LTX Corp F2Q08 (Qtr End 1/31/08) Earnings Call Transcript

Feb.25.08 | About: LTX Corp. (LTXX)

LTX Corp. (LTXX) F2Q08 (Qtr End 1/31/08) Earnings Call February 19, 2008 4:30 PM ET

Executives

David Tacelli - CEO and President

Mark Gallenberger - VP and CFO

Analysts

Patrick Ho - Stifel Nicolaus

Brian Lee - Citi

Dave Egan - Lehman Brothers

Operator

Good afternoon, and welcome to LTX Corporation's second quarter analyst conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

At the request of LTX, this conference is being recorded. Speakers for today's call will be David Tacelli, Chief Executive Officer and President, and Mark Gallenberger, Vice President and Chief Financial Officer.

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

Mark Gallenberger

Thank you, Karen. Welcome to LTX Corporation's second quarter fiscal year 2008 conference call for the period ended January 31, 2008. Joining me on today's call is Dave Tacelli, CEO and President.

After my introductory comments, Dave will discuss the Company's performance for the second quarter and discuss the business outlook then I will provide further detail on the Company's financial performance during the second quarter of fiscal year 2008, as well as provide guidance for LTX's third quarter fiscal year 2008.

We will take your questions after our prepared remarks. Today's call will last approximately one hour. A replay of this call will be made available through March 13th, by dialing 888-286-8010, and the pass code is 91831568, or you can visit our website at www.ltx.com. As a reminder, the only authorized spokespeople for the Company are Dave Tacelli and myself.

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

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

Now on to the call. Dave?

Dave Tacelli

Thank you, Mark, and good afternoon, everyone. For some time now we have been describing and expanding customer base for our X-Series products, and how we expect those new customers to make the transition from engineering development to volume production. While our second quarter revenues met expectations, our second quarter product bookings grew 65% and accordingly we have increased our third quarter revenue guidance by 25% with most importantly a return to profitability.

Among our accomplishments for our second fiscal quarter were the following. Incoming orders grew 82% over the first fiscal quarter. The main booking story however, was product orders growing 65%. New accounts won over the past several years produced two-thirds of the increase in order dollars, with our largest customer accounting for the remainder, a direct result of customers moving new designs into volume production.

Two customers represented at least 10% of orders and revenue in the quarter, with three customers greater than 10% of product orders. We announced two new customers in China, an important and growing market for LTX. China is an ideal target given the number of RF/wireless companies requiring high-end capability at the lowest possible cost of test. And we won several new customers including two new subcontractors taking delivery of their first MX testers.

Now I review the second quarter, revenues was $31 million towards the high-end of our original guidance of $28 million to $32 million. Our business model results were in line with expectations and delivered net operating loss of $0.05 per share. The business model was performing very well and our expectation is that its business conditions improved during 2008, the leverage of additional revenue will drive very good profitability, and substantial positive cash generation.

We continue to generate cash during the quarter with a positive $1.2 million EBITDA, with our guidance for next quarter it will mark the 12th consecutive quarter of positive EBITDA performance for the company. Incoming orders for the quarter were $54.5 million with product orders of 65% sequentially, the highest level in the past six quarters.

We stated on the last conference call, that they will be two major drivers contributing to the expansion of our revenue in the next growth phase of the ATE industry. The first driver will be a volume production ramp with our existing accounts. These customers have been adding significant engineering capacity, but are just now at the early stage of brining many of these new products to production.

During the past quarter, we started to see the benefit as two different IDMs, started to move from engineering qualification and development to full volume production. One particular customer has over 80 new devices plan for release in 2008 in a wide range of performance analog and high-end SOC applications.

Another IDM in a similar position, where they are releasing a pipeline of new products into the RF/wireless, Cellular baseband, automotive and hard disk drive control markets. Both company started to migrate some of their new designs to volume production in the last quarter. We would expect these two companies to drive over 50 production testers during calendar 2008. In addition to these new accounts, we continue to make progress with expanding our business at our largest customer, and look for capacity buys later this fiscal year.

The second driver of our top line growth will be fueled by recent and coming introduction of key new instruments to the X-Series products.

These new instrument deliver performance enhancements to our industry leading low costs RF solutions, create new power options for the power management and automotive market and offer a new digital pin options that deliver high speed, test capability for digital technologies, such as USB 2.0 and DDR2. We believe these new capabilities will offer compelling technical differentiation in certain mixed signal, RF, complex communication and high-end SOC market.

We have already started to recognize revenue from these capabilities and our expectation is for that to grow substantially over the next two fiscal years, with revenue generated through the introduction of these new instruments to account for over 20% of our product sales by 2010. So, to summarize our top line is starting to benefit from the work we have done with new customers over the past several years.

We continue to work with these accounts to help them move their new designs from qualification stage to volume production. Our revenue continues to become diverse with several companies now contributing to our growth on a regular basis. Our growth is also coming from new instruments and technical capabilities driving broader market penetration as well as capacity expansion from existing customers.

So now the question becomes is this the really the beginning of LTX's next growth cycle or just a short-term bubble. We believe this is the beginning of the LTX's next growth cycle for the reasons I have just stated. As I talk with executives from our customers they are generally looking towards a strong second half of the calendar year. We believe the initial production ramp for new customers and incremental capacity expansion at select existing customers will sustain growth in our business.

As the semiconductor industry improves mid-year and beyond, that should provide further accelerant to our top line growth. We believe certain customers in market segments are more likely to see improvement from the next cycle and we are very well position to benefit from this increase.

For LTX we continue to emphasize three things. Focus our effort on customers that can add the most to our top line growth, develop the products and deliver the applications that support these customers and continue to drive a lean business model that can deliver profits cross cycle.

In summary we are encouraged by the signs that LTX's business has turned the corner and expect to grow the business, while maintaining our discipline on the business model. The X-Series products are enjoying strong momentum and our leadership in delivering scalable, cost effective test solutions, across the spectrum of semiconductor devices is being rewarded with an expanding list of strategic customers.

We will continue to focus on those opportunities that afford the best opportunity to grow our business and improve our leadership position by delivering compelling technical support and cost to test advantage for our customers.

I'd like to now turn the call over to Mark for his detailed comments on the quarter, Mark.

Mark Gallenberger

Thanks, Dave. Total incoming orders were $54.5 million, up 82% from last quarter. Product orders were up 65% sequentially, while service orders more than doubled to $14 million, driven by annual service contract renewals that occurred at the beginning of the calendar year.

Revenue for the quarter was $31 million, which is up 5% from last quarter's revenue of $29.6 million. Gross margin was 47.8%, which is down sequentially due to product mix, but in line with our guidance of 47.5%. Operating expenses were essentially flat from last quarter as we maintained tight controls over all expense items.

R&D spending was $11.3 million, which includes $437,000 in stock-based compensation expense. SG&A was $6.9 million, which includes $1 million in stock-based compensation expense. Net loss for the quarter was a negative $3.2 million, or $0.05 loss per share on a GAAP basis.

EBITDA was a positive $1.2 million for the quarter. The EBITDA calculation excludes depreciation of $3.1 million, net interest income of $334,000, stock-based compensation expense of $1.5 million and $72,000 in tax expense.

Next I'll provide a breakdown of bookings and revenue for the quarter. 79% of bookings were from IDMs, while 21% came from subcontract test and fabless companies. 74% of bookings for the quarter were for product, and 26% for service. In terms of revenue, 75% came from IDMs, while 25% came from subcontract tests and fabless companies. 77% of revenue was for product and 23% for service.

Now, on to the balance sheet. For the quarter, net cash increased by $3.1 million, or 10% of revenue. We ended the quarter with gross cash of $64.4 million, and net cash of $44.7 million. The increase in cash was driven by positive EBITDA and improvements to working capital. As a result, DSO was 72 days, versus 82 days in the prior quarter.

Inventory decreased from $25.9 million last quarter to $24.7 million this quarter, due to tight controls over the manufacturing build plan. Net capital expenditures were $1.1 million for the quarter, primarily driven by capital testers and spares to support the world wide installed base. Depreciation expense was $3.1 million. Accounts payable was down $900,000 to end the quarter with a balance of $13.7 million. Stockholders' equity decreased $1 million, to end the quarter with total equity of $113 million.

Now our backlog summary. We started the quarter with a backlog balance of $29.8 million. During the quarter we added $54.5 million in new orders and shipped $31 million to customers. We had $1.2 million in customer cancellations, and we judged out $4.1 million in orders that are not likely to ship within the next 12 months. Therefore, our ending backlog is $48 million with about two-thirds of it shippable over the next six months.

Guidance for Q3 is as follows. We expect revenues to be in the range of $37 million to $40 million, which is up approximately 25% sequentially. Gross margin is expected to be 51%. The GAAP reported net income per share is projected to be in the range of $0.01 to $0.03 assuming 62.7 million shares outstanding. We expect net cash to be up approximately $5 million to $7 million or 13% to 18% of revenue. Our theoretical GAAP break even for Q2 was $36 million, and we expect Q3 to be about the same at $36 million.

So in summary, our business model has performed well during this rough period. Our manufacturing move to Malaysia is on schedule for August and will provide additional margin improvement once fully complete and our X-Series products are being well received in the market place, as demonstrated by the strong growth outside our largest customer. In fact, we expect 90% of the incremental revenue growth for the April quarter to be driven outside our largest customer.

So this concludes our prepared remarks and at this time we will take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Patrick Ho with Stifel Nicolaus. Please proceed.

Patrick Ho - Stifel Nicolaus

What a nice quarter guys. First off, can you give me what the level of turns business you guys are averaging over the last few quarters?

David Tacelli

Yeah Pat, this is David. If you go back to last three to four quarters have been between 60 to high 70s as a turn piece of business and the next question you probably have is what do we expected to be in the April quarter. It's somewhere in the 30%to 40% range.

Patrick Ho - Stifel Nicolaus

Okay, great. So, you do have some room in your backlog over the next few months from your answer right there.

David Tacelli

That's correct.

Patrick Ho - Stifel Nicolaus

Second question, I know you've been talking about your instrumentation capabilities and the new introductions that you are going to be releasing over the next year or so. Are these targeting some of the existing customers you had before the X-series of products, or they targeting specifically some of the new customers that you won over the past two plus years?

David Tacelli

The simple answer is both. Some of the instruments have actually helped and helped us penetrate existing accounts and new divisions, and new product groups in existing accounts and also some of the instrumentation has allowed us to go after customers in the past that we would not have been able to achieve without the instrumentation.

Patrick Ho - Stifel Nicolaus

Great and my final question I know Mark you've been the spearhead on this transition, the outsourcing overseas. You mentioned last quarter that one of the goals that you're trying to get was the supply chain for this current quarter. What are some of the metrics we should be keeping an eye of April quarter?

Mark Gallenberger

For the April quarter what you should start to see at that point in time, is more boards being moved overseas and the mechanical and the test has being done by that timeframe and then once we start getting into our fiscal Q4, what you'll start to see is the system integration work in the final assembly and then ultimately the drop ship to the customers. So those will be the major milestones between now and August.

Operator

And your next question comes from the line of Timothy Arcuri with Citi. Please proceed.

Brian Lee - Citi

Hi, guys. This is actually Brian Lee calling in for Tim. I had a few quick things from me. The order uptick that you saw at your largest customer, was that driven primarily by capacity additions or was there some share gains embedded there as well?

David Tacelli

The upside that we saw at our largest customers the majority of that was capacity driven. We did see some additional follow-on business for a piece of business that we announced last quarter that we won last quarter in a different group inside our largest customer.

Brian Lee - Citi

Okay. But no net share loss.

David Tacelli

No

Brian Lee - Citi

Okay. Maybe as a follow-up to that, if I look at your largest customer's CapEx for this year, it looks like it should be -- up pretty significantly year-on-year and you guys have been roughly 6%,7% of their CapEx over the past few years. If we assume you hold that share in a way, which it sounds like you should at least be able to do -- this implies orders should be up there meaningfully over the next few quarters, even after higher base in Q2.

So, first is that the right read and second, is it fair to assume that, that will be enough to keep orders north of $50 million again in April even as service falls off a bit?

David Tacelli

The first thing is that I won't comment on orders beyond the current quarter, if I go back to your other point, which is talking about the orders in the CapEx spend rate at our largest customer. I think our largest customer right now they're experiencing some growth and they're really trying to drive their business on the analog side.

So, for us to actually capture the shares that we like, on the order side we'll have to continue to make penetration at the multiple divisions inside that section of the business. For their other piece of business, I'd call it status quo and we will gain capacity as they continue to ship and that's mainly a capacity or volume driven piece of business, not share gain piece of business for them.

Brian Lee - Citi

Okay, great. And one last thing for Mark, once Malaysia is up in running, what should be incremental drop through to the gross margin be?

Mark Gallenberger

Well we're talking about at our normalized revenue about 2.5 margin points at normalized revenue, which if you look at the last two cycles with an averaging around $48 million per quarter. So that's the way you should sort of model once we are fully offshore.

Brian Lee - Citi

Okay. Okay. Thanks, that's helpful.

Operator

(Operator Instructions) Your next question comes from the line of Dave Egan with Lehman Brothers. Please proceed.

Dave Egan - Lehman Brothers

Hi, guys. Congratulations on the momentum with the new customers and the design wins.

David Tacelli

Thanks, Dave.

Dave Egan - Lehman Brothers

I guess I had a question about the 50 you kind of ramp through some of that, a little pretty quickly I just want to make sure I got it correct. So, the two IDMs are driving the order increase primarily, is that more or less correct?

David Tacelli

On the product side we had three customers greater than 10% on the product side. If you look overall orders, because service is so high this quarter, we only had two customers greater than 10% total orders.

Dave Egan - Lehman Brothers

Okay, right. So, on the product orders that it would be fair to say that the two IDMs with the design wins that are now starting to ramp were about $11 million of the product order increase.

David Tacelli

Yeah. That's a fair assessment.

Dave Egan - Lehman Brothers

Okay. And then you said there was one that has 80 new designs, HPA SOC, I think last quarter you had said 50, is that correct, so that went from 50 to 80?

David Tacelli

Well, it's an ever changing target. They keep -- one of the things that we look at is, devices that they'll be ramping in design on our tester, and from quarter-to-quarter that the metrics we've been looking at is to make sure that those design wins or those designs going on our product continue to increase.

If we see it slowing down, that could be an indication that the customers pulling back either has lost some share, or the customers pulling back they doesn't see a robust market for those products, and that hasn't happened. They are continuing to increase. And again, one of these customers is we're looking at being a substantial customer over the next couple of years.

Dave Egan - Lehman Brothers

Okay, great. And then together, I think last quarter you had said that, you would expect these to be able to ship about 50 tester to these two customers, and that's what you said again today?

David Tacelli

That's correct. Yes.

Dave Egan - Lehman Brothers

Okay, thanks.

David Tacelli

I still see that. I mean, we love more of their devices to get into volume production, because then that number would increase. That's my expectation today based on conversation with those two accounts.

Dave Egan - Lehman Brothers

Okay, fantastic. And then one last question, in terms of these customers, has there been any changes as some of these customers are giving worst guidance in forecast to Wall Street and to investors. Is there change in terms of the ramp plan or do you foresee this more as the customers are changing to the new designs and that's where the ramp is going to be, is going to favor you.

David Tacelli

The good thing is because we haven't been, if I go back a couple of years being incumbent supplier of these accounts, there is not a lot of drag. I call it drag on the growth for us. And because they have so many new parts in design our equipment even if their overall business were flat, even flat to down, I still expect the current order volume to continue to increase. So, this is one of the rare situations, where not being the incumbent has been positive for us.

Dave Egan - Lehman Brothers

Okay, great. Thanks guys.

David Tacelli

Thanks, Dave.

Operator

There are no additional questions at this time. I'd now like to turn the conference back over to Mark Gallenberger for closing remarks.

Mark Gallenberger

Okay. Well thank you very much for participating today and we will be speaking with you again in three months, in May for our next earnings call. So, have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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