Q3 revenues of 30% plus, or $13 million from last quarter revenues to the midpoint of guidance We are certainly, we believe, in the beginning of the cycle. Not every quarter we will be up into the right, but we do believe the trend line is on a positive basis for the foreseeable future and that's based on independent market research coming out with forecast as well as customer sentiments and how they are looking at their business, which is certainly very important to how we look at our business.
One of the other stars of the business model that we put in place is the gross margin performance of the company and you can see even as we stake out the lowest cost solution part of the market for our customers, we are still able to deliver the leading gross margin performance in the industry. So that is certainly a key part of our story and will continue to be moving forward.
On a balance sheet basis, we have come through the bottom of the cycle in extremely good shape. For those of you that have followed the company at all over the years, you would be, I hope, encouraged by the performance of the company as we went through the down cycle and begin this next one.
In my almost 28 years with the company, I don't think we have ever been in a stronger financial position, never mind, customer or product position as we are beginning the next growth cycle. We have told people that we expect that our Q4 along with the increase in the revenues that we will start generating cash again. So we expect to generate $2 million worth of cash in our Q4, and hopefully, if the growth continues beyond that we will continue adding to the cash balance and again debt free, so very strong balance sheet, very strong business model. It's now proven itself not only in the upside, which it did through the last cycle, but it's proven itself as we have gone through the down cycle and come up the other side.
We like to look at our business over an entire cycle, because there's a lot of ebbs and flows whether the market segments or customers buying or different products that launch and so forth over a quarter or annual basis, so when we look at thing over a three-year or most recent cycle about a three-year period, we generated about $101 million of EBITDA and about $560 million odd in revenues so, again, very strong performance by the company.
We think we can do better than that in the next cycle. We think we can generate 24% of revenue and with the new product that we are launching, as long as some new customers on existing products that we have been able to win, we expect to be able to increase our share in the overall SoC market by several points, and that would translate into roughly $700 million revenue target for the company and achieving that along with the 24% EBITDA, we are generating another $160 million to $170 million of cash. So we are very excited about getting into this new cycle and as long as that cycle has growth, it continues to grow our new products, our new customers and our existing customers and products should drive the company to a very strong position moving forward.
Looking at peak quarterly revenue cycle-over-cycle, in the last cycle we peaked at $76 million and that resulted in EBITDA $25.1 million in that quarter and an EPS of $0.42 a share. We did peak out at 62.5% gross margin, which was above model or above plan. During that quarter, we did have some mix benefit, some inventory that had been previously written off on an older product line, contributed to the high gross margin in that particular quarter, generally we tell investors to model our business at above breakeven, that for every incremental dollar 60% goes to gross margin 50% goes to net income, and that's a pretty good way.
We have been somewhat better than that if you look back on a quarterly basis, but that's a reasonable way to look at our business, and we think with the new products that we have launched and the customers that we have and hope to win that we think we can peak next cycle whenever this may be at about $90 million a quarter compared to the $76 million at that $90 million, we think we can deliver $0.55 of net income. So business model remains very strong, gross margin performance very strong, balance sheet, from a financial perspective, company in very, very strong shape and pipeline of new products that have come out over the last year and are continuing to come out over. We will see additional products coming out on a fairly regular basis as well. So we're very optimistic about the prospects for the company and we hope this cycle will continue to move in a favorable direction and we will grow along with it.
With that I will stop prepared remarks and take any questions that may be here.
C.J. Muse - Barclays Capital
Rich, thank you for the presentation. First question, if you could talk about the strength that you are seeing in the current timeframe and I am assuming a good chunk of that is on RFPA side and then I guess more importantly in terms of your visibility to orders and what the trajectory and drivers look like as we move into the summer timeframe or are you starting to see MCU, auto, industrial, et cetera, pick up? I'd love to hear your thoughts there.
Sure. Yes. It's interesting this time around, because what we have seen historically is the low-end analog has kind of been the first one to kick in, and first market segment that would kick in kind of be a leading indicator.
This time around it was the RFPA market, as you mentioned, has come back a little bit quicker, a little bit strong than some of the other market share segments. So that helped us in our Q3 growth that's going to continue to help us in our Q4 guidance, but what's important is that it is now broadening out beyond that. There are still some market segments that have not shown tremendous amount of recovery at this point, but other market segments, driven somewhat by the automobile space are showing pretty good recovery for us moving into the fourth quarter.
It certainly is broadening out to other market segments beyond just the RFPA space, but RFPA space is an important part of our business, but in and of itself, it doesn't generate enough revenues to really have the growth that we are seeing on our quarter-over-quarter guidance. The guidance is indicative of broadening out into other market segments. Again, the automobile space is one of the major drivers of that.
I guess on the market share side, and your comments around next cyclical peak being around $90 million. Can you talk about what your assumption is within the different segments of the SoC market and where you see the biggest potential for share gains?
Right. Well, what's that number is based off of is, the first assumption is, let's assume the market size of that particular year as same as the market size was when we peaked in that $76 million, so you have make an assumption on how large of market we are going to be in at that time, so if we assume that it is the same size, what we are seeing is that we haven't really lost any customers to speak from our previous achievement of $76 million. Now there maybe some that buy less or buy more within that group of customers, but we haven't lost any significant customers to competitors, so that $75 million or $76 million base is still a very much a part of our business.
Then the question is, how do you get to that extra bump into the $90 million range and a big portion of that will come from our new products. We talked about I think on our conference call earlier today that we expect the Diamondx for our next fiscal year to represent 20% to 30% of our product revenues, and of that 20% to 30%, 80% plus of that will come from new business, meaning, customers that either we weren't doing business with before or we are doing business with them now in a product area that we weren't doing business, so a new business opportunity.
What I'm referring to is not that we are using our product for doing production before, now they are just going to use the Diamondx. That's not inclusive of this new business definition. So Diamondx will be a very key component of the growth into that next peak and, based on the earlier reference from customers and feedback that we are getting, we are pretty confident that that's going to be achievable.
On the new products front, can you put out a little granularity as to when you think we will see revenues layer in, in a meaningful way, where we will see kind of the pop in your market share. I think you have talked about 80% from new customers, and I would love to see that flow. How are we supposed to model?
We should see that initial revenues coming in perhaps in the fourth quarter for some conversion from engineering machines into revenue, but really the volume will come from when people put products into production and that drive capacity expansion on our product line. When people adopt the new system, they are usually adopting new systems for new devices, so how quickly the product will ramp will very much depend on how successful our customers are in ramping their products.
If you look back, we had a customer that adopted our Diamond platform several years ago as the next-generation platform, we had no idea they were going to be as successful as they were in the market, they ended up ramping extremely fast and we have ramped along with them. Those dynamics can happen again or can be a slower build. It's really difficult to tell.
I will say that the customers that are initially adopting the Diamondx aren't small companies that they are ones that can drive volumes, so I think the likelihood of we are being successful in the market with their products is very high and therefore I would expect a pretty good ramp through the fiscal year with the Diamondx for those customers. So I don't know if we will see a step-function. It's possible, but I am not sure. I think you will likely see a probably a faster expansion in our Q2 through Q4 than you would in the Q1 period.
C.J. Muse - Barclays Capital
We're going to breakout.
Sure. Thank you very much.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!