Executives
Bob Cook – IR
Paul McLaughlin – Chairman and CEO
Steven Roth – CFO
Alex Oscilowski – COO
Analysts
Suresh Balaraman – ThinkPanmure
Steve O'Rourke – Deutsche Bank Securities
Patrick Ho – Stifel Nicolaus
Mahesh Sanganeria – RBC Capital Markets
Gary Hsueh – Oppenheimer & Co.
Gus Richard – Piper Jaffray
Rudolph Technologies, Inc. (RTEC) Q1 2008 Earnings Call Transcript May 5, 2008 4:45 PM ET
Operator
Good afternoon. My name is Marcus and I will be your conference operator today. At this time, I would like to welcome everyone to the Rudolph Technologies first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator instructions) Thank you.
It is now my pleasure to turn the floor over to your host, Mr. Bob Cook. Sir, you may begin your conference.
Bob Cook
Thank you, Marcus, and good afternoon, everyone. Rudolph issued its first quarter 2008 earnings release this afternoon shortly after the close. If you have not received a copy of the release, please call my office at 973-448-4306 and a copy will be faxed or emailed to you. Joining us on the call today are Paul McLaughlin, Chairman and Chief Executive Officer; Alex Oscilowski, Chief Operating Officer; and Steven Roth, Chief Financial Officer.
As is always the case, I need to remind you of the Safe Harbor regulation. Any matters today that are not historical facts particularly comments regarding the company's future plans, objectives, forecasts, and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such estimates whether expressed or implied are being made based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainty that can cause the actual results to vary materially. Thus, the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Rudolph's results are described in the company's latest Form 10-K as well as other periodic filings with the SEC. Rudolph Technologies does not update forward-looking statements and expressly disclaims any obligation to do so.
I will now turn the call over to Paul McLaughlin. Paul, please go ahead.
Paul McLaughlin
Thank you, Bob. Good afternoon, everyone, and thank you for joining us for Rudolph Technologies first quarter 2008 conference call. In our prepared remarks, I will give you a top-level look at issues important to Rudolph. Then, Steve will provide Q1 financial details. This will be followed by Alex, who will update us on the progress with our new products, order flow, and integration status of both our recent acquisitions. Following that, I will return to discuss our Q2 guidance.
To begin, we are pleased with the top-line results for Q1. However, we made a series of decisions in Q1 that consciously brought the operating line below what we would normally consider acceptable. Fundamentally, we chose to invest in our future at the expense of short-term EPS. You will note that we were $0.03 below the bottom of our EPS guidance range on a pro forma basis and were not operationally profitable.
From a top-level perspective, let me give you some color on two of the major strategic decisions we made that will help you better understand what we are doing. First, since our customer base is shrinking and consolidation is happening in the memory area, we felt to accelerate growth in the top line we needed to continue to aggressively invest in three areas – one, organic growth; two, inorganic growth; and three, selected strategic initiatives.
You will notice in our results that we spent $7.8 million in R&D in the quarter, up from $6.7 million last quarter as we chose not to cut back on key R&D programs in our core business and to continue with selected development programs already underway at both our acquisitions. We believe that this R&D spending is necessary to gain customer mindshare and consequently gain market share as we accelerate out of the downturn. You will hear some specifics from Alex about these new products.
In the area of inorganic growth, you all know we have expanded our total addressable market with acquisitions of probe card test and analysis products from Applied Precision and acquisition of 3-D inspection intellectual property and selected assets from RVSI. Spending to bring those operations quickly into the Rudolph family was heavy in Q1 and will continue for a while longer. Steve will discuss the effects of that on our P&L, and both Steve and Alex will discuss synergies already realized and what further synergies can be expected.
I am very pleased with the integration progress of both acquisitions by the responsible teams from our inspection business unit. These represent the second and third integrations our Minnesota personnel have been involved with and I can tell you they are very far down the learning curve. Alex will give you an update on those activities as well.
In the third area of growth, strategic initiatives, we made progress on several fronts. The most notable this quarter was Rudolph becoming the first equipment company to become an associate member of SEMATECH's metrology program at the College of Nanoscale Science and Engineering at University of Albany, New York. Rudolph Technologies will be working with leading technologies from device companies as together we try to put the best minds to work to address metrology and inspection challenges of device scaling. I recently had the opportunity to tour the fab at Albany NanoTech and meet with executives there at what is truly a world-class facility. I came away reconfirming that this approach to collaborative R&D work is what will help RTEC remain at the leading edge technically, thereby providing a window to hardware and software solutions that our customers will need from us in the longer term.
The second item that will give you a better understanding of what is high priority at Rudolph has to do with the balance sheet. On first blush, it may appear that we are not focused on inventory or accounts receivable, but that is a wrong conclusion. Rudolph is a strong franchise financially and as we did in prior downturns, we chose to use our strong balance sheet on a temporary basis to support our operational objectives. This includes a well-managed program to get demonstration tools in R&D and pilot facilities at selected customer sites to allow our customers to experience first hand the benefits of our latest software and hardware development with the expectation of successful adoption when capacity expansion takes place.
In fact, in our core businesses, that is businesses excluding the recent acquisitions, our inventory went down quarter-over-quarter despite acceleration in this demo tool program. We have a track record of successful placement of demonstration tools and we will continue to use that program as an assist to the more important goal of top-line growth. Nonetheless, inventory is an area of focus and you will hear more about that from Steve.
In the accounts receivable area, we also use our strong balance sheet to support operational objectives, which include generating new business and protecting gross margin. Having said this about how we use our balance sheet to support operational objectives, I do believe that we are by no means doing all we can to lower inventory, reduce days sales outstanding and improve cash. I look at this as an opportunity and you can expect to hear of progress in the coming quarters.
With that segue, I will now ask Steve to provide more detail on Rudolph's financial performance during the 2008 first quarter and discuss balance sheet issues specifically. Steve?
Steven Roth
Thanks, Paul, and good afternoon, everyone. Revenue for the 2008 first quarter totaled $37.2 million, compared to $32.6 million for the 2007 fourth quarter, and above the high end of our previous guidance range. Revenue was also impacted by our revenue recognition policies being applied to the Applied Precision and RVSI operations resulting in revenue from five tools being deferred and not recognized in the quarter.
Now, let me give you some statistics on the revenue. Front-end revenue was 60% of our revenue, down from 64% in Q4. Back-end revenue increased 17% in absolute dollars compared to the prior quarter. International sales represented approximately 85% of revenue, of which 79% was from Asia while domestic sales accounted for the remaining 15%.
Revenues from a product perspective were inspection products accounted for 55%, metrology products 22%, and software products and parts and services accounted for the remaining 23%. And 300 mm sales accounted for 67% of revenue – of tool revenue.
Switching gears, first quarter gross margin was 41% compared to 45% for the 2007 fourth quarter. As I discussed on our last conference call, in purchase accounting, inventory of an acquired company has to be recorded at fair value and therefore reduces the margins when the systems are sold. In addition, as a result of the leading edge 3-D technology that we acquired in the RVSI acquisition, we elected to move forward with the wafer scanner product line as an alternative to our historical product offering and took a charge to write off existing 3Di inventory. Those two items related to our acquisition reduced the margin by 3% in the quarter.
Average tool margins on our historical business products actually improved in the quarter. However, this improvement was offset by lower software sales. Going forward, our margins will continue to be impacted by the acquired written-up inventory over the next several quarters. The value of the inventory step-up from both acquisitions remains at $3.4 million as of March 31, and we expect approximately $1 million of the step-up to affect second-quarter margins. Excluding inventory step-up adjustments, we currently expect gross margins to be approximately 43% to 45% in the second quarter of 2008.
Research and development expenses for the first quarter totaled $7.8 million, compared to $6.7 million in the fourth quarter of 2007. As a percentage of revenue, R&D was 21% in both 2008's first and the 2007 fourth quarters. The increase in R&D in absolute dollars was primarily due to the engineering teams acquired in the acquisitions, which added approximately $1.3 million in R&D expense. We currently anticipate that second-quarter 2008 spending on R&D will be approximately 20% to 23% of revenue reflecting our commitment to our key programs as well as ongoing engineering integration activities.
Selling, general, and administrative expenses totaled $9.1 million for the first quarter of 2008, compared to $7.9 million in the 2007 fourth quarter. SG&A was 24% of revenue in both quarters. The increase in absolute dollars was also primarily due to the acquisitions. We expect SG&A to be approximately 23% to 26% of revenue in the 2008 second quarter.
As part of our integration activities, we have already identified and implemented processes to achieve $2.5 million in annualized synergies. These synergies are mainly related to the elimination of executive and overhead functions and the related costs as well as a reduction in professional fees. Additional synergies will come from the consolidation of manufacturing operations, which Alex will talk about shortly.
Interest income was $381,000 in the first quarter of 2008, compared to $1.1 million in the fourth quarter of 2007, and is directly related to lower cash balances as a result of our acquisitions and lower interest rates.
Our provision for income taxes in the first quarter was a benefit of $1.4 million with an effective tax rate of 46%. U.S. Congress did not extend the research tax credit for 2008 prior to its expiration. As such, we cannot anticipate the benefit of our 2008 R&D credits for the calculation of our income tax provision until a new law is passed. With the benefit of the R&D credits, we anticipate that our effective tax rate will be approximately 34% for the year. Excluding the credits, the rate will be approximately 42%.
For the first quarter, we reported a net loss under generally accepted accounting principles of $1.6 million or $0.05 per share. These results were impacted by the inventory adjustments that I just discussed and other acquisition-related charges such as integration costs and accruals for stay bonuses, which combined equals approximately $0.03 per share after tax. For the 2007 fourth quarter, the net loss totaled $544,000 or $0.02 per share and also included acquisition and non-recurring charges.
Even with the adjustments I just mentioned, we were below our Q1 guidance due to our commitment to our R&D programs, other higher than anticipated operating costs, and lower margins. And while we have implemented processes that have resulted in synergies that I previously mentioned, some of the cost reductions associated with those synergies will have impacts on future quarters.
Looking at our balance sheet, we clearly see this as an area of opportunity. We ended the first quarter with cash and marketable securities at $59.2 million, reflecting cash used in operations and for the acquisitions for RVSI's intellectual property and selected assets. As Paul mentioned, we are focused on accounts receivable and inventory both of which have increased significantly as a result of the acquisition.
In accounts receivable, we have seen our DSOs increase to record highs partially due to our acquisitions being completed during slow sales periods. Nonetheless, we are implementing new processes, which we believe will speed up collection times. These include faster tool acceptance periods and working with our customers on adhering to payment terms specifically in Asia, which tend to stretch terms during the slowdown period, all with the goal of bringing our DSOs more in line with industry averages over the next several quarters.
In inventory, our balances increased 25% just as a result of the acquisitions offsetting improvements made in the quarter on our historical business. As Paul mentioned, some of the increases are related to our investment in demonstration units, which we view as important to positioning ourselves for the next upturn in the cycle. However, there are other areas where we believe we can improve our inventory levels such as additional outsourcing initiatives, improvement in the management of service and repairs to better serve our customers and the integration of the manufacturing operations of our recent acquisitions, again with the goal of bringing our inventory levels more in line with industry averages.
In the second quarter, we expect to be cash flow positive from the early results of the initiatives I just discussed. Over the next several quarters, we will continue to update you on our progress.
With that, Alex Oscilowski will provide more detail on Rudolph's operational performance with particular emphasis on our new products and the progress on our integration activities. Alex?
Alex Oscilowski
Thank you, Steve. Demand for Rudolph's products was driven by our memory and back-end customers along with increased demand from our foundry customers. These three categories accounted for greater than 80% of tool revenues in the quarter. Our leadership offerings in front- and back-end macro defect inspection and copper and thin film metrologies drove product revenue with our new AXi, NSX, MP3 and S3000 tools delivering approximately 60% of Q1 revenue. Each of these new growth products fueled by Rudolph's R&D investments and introduced at SEMICON West last July continued to achieve transaction in Q1. Multiple units of our new NSX product family were shipped in Q1. The leadership defect detection and throughput delivered by this product are resulting in rapid adoption by leading IDM and OSAT providers focused on 100% back-end wafer inspection and related applications where quality is paramount.
Our flagship, MetaPULSE, metal metrology tools were shipped to two major memory customers for the development of their copper interconnect technology as the MetaPULSE family continues to set the copper standard for the industry. Rudolph's latest offering in the S3000 family of thin film metrology tools continued to ship in Q1 as our memory and logic customers demand superior performance and cost of ownership.
As Paul mentioned, we continue to invest heavily in new product R&D for tomorrow's leadership products. In automated macro defect inspection, Rudolph is building on the core hardware and software architecture and technologies that power our Explorer platform with improvements in resolution, depth of focus, ease-of-use, and throughput.
Our metrology investments are focused on further refining our FOCUS beam and picosecond laser measurement technologies to deliver improved ease-of-use, throughput, and cost of ownership while maintaining excellent repeatability. These new products, which are designed for improved manufacturability and reliability, will also deliver margin upside as production levels ramp.
Orders in Q1 increased as our book-to-bill ratio was above one with our latest generation front- and back-end automated macro defect inspection and metrology tools leading the way. In our metrology business, we continue to realize strong order flow for our latest generation MetaPULSE product family for both aluminum and copper applications. And Q1 saw momentum continue to build for our latest generation NSX tools with both IDM and OSAT customers for automated macro defect inspection.
Paul mentioned that Rudolph has consciously chosen to use our strong balance sheet to support our customers and we are making excellent progress in active beta and demonstration tool programs with our MetaPULSE-III XCu for leading edge copper metrology applications, our S3000A for thin film metrology, and our AXi 940 for automated front-end macro defect inspection. Backlog increased over 25% in Q1 led by our NSX, AXi and MetaPULSE products.
The operational integration of our new probe card test and analysis business purchased from API and our new 3-D inspection products purchased from RVSI continue to make excellent progress as Paul mentioned, led by the same experienced team that successfully executed the Rudolph-August integration in 2006.
The first of our PCTA products has successfully transferred to our Bloomington, Minnesota manufacturing facility. This facility has recently been enhanced and expanded to support ongoing demand for our automated macro defect inspection products as well as our newly acquired PCTA products. And the manufacturing transfer of the second PCTA product family is well underway. Inventory for the new 3-D inspection products referred to as our wafer scanner product group, WSPG, has completed the transfer to our Bloomington facility and the first tools will ship from Bloomington in early Q3. Our WSPG engineering team has also been relocated to a new facility with improved capability and lower operating costs in Bohemia, New York.
In addition to the internal operational integration, we continue to cross train our field service and applications engineers, technical support experts and our sales team to bring the full capabilities of the PCTA and WSPG products to our customers through Rudolph's world-class global customer facing infrastructure.
All of these efforts are focused on increasing our leverage to deliver improvements in margins and overall performance from our global operations. After this first quarter of integration, we remain confident that the $3 million synergy estimate we gave you in December for PCTA is attainable.
Now, I would like to turn the call back over to Paul. Paul?
Paul McLaughlin
Thank you, Alex. As mentioned in our last earnings call in February, we at that time did not see a sharp positive slope to a recovery and that view has not changed over the past three months. We continue to see customers delay capital equipment purchases and we continue to get push-outs of delivery dates particularly from our front-end customers. These tools being pushed out tend to have higher average selling prices, which lead to increased volatility and uncertainty. Nonetheless, as you can see from our above guidance revenue results for Q1 and as you heard from Alex, our backlog and orders were up strongly in Q1. We, therefore, remain cautiously optimistic that this U-shaped downturn, which for Rudolph, we've been at the bottom of the U for the past three quarters, is nearing an end, particularly for our back-end volume driven business.
With our mix of two-thirds front end and one-third back end business, we believe there are two differently phased cycles affecting our business and this will lead to a more stable and predictable environment. I again caution that this does not mean we are immune to semiconductor technology and capacity cycles but rather we have a balance of businesses that can help dampen the amplitude of a business downturn like the one our industry is currently in.
Now for guidance. As I mentioned, we believe we are bouncing along the bottom at cycle trough revenue levels, but with a negative bias until macroeconomic conditions improve. We believe this will continue for at least the next quarter. Currently, we are forecasting revenue for the second quarter ending June 30, 2008 to be flat-to-down 5%. The company is expecting earnings per share to be between minus $0.02 and minus $0.04 excluding the impact of acquisition related purchase accounting expenses for recent acquisitions of Applied Precision Semi and RVSI LLC.
Thank you and that concludes our prepared remarks. Now, let me open the call for questions. Marcus?
Question-and-Answer Session
Operator
Thank you. (Operator instructions) Our first question comes from Suresh Balaraman.
Suresh Balaraman – ThinkPanmure
Thanks guys. Paul, a couple of questions. One is, when we look at the utilization rates in the – even the second-tier foundries, some of them have had the best utilization rates in almost two years. And are you seeing different dynamics this time in terms of when they are placing orders as opposed to what we have seen historically?
Paul McLaughlin
I think we are. I think the – there has been a big change in the foundry business model and it has been led by TSM. They are waiting until the last minute, Suresh. I think the 2004 downturn where those foundries put up some pretty awful red numbers, which was on the heels of a downturn three years earlier, they changed the way they operated. And they wanted to try to develop a model that – wait until the last minute to buy any capital equipment and try to – in any case try to minimize the capital. Now that’s not good for us. But what it has done is pushed a bubble into the hose if you will and at the end of the day I think this has got to break loose, but it will break loose in a moderate way. So the answer to your question roundabout is, yes, the model has changed. I think the foundry people are acting differently with TSM leading this pack. And I think they are being very measured in their capital equipment expenditures and when you look at the charts that talks CapEx to sales ratio, you can see the foundry has been down quite substantially over the past couple of years. That probably cannot continue. We expect it will not continue. We think, overall, it will have to come back up. And it will come up – come back up at selected foundries depending upon how well they (inaudible) do. Does that make sense? Suresh, did that make sense to answer you question?
Suresh Balaraman – ThinkPanmure
Yes. With the book to bill greater than one, is it all the bookings out in the future and not next quarter, next one or two quarters. Is that how the bookings are which is why – so I'm trying to reconcile the higher book-to-bill ratio with the sequential downtick in revenues.
Paul McLaughlin
Yes. I think what we are seeing is some push-outs that have happened. We've got some already in the second quarter which make – particularly in the front end. They have pushed to the right. And it – you know those are our bigger dollar value items and so, consequently, we are a little bit gun-shy. And it is not – in using the scenario that I just talked to you about, I think these – our customers are recognizing that they can wait until a later time because we the capital equipment supplier have tools ready and can turn much quicker. So I think they are waiting and I do believe we are going to continue to see some pushes and delays in shipment schedules as the quarter goes on. So I don't think the bookings will stay there [ph]. I think it will just move to the right, Suresh.
Suresh Balaraman – ThinkPanmure
Okay. Thanks guys.
Operator
Thank you very much. Our next question comes from Steve O'Rourke.
Steve O'Rourke – Deutsche Bank Securities
Hey, Paul, just a follow-up on the last comments. What gives you some confidence or do you have confidence that things pick up in the second half just from a general business perspective?
Paul McLaughlin
I think what we are looking at the second half, the back-end seasonality and cyclicality both are positive for us that may not be for others. And I think that’s a plus in the second half. Do I – am I confident on front-end coming back in the second half? Not really, Steve.
Steve O'Rourke – Deutsche Bank Securities
Okay. And just another question. How should we be thinking about overall company operating expenses going out through the year?
Steven Roth
Well, I gave you the guidance. This is Steve Roth. I gave you the guidance for the R&D standpoint. I think those – when you convert those into absolute dollars, there is probably some integration costs built into those for the next quarter or so even with the engineering teams that will start to wane off, and then same with the SG&A lines where there is some people obviously doing a lot of work on the integration activities. As those – as we continue to move all those manufacturing operations into Minnesota, those will eventually wane off. So I think you can probably look at our R&D in absolute dollar terms and figure that that’s probably the kind of the levels we are going to run at right now. Hopefully, we can see improvements in the top line, so percentage wise that will drop.
Steve O'Rourke – Deutsche Bank Securities
Okay. And one last question. You talked about efforts for strategically positioning some demo tools, for example. Has this effort stepped up or are you just kind of maintaining a quarterly run rate through the downturn in a sense here?
Paul McLaughlin
I think, Steve, you heard Alex talk about the plethora of new products, the MP3s, the S3000s, the AXis and the NSX. All four have new flagship products. All four are out at selected sites, so it has picked up rather a lot. We monitor that very carefully. Obviously that’s a concern. But our turn rate – we've got a real track record of success here. And I think it has been led in the past by August. Before we merged with them, they had a great record of putting tools in and making them stick. We think we are going to hit those kind of high stick rates and we've chosen to use the balance sheet to do just that. So it's up quite a bit.
Steve O'Rourke – Deutsche Bank Securities
Okay. And one last question if I might. The recent Dataquest data that came out on market share and market sizing indicates that maybe the metal film metrology market has contracted and maybe you have some market share losses in macro defect inspection. Would you care to comment on that and that data?
Alex Oscilowski
Steve, this is Alex Oscilowski. As you point out, those markets have contracted over the course of 2007. And what you have to do is kind of get below the numbers and look at how different companies sell into those markets and how the data get reported. So in automated macro defect inspection, if you look at that market again, we feel very comfortable about our offerings going into this year and out into the future. We have some good solid products there. In metal metrology, as I mentioned, '07 – you are correct that that market did contract across the board. If we look at the past quarter and trends we are seeing recently, we are – again we are feeling pretty bullish on our MetaPULSE line in that space. So, going forward, we feel we've got the right products to take a look at that market.
Steve O'Rourke – Deutsche Bank Securities
Okay.
Paul McLaughlin
I think there was one thing that could be mentioned in there in terms of the inspection business. We were surprised at the strength of Nikon. And I think that may have been a reflection of more business in Japan. We have historically struggled to get mindshare in Japan, which has always been an issue. And we think they had a little bit higher share this past year. And so there are some anomalies. We were not satisfied with where we are. We’d like to – we will build that back, we believe, with the introduction of the 940 that we introduced at SEMICON West – or introduced at SEMICON Korea two months ago.
Steve O'Rourke – Deutsche Bank Securities
Fair enough. Thank you.
Paul McLaughlin
Okay.
Operator
Thank you. Our next question comes from Patrick Ho.
Patrick Ho – Stifel Nicolaus
Just two quick housekeeping questions. First, Steve, what was the stock options impact in terms of EPS? And can you just repeat again what was the dollar impact of the charges in 1Q? I heard 3% impact to gross margins. What was the dollar content again?
Steven Roth
Let's go back to the stock options one, first. It’s 755,000 for the quarter on the 123. I did not – so you are talking about the 3% margin hit from both the inventory write-ups, the write-offs.
Patrick Ho – Stifel Nicolaus
Yes.
Steven Roth
About 1.2 million.
Patrick Ho – Stifel Nicolaus
Okay, great. Now just I guess the industry related questions. One, Paul, in terms of the outlook you've given, would it be fair to assume that a lot of it is memory driven?
Paul McLaughlin
The push-outs will be memory driven. The upside that we talked about where I mentioned that there is – Q2 back end guidance from people in the back end has been strong – the Cliques [ph], the Teradynes, the (inaudible) Clique and Teradyne, Veragi [ph]. They were all good signs but we've been done this road before. So I am cautiously optimistic as what – but we have to be realistic that the memory is sorting out. We all saw what SMIC did. They are exiting the business, which some people will consider healthy, which we do. And you see things going on with Micron combining with Nanya, things like that that are happening. So it’s in a state of flux, so you are right. The reason we are a little bit, in fact, very cautious despite a very good quarter in the order flow is memory. Memory is driving that.
Patrick Ho – Stifel Nicolaus
Okay.
Paul McLaughlin
I think you perhaps said it right today when you talked – I caught a piece that you sent out today, which I thought was very good, talked about people like us are going to be dependent not only on execution like we are talking about here or these acquisitions but on a turnaround in the business. We got to see that memory thing sort of settle down a little bit and see the players are jockeying for a limited number of places around the table. So it’s a little bit like musical chairs in who goes with whom, well DRAM versus NAND, that kind of thing. We saw today that our friends at TECH pushed out IMFT. Was that correct, Alex? It was IMFT pushed out of –
Alex Oscilowski
Singapore.
Paul McLaughlin
Singapore. It was pushed out till ramping volume NAND until the second quarter of '09. That is what they are thinking now. So I mean that's what makes me get a little bit gun shy if you will.
Patrick Ho – Stifel Nicolaus
Okay, now fair enough. I think you guys did a really good job at integrating August and I'm looking at my model from when you guys acquired August, seeing the increase in both R&D and SG&A following that acquisition. I understand the increase going on right now. On a percentage basis, it's less because I think the two acquisitions you just made are smaller. Would it be fair to characterize because it took you about three to four quarters before I guess OpEx started leveling out after the acquisition. Would that be a fair time frame to look at the two most recent acquisitions you made?
Paul McLaughlin
That would be a good benchmark to use. I am comfortable that we’ll bring those down. The question is, you look at it a percentage basis, it won't go too far from where it is if volumes don't – if we don't get off this bottom. I referenced that I thought we were in a sort of a U-shaped cycle right now. We are at the bottom of the U. We have been for the last three quarters. And I would be the first to tell you if I saw it bouncing out this quarter, but I don't.
Patrick Ho – Stifel Nicolaus
Okay. And final question on my end. I think, Steve, we've talked about in the past about the things you could do to improve inventory and AR management I guess pre- these acquisitions. Do you feel that these acquisitions will I guess stunt the work you have been doing up to this point?
Steven Roth
Well, I think I said even in my prepared remarks that inventory actually on the historical business actually improved even with the demo tool items that Paul mentioned. So I think we are making some fronts on that. And I think this just makes it a bigger – just we have to implement the same policies that we've related to the two acquisitions. As Alex mentioned, a lot of the inventory now is being moved to the Minnesota operations. So I think it will take a little bit of time. But they will flow into the same process that we are putting in place for everything else we are doing. So I think it will slow. I'm hoping for just continued improvement I guess is a good way to say it.
Patrick Ho – Stifel Nicolaus
Okay. So you don't feel like this will cause like a – I guess a big wall to the progress you have already made on the core business before these acquisitions?
Steven Roth
No I think it’s just a bigger bucket to play with in both the AR and the inventory. But I think you are going to see improvements over the next several quarters I think in both of these categories.
Patrick Ho – Stifel Nicolaus
Right. Thanks a lot guys.
Operator
Thank you. Our next question comes from Mahesh Sanganeria.
Mahesh Sanganeria – RBC Capital Markets
Thanks. Paul, a couple of questions on the surprise compared to your guidance. Your top line came in better but the gross margin was – even if we account for the acquisitions-related charges, the gross margin is lower than your guidance of 48%. And also, in fact, R&D was actually in line with what you had guided but SG&A was higher. So just want to get a sense of what did change during the quarter for these surprises.
Paul McLaughlin
Okay. I think that you are exactly right; the margin is the issue. The things that we talked about were quarter specific I think with somewhat of the mix, but also the fact that software did not contribute to anywhere near what we thought it was going to contribute. Steve, any other–?
Steven Roth
And I think that as well as in my remarks you remember I said we deferred a bunch of tools. So, and those tools were related to the acquisitions. So we acquired, for example, the Seattle operations at Applied Precision. There's a full manufacturing operation there which we talked about we are moving. So the overheads there were weighing down on the margins for the tools that shipped – at the tools that we recognize revenue on even though we actually shipped more tools out of there. So I think that all played into the part of the margin miss.
Mahesh Sanganeria – RBC Capital Markets
Okay. So, going forward at these kind of revenue level, we should be thinking about 44%. Is that the right way to think–?
Steven Roth
I said – yes, I said 43 to 45, I think somewhere in there. It's somewhat mix dependent.
Mahesh Sanganeria – RBC Capital Markets
And how much dollar amount – any guess on what’s the dollar amount we should look into for June quarter's step-up of inventories?
Steven Roth
I think I said about $1 million.
Mahesh Sanganeria – RBC Capital Markets
About $1 million. Okay. And one high-level question. What is your sense of CapEx for the front- and back-end for 2008? Most of the companies have said something like front end overall is 20% to 25%, but I think you said that you were going to be positively impacted by the back-end better than front-end. So can you give us the sense of the mix that front-end do you think will be down 20% – 25% or – and the back-end will be maybe flat, up, or down?
Paul McLaughlin
I think one way to look at it, Mahesh, is the – if you look at book to bills, the book-to-bill in the back end is at parity. We of course had with a couple of new products and the acquisitions have added to our bucket. So the way to look at Rudolph is one-third of that macro bucket is tied to those kinds of seasonality and cyclicality events that we forecast will be volume related in the second half of this year. So a third of our business could see some strength, not straight up. We've said before the slope of the curve is not directly up, but that’s where the strength comes in. But in the two-thirds of our business, the front-end business, there are issues going forward. And I think we have heard from a lot of our peer companies that 15%, 20%, 25% down in CapEx spending is not out of the question. In fact, most people are forecasting it. So we are reflecting that in our thinking right now.
Mahesh Sanganeria – RBC Capital Markets
Okay. Just quickly one housekeeping I missed. How much did you say was the front-end in the June quarter total percent?
Steven Roth
60%
Mahesh Sanganeria – RBC Capital Markets
60?
Steven Roth
60.
Paul McLaughlin
That's for the first quarter. We didn't say for June quarter.
Steven Roth
Oh for the June quarter, no. The first quarter was 60% of revenue.
Paul McLaughlin
But the rule of thumb is two-thirds, one-third.
Mahesh Sanganeria – RBC Capital Markets
Okay. Alright, thank you very much.
Operator
Thank you. (Operator instructions) Our next question comes from Gary Hsueh.
Gary Hsueh – Oppenheimer & Co.
Just another question here on gross margin guidance for the June quarter. Is this a structural kind of new world after these acquisitions at the mid-$30 million kind of quarterly run rate we should be thinking about the mid- 40% gross margin level or is this just again a near-term depression just ahead of some integration activities particularly with API in Seattle?
Steven Roth
Hi, Gary, this is Steve. I think obviously when we complete all the manufacturing integration activities, you can see potentially a bump in the margins for those activities. But I mean we are bouncing around here actually a little bit below breakeven obviously from the numbers. So I think this is probably where we are at trough levels given that we will obviously take some costs out and you will see some improvement just because of the integration activities. But if we were to stay at these levels, I would d say we would probably be around those levels plus or minus one to two points.
Gary Hsueh – Oppenheimer & Co.
I mean the reason I asked, Steve, is I am just wondering is it a structural problem or is it because API is actually kind of in a downturn now?
Paul McLaughlin
It's more the latter. Let me give you some rough guidance on that. You've perhaps seen some of our larger customers in that – in the probe card area. Some of the difficult times that people – I reference our – a good customer has been FormFactor, and they continue to be a good customer of ours and we are close with them. But they've got some issues as well as that whole part of that market has some issues. So you are right, that part of the market is suffering as we speak. We think that’s a short-term effect. I just don’t see it lasting. I think that’s going to turn around. It will be company-specific and some will do better than others. But fundamentally I think that your comment about API being down is correct.
Gary Hsueh – Oppenheimer & Co.
Okay. And, Steve, just kind of a housekeeping question here. It looks like just triangulating on the miss here in gross margin, it’s around four percentage points. Is that more driven due to the software side of the business not meeting expectations or more due to the five units on the API side that you couldn’t recognize revenue on?
Steven Roth
You are saying the four point miss is this differential between the pro forma 44%?
Gary Hsueh – Oppenheimer & Co.
Yes, and the 48% midpoint of guidance, right.
Steven Roth
I think it is definitely a combination of both, Gary. I don't know if it's just one or the other. We’ve got a pretty good infrastructure at the Seattle operation, which we are obviously dismantling. So I don’t want to split it in half because obviously the software is very high margin type of activity too. That impacts us pretty tough when it doesn't come through.
Gary Hsueh – Oppenheimer & Co.
Okay.
Paul McLaughlin
I think, Gary, another comment, we've just started on the learning curve particularly at some of the new transparent products that we have introduced. And that is early in the learning curve and has not yet got to where we think the longer-term margins will be. We have got it to ship our S3000 in volume. But we are very early in the learning curve and I think that will go away next quarter and the quarter after, in the several quarters ahead. But that is a factor as well.
Gary Hsueh – Oppenheimer & Co.
Okay, great. And I just can't help but ask the question about inventory levels here. So, Steve, you are saying that basically in your core business pre- these acquisitions, inventories declined roughly 25% sequentially. So if I look – you basically would have been somewhere in the low- $50 million range in terms of net inventory levels exiting March. So it looks like you basically picked up $27 million in inventory, maybe $1 million of that from a write-up. Is that right? And have we added basically $25 million in new inventory from these acquisitions?
Steven Roth
No, no, no. I think – well, I'll back up to – I said the acquisitions added 25% to the inventory levels.
Gary Hsueh – Oppenheimer & Co.
Oh, I'm sorry. Okay.
Steven Roth
And I also said that the write-up inventory as of March is sitting at $3.4 million. So you can envision in the balance sheet numbers, there is at least 43.4 million sitting there from just written-up inventory purchase accounting on top of the 25% uptick because of what we acquired.
Gary Hsueh – Oppenheimer & Co.
Okay. Okay, perfect. Thank you.
Operator
Thank you. Our next question comes from Gus Richard.
Gus Richard – Piper Jaffray
Yes. Thanks for taking my question. Just real quickly, as you see a transition of older 8-inch capacity over to the foundries, are you seeing demand for an upgrade of that capacity for the copper?
Alex Oscilowski
This is Alex. It’s really very customer dependent. In the memory space, different customers are approaching the transition differently whether they are looking at DRAM first or looking at Flash first and also in what they do with 200 versus 300 mm fab. So it's hard to give a general answer. Typically, customers who have 200 mm capacity are making that trade-off against ramping their existing 300 mm fabs. So it tends to be more opportunistic if they have the added space. In the 200 mm fab, some are looking to do a partial or a full conversion.
Gus Richard – Piper Jaffray
Let me try the question again. I think you missed my point. A lot of the older 8-inch capacity in the DRAM memory space is moving over towards the foundry as they try to augment their capacity at 200 mm. And there is a tightening at 300 mm in the foundries for 65 and 90 and I was wondering if some of that older 200 mm capacity is being added at the foundries. Are they incrementally upgrading that to copper to support 13 [ph] on 8-inch?
Alex Oscilowski
So your question is, is the added 200 mm capacity in the foundry space being converted over to copper?
Gus Richard – Piper Jaffray
Correct.
Alex Oscilowski
Again, I think that’s very customer dependent. We are seeing a movement to copper at the 300 mm level. And we have the ability to help customers do that at 200 mm level at all, but I wouldn't say it's a big trend.
Paul McLaughlin
I don't think – as I look at the order book and the paperwork in front of me here, Gus, I do not see 200 mm copper jumping out at me.
Gus Richard – Piper Jaffray
Got it. Okay. And then just moving on to the probe inspection, when you look at the various types of probe cards – MEMS, Cobra, maybe even some of the chemical etch variety, in the inspection tools that you produce for probe tips, is it all of the above or is it one versus another? Is it a capital intensity for inspection if you will across the various technologies?
Paul McLaughlin
I think it’s across the board. I think we apply to all of them, Gus, if that’s your question. I think we are tied more to the advanced probe card area. We have historically tracked with – when we did our due diligence on the Applied Precision, we noticed the direct tracking in correlation to the people like the FormFactor, the MJCs, the people like that. Those were the ones that – in the leading edge stuff. Thing edge up [ph], the Applied Precision on leading edge down, they were down.
Gus Richard – Piper Jaffray
Okay. So primarily memory and microprocessor types of applications?
Paul McLaughlin
That's correct. [ph]
Gus Richard – Piper Jaffray
And then the last one for me, in the transparent film – thin film, there has been some consolidation in that market. Has that helped pricing in your market share?
Paul McLaughlin
Pricing, I don't think we've had much of a problem in pricing. I think we have a cost issue because we are early in the curve in these brand new S3000 tools, which we expect will be the majority of the order book in the quarters to come for us in the transparent area. It’s a family of products, the 3000, and we think that will be the majority, but–
Steven Roth
Yes. I would agree, Paul, we're not –
Paul McLaughlin
Consolidation within the space, yes, there was some of it.
Gus Richard – Piper Jaffray
I was thinking that that might have created a price umbrella and actually you were able to lift pricing as opposed to having pricing pressure.
Paul McLaughlin
Well, it’s dominated – the transparent business is dominated by a 70% share owned by our friends in San Jose. And the balance is divvied between three, four, maybe five other companies that I can think of all with relatively small shares. You've got to split up 30 points by five guys versus the other guy with the 70. So it's a structure that allows you to get underneath the price umbrella of the number one guy and that has kept the margins in pretty good shape.
Gus Richard – Piper Jaffray
Got it. Okay. I think that covers it for me. Thank you.
Paul McLaughlin
Thank you. Good to talk to you.
Operator
Thank you. At this time, there appears to be no further questions. I will turn the floor back over to Mr. Paul McLaughlin for any closing remarks.
Paul McLaughlin
Let me sign off by saying thank you for joining us for the call and we look forward to seeing you at the end of next quarter. Thank you.
Operator
This concludes today's Rudolph Technologies conference call. You may now disconnect.
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