Eagle Test Systems, Inc. Q2 2008 Earnings Call Transcript

May.11.08 | About: Eagle Test (EGLT-OLD)

Eagle Test Systems, Inc. (EGLT-OLD) Q2 2008 Earnings Call Transcript April 29, 2008 6:00 PM ET

Executives

Len Foxman – President and CEO

Steve Hawrysz – CFO

Analysts

Peter Kim – Deutsche Bank

Gavin Duffy – Broadpoint Capital

Gus Richard – Piper Jaffray

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the second quarter 2008 Eagle Test Systems, Inc. earnings conference call. My name is Bill and I'll be your coordinator for today. (Operator instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to transfer the conference over to your host for today's presentation, Mr. Len Foxman, Chief Executive Officer. Please proceed, sir.

Len Foxman

Thank you, Bill. Good evening, and welcome to Eagle Test Systems Second Fiscal Quarter 2008 Earnings Conference Call, where we'll discuss the company's second quarter results, which were released earlier this evening. I'm joined by our Chief Financial Officer, Steve Hawrysz. This call will begin with Steve handling some administrative issues and then discussing our second quarter financial results. Steve will then turn it back over to me for some commentary on our industry and Eagle's business. We'll then open up the call to take questions from all of the participants. For planning purposes, this call will end approximately one hour from its start. I'll now turn it over to Steve to take care of the administrative issues and also discuss our second quarter results. Steve?

Steve Hawrysz

Thanks, Len. Eagle Test's press release with our second quarter financial results for the three months and six months ended March 31, 2008 was sent out at the close of market today, and is available at the Investor Relations section of our Web site or by calling our Investor Relations help desk at 847-327-1033. This call is being simultaneously webcast over our Web site at www.eagletest.com. A replay of this call will be provided on our site starting about one hour after this call is completed. The telephone replay number for U.S. and Canada is 888-286-8010, or outside the U.S. and Canada it's 617-801-6888. The replay passcode is 60674706. Replays will be available for two weeks following the call.

Next, investors should look into the contents of this call as the official guidance for the company for our third quarter of fiscal 2008 ending June 30, 2008. The company has a policy not to update guidance given on our call. However, if we do have communications for public dissemination, our intent is to do so simultaneously to all investors to the best of our ability. Investors should note that Len Foxman, our CEO and myself are the only authorized representatives to provide company guidance. The items discussed today other than historical information, may include forward-looking statements related to future financial performance and other performance expectations, which may include commentary as to revenues, demand for products, operations or our research and development spending, earnings per share, and other opinions of management.

Investors are cautioned that forward-looking statements are neither promises nor guarantees and involve risks and uncertainties that my cause actual results to differ materially from those projected in those forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission including in our annual report filed on 10-K dated December 6, 2007, and we incorporate herein the discussion of those risk factors. A copy of the Form 10-K can also be accessed through the Investor Relations section of our Web site.

Eagle Test is under no obligation to update any forward-looking statements made today. However, any updates will be made broadly and available over the web. Lastly, I would like to note that the results of our annual stockholder's meeting held on January 31 in Buffalo Grove resulted in the election of two Class II Directors, Ted Foxman and William Gibbs to 3-year terms with approximately 70% of the eligible shareholders voting for the Director nominees.

I'll now review the financial performance for the second quarter ended March 31, 2008. Our net revenue for the quarter was $33.1 million, which is up approximately 55.5% from the same quarter last year and 6.9% sequentially. The increased revenue level resulted from increased customer demand for our semiconductor capital equipment and particularly our largest customer, who increased its business with us both sequentially and year over year.

We reported net income for the quarter of $6 million or $0.26 per common share on a fully diluted basis, compared to net income of $1.8 million or $0.08 per share on a fully diluted basis for the same quarter in the prior fiscal year. Our net income also increased sequentially from the $5.3 million or $0.23 per diluted common share reported for the previous quarter ended December 31, 2007.

Net income as a percentage of revenue was 18% for the current quarter versus 8.6% of net revenue for the same quarter last year, and 17.2% of revenue for our first quarter. Gross margin percent for the second fiscal quarter of 2008 was 62%. This is slightly higher sequentially than the 61.5% for the December 2007 quarter and has increased from the 60.5% gross margin reported for the March quarter of last year.

The increase in gross margin is primarily a result of our year-ago quarter being negatively impacted by an inventory reserve of $470,000. Operating income for the quarter was $8 million or 24.2% of net revenues. This is an increase in operating income of $1.2 million sequentially, which is due to the $1.5 million gross margin improvement as a result of higher revenues, offset by a planned, increased in R&D of $384,000 on a sequential basis.

Current quarter operating income of $8 million also compared favorably to the same period last year, and increased $6 million from the March 2007 quarter. This increase in operating income was due to a $7.7 million increase in gross margin, primarily as a result of higher revenue levels this year, offset by increases in SG&A expenses of $545,000 resulting from an increase in personnel for sales, customer service and application engineering to support domestic and international initiatives and increased incentive compensation and warranty accruals, both based upon increased revenue levels.

Our research and development increased $1.1 million when compared to the same period last year, as a result of an increase of $580,000 in contract engineering fees and $350,000 increase related to increase in headcount and headcount-related costs as a result of the additional hires.

Sales, general and administrative for the March quarter sequentially decreased slightly from the December quarter by $80,000. This sequential decrease was a result of $150,000 in lower professional fees related to international and domestic consultation, $110,000 in lower international support costs as a result of the VAT reclaim benefit we received in the current quarter, and $115,000 in lower equipment-related expenses in the current quarter and a decrease in bad debt reserve of $70,000 in the current quarter.

These decreases were offset in part by an increase in SG&A personnel-related costs were $350,000 in the current quarter, resulting from increased headcount and payroll tax expenses. As noted previously, research and development costs for the March 2008 quarter were up sequentially by $384,000 from our December 2007 quarter. This sequential increase was planned and resulted from increased subcontract services and increased employee costs in addition to material and prototyping costs on new product development projects.

Stock based compensation recorded under FAS 123 in the current quarter was $407,000 and is $696,000 on a year-to-date basis and thus not significant enough to be broken out separately in our results. Other income for the current quarter was $1.1 million, compared to $1.2 million in the same quarter last year and is principally due to investment income on cash and marketable security available and invested. The decrease in investment income was due to investing more of our available funds through tax-free instruments on similar investable cash balances versus last year, and lower overall rates.

During the current quarter, we continue to evaluate our current investment portfolio and policies in light of the credit market issues as highlighted in our prior conference call. And as a result, this quarter we've reclassified approximately $35.9 million of our investments as long-term marketable securities. These securities are tax free auction-rate securities and municipalities and student loan portfolios which began (inaudible) the Dutch auction process beginning in mid February of 2008. These securities continue to accrue and pay interest. These instruments continue to be rated at AA or better based upon key rating services, and have not been downgraded.

In most cases, these instruments are backed by monoline insurance agents or in the case of some of the student loan bonds, by U.S. federal agencies. Based upon analysis which resulted in an estimated valuation based upon type of security, tax status, credit quality, duration, insurance and portfolio composition as well as observable market data including yield or spreads of trading instruments, the company recorded a valuation allowance.

This valuation allowance of $793,000 is recorded as an unrealized loss in these securities, net of tax benefits of $524,000 which at this point we feel is temporary in nature and accordingly have not recorded this item through our results of operations but instead have reflected this as a component of other comprehensive income. At this point, we do not believe that there are any other factors that have impaired the value of these underlying investments, except for the lack of liquidity in the current market through the unprecedented market disruption surrounding the Dutch auction process.

We feel at this point the liquidity issue is temporary. However, we will continue to monitor this situation and currently plan to hold these investments until this disruption subsides. Due to the current lack of liquidity for these investments and the uncertainty of reestablishment of the auction market for these securities, we are currently a taking longer-term view on these investments right now. There is no impact on our ability to fund operations, nor do we feel that this impairs our ability to execute our near or longer-term plans.

At this point, we do not feel that these investments are permanently or other than temporarily, impaired. We will refrain from investing in investments that do not provide us liquid-form investment and we will continue to practice our principles of preservation of investment principle, as we've not chased investment return with cash we maintain for strategic and growth purposes.

Our income tax expense in the quarter was $1.3 million, reflecting a tax rate of 34.1%. This effective tax rate reflects annualized tax benefits and tax advantage interest income and tax that the company will be able to utilize in the fiscal tax year return. Our quarter ending headcount was 400 total employees. This is up from 373 employees reported in our December quarter, and primarily included sales and marketing adds of six, research and development of three, and SG&A adds of six people. In addition, we added about ten people to admin increased inventory levels and production levels in the plant.

On a geographic basis, our over 10% ship-to countries in the March quarter were the U.S. at 30%, Malaysia at 38.9%, and the rest of the world at 31.1%. We are required to report significant customers who make up over 10% of our revenues. During the March quarter we had two customers that fell into that category; Texas Instruments at 60.2% of net revenues, and Fairchild Semiconductor at 11.4%.

Demand for our test systems vary across our entire customer base. We continue to target most of our efforts to the top 10 independent device manufacturers, as that focuses our effort on 80% of the demand. These IDMs drive a significant portion of the subcontractor work as well. Our customer diversification efforts are broad, but focus on a limited universe of power buyers which is one of the leverage components of our business model.

We continue to be pleased with our diversification success with customers across product lines and geographically. However, we do realize that our top customer has publicly stated that their desire to increase its market share in key markets, and in the current quarter we've benefited from their increased capital expenditures related to their plan to grow market share.

Our focus continues to be demonstrating our low cost of test platform and solving customer problems with our solutions. We believe that we can continue to do that with our customers, retention will remain high, it has been historically and market share should follow.

Moving on the balance sheet. We ended the second quarter with cash and marketable securities of $114 million. This is before the non-cash unrealized loss of $1.3 million booked during the quarter which was $793,000 net of tax benefits which was booked to comprehensive income as discussed earlier. This is a sequential decrease in cash of $1 million and it reflects $1.9 million in cash generated from operations and $2.8 million used for capital expenditures in the quarter.

The increase in cash from operations was principally net income generated from operations of $6 million, plus depreciation of $917,000 and $407,000 of stock option expense which are both non-cash items. Other sources of working capital during the quarter included an increase in accounts payable of $5 million based upon timing of vendor payments resulting from increased inventory levels for anticipated product shipments, and an increase in accrued compensation and other liabilities, and prepaid expenses of approximately $1.2 million due to the timing of payments for payroll, incentive compensation and other accruals and prepaid expenses.

These operating cash increases were offset by uses of cash to finance an increase in inventories of $9.7 million in the current quarter and payment of income taxes on our first six-month operating results. Total cash used by investing activities was attributable to $2.8 million in capital expenditures made during the quarter. Primarily, these purchases of capital equipment used in the sales, application engineering and production areas as well as research and development functional areas, and included $800,000 of facility leasehold in IT infrastructure enhancements for growth initiatives that were above those planned.

Accounts receivable represent 67 days of sales outstanding, which has not changed from the DSOs reported at the end of the December quarter. We ended the quarter with inventory of $36 million or 1.6 turns. That amount invested in inventory is up $9.7 million from the end of our December quarter and it has increased from year-ago levels when our inventory balance was $20 million. In reconciling this increase for you, we must buy and stock parts based upon visibility and estimated build plans.

Last year in March and June, demand was at the $40 million level. This year, based upon December's performance where we took down much of our buffer stock and the current March performance and estimated range of the June system business, it's up approximately last year versus this year, about 60%. This would account for about $12 million of the increase in inventories due to the run rate business.

Additionally, we've also decided to invest in stocking more long lead time items and stocking of certain high run rate subcontract manufacture instruments, in order to be able to be more responsive to customer demands which have been requiring shorter lead times between order and system shipment. This accounts for about the other 10% increase in inventory, not accounted for by the increase in business levels from the year-ago period.

Inventories will increase and decrease, depending on anticipated shipping volumes for the next three to six months, since our visibility has not improved, we've decided to be in a position to be responsive to our customer demand, given the demand environment for test equipment in general.

We believe being able to be responsive to customer needs more quickly is in our best interest and also believe over time we should be able to be better than two turns over time on a consistent basis.

I'd now like to switch over to a discussion on our guidance. I'll now offer some guidance for our third fiscal quarter, fiscal 2008 which is to end June 30 2008. We estimate net revenues to be between $30 million and $34 million for the quarter. The company estimates that earnings per share will be between $0.19 and $0.26 per diluted common share, based upon estimated weighted average shares outstanding of 23.2 million diluted common shares.

Our third quarter guidance assumes the continued normal system configuration and instrumentation mix of product shipments and gross margins. SG&A spend should continue to reflect some increased investment in application engineers, driven by demand in sales territories for technical support resources.

Research and development spend, which we guided to be up in the first and second quarter, will increase slightly to reflect some additional engineering prototyping spend and continued contract engineering engaged on product development projects. But we see research and development spending leveling off in Q3 and continuing at this increased level through the middle of next year as we complete these product developments, which are future revenue enhancing projects and products.

Our estimates assume and annualized tax rate of 34%. Our guidance policy is to only comment on the current quarter based upon information available to us at the time we release our guidance. We do not provide backlog or sales order information for the quarter completed since this snapshot-type information can change rapidly and has historically not been a good barometer for our business performance or the outlook for the company's future performance. Nor does the company anticipate updating its guidance prior to the next earnings release. However, if we do have any communication for public dissemination, our intent is to do so simultaneously to all investors to the best of our ability. We anticipate our next earnings conference call to be on or after our auditors have completed their third quarter view and we've reviewed our results with our Audit Committee. We currently anticipate that the third quarter fiscal 2008 earnings announcement will be made around July 29 of 2008.

I'll now turn the call back over to Len for some additional comments on the business before we open the call up to your questions. Len?

Len Foxman

Thanks, Steve. I'm pleased that Eagle's business has continued to remain strong through the first half of the fiscal year. More importantly, I'm very pleased to see that we remain profitable, while placing strong emphasis on investment in expansion of R&D, sales and support. As Steve mentioned earlier in the call, we've continued to see strong demand from our largest customer, Texas Instruments.

As our largest customer, I'm pleased to see that they've performed well in the analog segments we serve. I'm also encouraged by the positive momentum in our relationship with TI as evidenced by the recent announcement that Eagle was recognized with TI's 2007 Supplier Excellence Award. I further believe that this past quarter's results continue to demonstrate the strength of our model and its ability to deliver positive earnings for shareholders.

In spite of the uncertainty in the broader equipment markets, this past quarter Eagle posted its highest revenue since the fourth quarter of fiscal year 2006 with 7% gain in quarter-over-quarter revenue. Our current quarter revenue was $33.1 million and represents the fourth highest quarterly revenue in the 31-plus year history of our company. We also saw Fairchild Semiconductor become 10% customer for the first time this quarter. The addition of Fairchild to the 10% customer category increases the number of different 10% customers we've had over the last 10 quarters to seven different customers.

Based on our ability to deliver profitable results on a consistent basis, we've continued to focus on investing further in our customer expansion efforts and new product development. In particular, we've been investing at higher rates in R&D, so that we can continue to expand the breadth of our product that we are offering. Additionally, we've recently finished some important product enhancement initiatives that will make our existing product even more competitive and allow existing customers to increase the productivity of their Eagle equipment at a significant savings.

We believe that there is growth potential in both new products and enhancements that deliver significant advantage for the customers and we are committed to focus heavily on R&D activities. Eagle's key areas of focus continue to be the main drivers of our product sales. We've seen increased opportunities in both new and existing customers in a wide range of device markets that we addressed, including automotive, power management, high performance analog, as well as discrete and (inaudible).

Specifically, we received interest from a number of potential customers for new RF and discrete products when we displayed our RF 6000 and new 200T/FT final test solutions at SEMICON China this past quarter. We are encouraged by the interest that these products have generated and we have received follow-on orders for both of these recently released products. We believe both product areas hold significant growth potential for Eagle in the future.

We remain very confident about our potential for future growth from new and existing customers with both our current and future products. However, we are beginning to commit more significant time toward finding opportunities to utilize our cash to fund efforts that have the ability to accelerate our short-term growth potential.

In closing, we remain cautiously optimistic about the conditions of the market in general. As Steve indicated from our guidance for the third quarter, Eagle remains confident that customer spending in our markets will remain strong. Although we are skeptical about the economy as we continue to inch closer to election time, we remain focused on things within our control such as developing new products to remain competitive and to leave us ahead of the competition in increasing and improving personnel that serve our customers. Because of our strong focus on profitability and shareholder value, we are keeping a watchful eye to ensure that our spending has strong potential for return on any investments that we make. I'd now like to turn the call back to Bill to open the call up for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Peter Kim of Deutsche Bank. Please proceed.

Peter Kim – Deutsche Bank

Hi, thanks for taking my questions. I wanted to start off with talking about the inventory. Your inventory level is at a record level and I understand that churn times have diminished and you are interested in stocking some longer-lead parts to facilitate the quick return times. But is there any eval tool there, maybe in the inventory or could you give us a better explanation and color about why inventory is are so high?

Steve Hawrysz

Yes. Peter, I guess your question is are there any eval systems in inventory? Is that your question?

Peter Kim – Deutsche Bank

Well, I'm trying to get a better understanding about why inventory is so high. And given your explanation in your prepared comments, I'm not quite sure that it justifies raising inventories this high unless there is expectation that you have larger shipments, fund rates in the future that you need to stock up for.

Steve Hawrysz

Well, my comments that I stated earlier, last year when our inventory was about at the $20 million level in the three to six month period, we were doing about $40 million in business. This year, when you look at what we did in December, what we did in March and what we are anticipating doing in June, our levels now on that six-month running average are probably in the $60 million to $65 million revenue range. And so therefore, our inventory levels have to be higher in order to meet that. Another factor that came into play was that our December quarter ended up being much better than we had anticipated and therefore we had to take down a lot of our buffer stock and a lot safety stock that we had. So we had to replenish that in order to catch up. So, I think that that accounted for about $12 million increase in inventories from the year-ago levels of $20 million, and then about an additional 10% increment was just our decision to stock long lead-time parts as well as parts that we have or instruments that we have and instrument modules that we have manufactured at subcontractors so that we could do quicker turns in house. So, we are putting some of that finished goods stock on the shelf. And so when you go from a run rate of about $40 million to like the middle quarter of last year to about $50 million to $55 million this year, you are increasing your usage and you are trying to increase your turns. We can increase our turns if we can get what our customers want and when they want it, but there's not an exact science to that. So there has actually got to be some estimates and I wish that all of our components were highly similar between our products, but they are not. There is a high degree of similarity in our instruments across our systems, but there still are a number of differences that if the system is configured one way versus another way, if we don't have one set of resources, we won't be able to ship that system. So to the extent that our forecast accuracy isn't that accurate, that also makes up part of the difference as well.

Len Foxman

The other thing that I would mention in this, Peter, is if you look at some of the things that have occurred in the last quarter, there are some recent acquisitions that some of our customers have made and so they are going to be expanding their business. And since they've already been existing Eagle customer, they are moving some of those products on to the Eagle platform from the previous platforms. And as they do that, of course, that's going to most likely generate more volume for us even in our existing customer base. So we've got to be responsive to this or we are not going to get the market share again that we've the opportunity to get.

Peter Kim – Deutsche Bank

Okay. Then can I follow up with just a couple of small ones about the balance sheet? How much of your cash is what you would consider fully liquid at this time?

Steve Hawrysz

I guess at this point in time what we've re-classed of the $35 million is what we would consider to be longer term.

Peter Kim – Deutsche Bank

There's no further exposure you see in your cash (inaudible) right now?

Steve Hawrysz

No, not at all, no.

Peter Kim – Deutsche Bank

Do you see that affecting your other income, going forward? Or do you anticipate a lower return?

Steve Hawrysz

No. Actually we are seeing a good return. Actually though my estimates do reflect lower interest is due to overall market rate conditions which have gone down.

Peter Kim – Deutsche Bank

Okay. And lastly, I just wanted to ask about the current bookings environment and the churn times. Are you seeing a significant change in the churn times that your customers are looking for and how'd you qualify the current bookings environment and how customers are booking? Are they booking a little in advance or are they expecting a book and churn right away?

Len Foxman

Well, the situation that affects all of this is much more the overall economic situation that we see here in the United States. Clearly, with as many things potentially involving the R [ph] word that everybody is hesitant to mention, people are sitting pretty close to the nest. They're not stretching out there a long way. Now when it's very clear that the business level is going to be solid and they can book orders, they'll come into us for what they like to think of this instantaneous delivery. Well, we can't make instantaneous deliveries, but we have to be ready to respond in a very short time. And in the present environment that's around, it's shorter than what I would classify as usual. I don't see that changing certainly throughout this entire political process that's going to take place through the end of the year.

Peter Kim – Deutsche Bank

Great, thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Gavin Duffy of Broadpoint Securities. Please proceed.

Gavin Duffy – Broadpoint Capital

Thanks, can you guys hear me, okay?

Steve Hawrysz

Yes, hi Gavin, how are you doing?

Gavin Duffy – Broadpoint Capital

Good, Steve. Just briefly, I just wanted to touch on the great relationship with TI. It looks like Q to Q they are up maybe around 40% sequentially, but the non-TI business is probably down a bit over 20%. And I was just figuring out was it just one type of a customer? I mean we've seen Fairchild pop up and does everybody else doing just a little bit weaker in the quarter?

Steve Hawrysz

Yes. I guess I would say that. I guess I'll let Len comment a little bit on that. TI was a very strong customer. Our guidance that we are giving for next quarter doesn't anticipate our largest customer being as larger percentage of our business, so I think we do see some of our other customer business picking up this quarter. And we will see our largest customer decrease as percentage of our business. So I think I can't state that. So I think you are going to end up seeing some ebbs and flows of all of our customers and Fairchild and TI were strong customers this quarter. I think if you look at the first quarter, you saw TI our only significant customer and our other customers all ordering at certain levels and I think some of them had some digestion this quarter and I think you are going to see that pick up in our third quarter. Len, I don't know if you have anything you want to add to that.

Len Foxman

Well, the fact that Fairchild came up for the first time as one of our 10% customers. The reality is that we are seeing more of the ebb and flow of what's going on in the marketplace. If you look at some of the digestion that people are doing on some of the things that they've got on the horizon, I think what you'll end up seeing is this coming quarter the mix is going to change. And I think you'll see some of these other people stepping forward. I wish they'd all go light the house afire, but they don't all do it in unison. (inaudible) – Yes, sometimes that's to our benefit. So, I can't make any further comments on that.

Gavin Duffy – Broadpoint Capital

Well, that's great because obviously that's what all of us want to see is continued revenue diversification. And I guess what you are saying, it's like an asset. TI might not be a bigger customer next quarter in terms of overall product revenue. Is that just basically some of their digestion or is there just any change in where you might be addressing within TI?

Len Foxman

Well, it's certainly not due to any change in where we are addressing within TI. I think we've a stronger position within TI than we've ever had. The fact of the matter is TI has certainly announced that they've got a lot of their inventory into distributors at this point in time. And I think that until those distributors digest some of that inventory, TI will probably be scaling down some of the rate at which they're moving forward in the CapEx things. But as you can tell from the guidance that Steve's given, we see other people stepping forward to backfill any of that decrease in their CapEx for this coming quarters. So, I'm not particularly concerned about it. The other thing is that I think based on what we've heard that TI is opening up the facility in Clark, a former Air Force Base. That's a scheduled event that they are having (inaudible). I don't have any details about that but it's all part of their overall plan. They've got very ambitious market share increases scheduled for themselves.

Gavin Duffy – Broadpoint Capital

Alright, I appreciate it. Thanks a lot, guys.

Len Foxman

Okay.

Operator

(Operator instructions) We do have a question from the line of Gus Richard of Piper. Please proceed.

Gus Richard – Piper Jaffray

Hi, yes thanks for taking my question. A couple quick questions. When you are talking to customers about products, how key is it to be able to have short lead times? Is that something that's on every order? Is that something that's negotiated when you effectively win the test business for a device type?

Len Foxman

Well, I have never seen generous lead times in this business for all of the history that I have in it. Everybody is fighting for as short as possible deliveries they can get. We try to do forecasts with them, but the volatility in the semiconductor business, that doesn't bode well for the group of people as prognosticators. They are usually very fairly unable to make solid long-term projections. When you are negotiating the order, you always have to talk about delivery times. And from time to time, you can pin a delivery requirement to a specific device that's going to released. However, what happens more often, particularly in established customers is that there's just a mix of different capacity demands and based on that mix, and what portion of it is on your platform, you'll see this vary. So, in a lot of cases, particularly with your existing customers, it's very hard to pin it down to a specific device.

Steve Hawrysz

I think we ask them for 8 weeks to 10 weeks lead time. There will be times when they say, I need a system in four weeks or I need a system – and order by order – this order I need this system as soon as possible and they'll say, what's the best you can do? And if you got in the plan, we can meet short lead time and that's the easiest way to grow the business. But it's all over the place, I think is what Len was saying.

Len Foxman

Part of the value that they place on you as a vendor is your ability to live with their inability to give you a solid forecast or long lead times.

Gus Richard – Piper Jaffray

Okay, thanks. And then just another topic, in your diversification efforts, can you talk a little bit about maybe your top three or four prospects over the next couple of quarters where you think you might be able to gain some traction?

Len Foxman

Well, we've got continuing efforts with ST. We've got continuing and ongoing efforts with On Semi. And what you'll most likely see is a continuation of strengths with Fairchild. So, I see all of those existing customers as being good drivers at least in the near term based on what we see in their business plans.

Gus Richard – Piper Jaffray

Okay, and then the last one for me, can you talk a little bit about the competitive environment at your largest customer both internal and other ATE suppliers and what you have been seeing over the last year or so?

Len Foxman

Sure. As far as internal goes, there's an internally built test platform which has been in existence for over 20 years. It was primarily designed as a digital platform, but they have added various things over to it over time. For us, that hasn't been as significant competitor due to the strong analog nature of the products that we tend to get applied to. So there hasn't been a lot of so to speak direct competition between the two of us on that score. As far as the competitors are concerned, we deal with them everyday. In the analog space TI is the biggest target out there and so they continue to try to make whatever inroads they possibly can, but the main thing is that as long as we are delivering TI, the best solutions for the lowest cost of test in a timely manner that allows us them keep their competitive edge in the manufacturing deals, TI is there and they are smart and they keep track of what they are doing and if we do a good job, I feel confident that we'll be favored with the business. We certainly don't take our eye off the ball at TI.

Gus Richard – Piper Jaffray

Okay, great. Thanks.

Operator

Thank you very much, sir. And at this time, ladies and gentlemen, we've no further questions in queue. I would like to turn the call back over to our speakers for any closing remarks they may have.

Len Foxman

Okay, thanks Bill. I would like to take the opportunity to thank all of you for attending and participating in our earnings conference call for the second quarter of fiscal 2008. We are pleased with the success we continue to have in our current fiscal year and we are committed to addressing our opportunity in the ATE market with the unique test platforms we bring to the targeted customers through product markets and geographic regions that we continue to aggressively pursue. As Steve stated earlier, we'll endeavor to communicate any additional information simultaneously to all investors to the best of our ability. However, it should also be noted that we are under no obligation to provide an update to the information presented in this call. Alright, thanks everybody and we appreciate your interest.

Steve Hawrysz

Thank you.

Operator

Thank you very much, sir and thank you ladies and gentlemen for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

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