Eagle Test Systems, Inc. F3Q 2008 Earnings Call Transcript

|
 |  About: Eagle Test Systems Inc. (EGLT-OLD)
by: SA Transcripts

Eagle Test Systems, Inc. (EGLT-OLD) F3Q 2008 Earnings Call Transcript July 30, 2008 6:00 PM ET

Executives

Leonard Foxman - President and CEO

Steve Hawrysz - CFO

Analysts

Krish Sankar - Bank of America Securities

Peter Kim - Deutsche Bank

Gavin Duffy - Broadpoint Capital

Gus Richard - Piper Jaffray

Chris Vancor

Operator: Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Eagle Test Systems Incorporated Earnings Call. My name Maloney and I will your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions). As a reminder, today’s call is being recorded.

I would now like to turn the call over to Mr. Leonard Foxman, CEO. Please proceed.

Leonard Foxman

Thank you very much Maloney. good evening and welcome to the Eagle Test Systems third quarter fiscal quarter 2008 earnings conference call where will discuss the company’s June quarter results which were released earlier this evening. I’m joined by our Chief Financial Officer, Steve Hawrysz.

Steve will begin the call by some handling administrative issues and then discussing our third quarter financial results. Steve will then turn it back over to me for some commentary on our industry and Eagle’s business. And then we’ll then open it up to take -- 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 June quarter results. Steve?

Steve Hawrysz

Thanks, Len. First, Eagle Test’s press release with our third quarter results for the three and nine months ended June 30, 2008 was sent out at the close of market today, and is available at the Investor Relations section of our website or by calling and leaving a massage with our Investor Relations help desk at 847-327-1033. This call is being simultaneously webcast over our website 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 46380451. Replays will be available for approximately two weeks following the call.

Second, investors should consider the contents of this call as the official guidance from the company for our fourth quarter of fiscal 2008 ending September 30, 2008. The company has a policy not 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. The investors should note that Leonard 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 relating to future financial performance and other performance expectations, which may include commentary as to revenues, demand for products, operations or R&D 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 SEC filings including in our annual report filed on Form 10-K dated December 6th, 2007, and we incorporate herein the discussions of those risk factors. A copy of that Form 10-K can also be accessed through the Investor Relations section of our website.

Eagle Test is under no obligation to update any forward-looking statements made today. However, any update we make will be broadly disseminated and available over the web.

I will now review our financial performance for the third quarter ended June 30, 2008. Our net revenue for the quarter was $35.5 million which is up 78.6% in the same question last year and 7% sequentially. The increased revenue level was resulted from increased customer demand or our semiconductor capital equipment across a broad number of customers over the year on a year-over-year basis and sequentially for a number of customers excluding our current customer.

We reported net income for the quarter of $6.8 million or $0.30 per common share on a fully diluted basis compared to net income of $2 million or $0.09 per diluted common share for the same quarter and the prior fiscal year. Our netted income also increased sequentially from $6 million or $0.26 per diluted share reported in the previous quarter ended March 31, 2008.

Net income as a percent of net revenue was 19.2% for the current quarter versus 10.1% of net revenue for the same quarter last year and 18.1% of net revenue in our second fiscal quarter. Gross margin percent for our third fiscal quarter of 2008 was 65.6%. This is higher sequentially than the 52% margin for the March 2008 quarter and has increased from the 62.3% gross margin reporting for the June quarter last year. The increase in gross margin is primarily resulted better leverage on our fixed cost due to higher productive, production activity and favorable product mix versus a previous and year ago quarter.

Operating income for the quarter was $10 million or 28.2% of net revenue. This is an increase in operating income of $2 million sequentially, which was due to $2.7 million in gross margin improvement as a result of higher revenues and better margin offset by an increase in SG&A of $900,000 resulting from higher revenue performance and additional planned headcount. This increase was offset slightly by a decrease of $140,000 in R&D spend on a sequential basis due to lower contract or expenses related to outsource R&D projects in the current quarter, and lower than anticipated material cost and prototyping spend for the R&D projects in process.

Current quarter operating income of $10 million was also compared favorably to the same period last year and increased $8.2 million from the June 2007 quarter. This increase in operating income was due to $10.9 million increase in gross margin primarily as a result of higher revenue level this year, and better overall margin based upon better overhead absorption. This is offset by an increase in SG&A expenses of $1.9 million resulting from an increase in personnel for sales, customer service, application engineering to support domestic and international initiatives, and increased incentive compensation and warranty accruals both based upon increased revenue levels. R&D increased to $797,000 when compared to the same period last year, as a result of an increase of $436,000 in contract engineering and $390,000 increase in headcount related cost as a result of additional hires in R&D.

SG&A for the June quarter sequentially increased from the March 2008 quarter by $900,000. This sequential increase was a result in increase in SG&A personnel-related costs of $240,000 in the current quarter, resulting from increased headcount and commissions on increased revenues and an increase of $210,000 for warranty and bad debt reserves based on higher revenue activity.

Foreign support cost increased $350,000 as a result of that reclaim benefit received last quarter that lowered our second quarter cost and was non-reoccurring in nature. As noted previously, R&D costs for the June 2008 quarter were down sequentially by a $143,000 from our March 2008 quarter. This sequential decrease was attributed to a $150,000 in lower contracts or expenses related to outsourced R&D projects in the quarter and a $132,000 in lower anticipated material costs and prototyping spend for the R&D project and processes for the quarter as compared to the March 2008 quarter. These R&D decreases were offset by a $190,000 in increased employee costs on additional R&D headcount.

Stock-based compensation recorded under FASB 123 (NYSE:R) in the current quarter was $313,000 and is $1 million on a year-to-date basis and thus not significant enough to be broken out separately in our financial results. Our income for the current quarter was $927,000. Our other income for the quarter was $927,000 compared to $1.1 million in the same quarter last year and there is principally investment in common cash and marketable securities available and invested.

The decreased investment income was due to investing more of our available fund in tax-free instruments in the current quarter resulting in lower yields on similar investable balances year-over-year.

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 continue to have $28.6 million on our investments classified as long-term marketable securities. Our long-term investments are down by $7.3 million from last quarter or 20% as the number of our auction rate securities were successful in the June quarter or were issues that we called at par.

The long-term securities continue to be tax-free, auction rate securities and municipalities that approximates $5.3 million and student loan portfolios of about $24.8 million. These securities continue to accrue and pay interest. These investments continue to be highly rated securities and are back by monoline insurance agents or in the case of some of the student loans by a U.S. federal agency.

Based upon our analysis the company recorded an additional unrealized loss in these securities of $224,000 in the current quarter. The total unrealized loss in these securities is now at $929,000 net of tax benefits of $612,000, which we continue to feel as temporary in nature and accordingly have not recorded this item to our results of operation. But that continue to reflect this item as a component of other comprehensive income.

At this point, what I 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 due to the unprecedented market disruption surrounding the Dutch auction process. We continue to feel at this point that 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 lack of liquidity for the instruments and uncertainty of reestablishment of the auction market for these securities. We continue to take a longer term view on these investments at this time. There is no impact on our ability to fund operations and at this point we got feel that these investments are permanently or other than temporarily impaired. We will continue to refrain from investing in investments that do not provide us a form of liquid investment and we will continue to practice our principals of preservation of this investment principal with cash we maintain for strategic and growth purposes.

Our income tax expense for the quarter was $4.1 million, reflecting a tax rate of 37.6%. 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 year tax return.

Our quarter ending headcount was 419 total employees. This is up from 400 employees reported in our March quarter. Principally this is resulted from sales and marketing headcount increases of approximately five employees and research and development increases of about eight employees during the quarter.

On a geographic basis, our over 10% ship-to-countries in the June quarter were the U.S. at 30.5%, Malaysia at 34%, and the rest of the world represented 35.5% of our shipments. We are required to report significant customers who make up over 10% of our revenues. During the June quarter we had two customers that fell into that category. Taxes Instruments at 28.1% of that revenue for the quarter and Intersil Corporation at 10.7% of revenues for the quarter.

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

Until we get additional customer that are over 10% on a consistent basis, looking at how our non-top customer revenue stream is growing, would be the best indicator of how we’re doing or growing our base business beyond our top customer.

In addition, we believe this should be looked at over a period of time versus a quarter-to-quarter basis, as a buying pattern of all of our customers who vary from quarter to quarter given capital, equipment buying patterns, which will differ for each of our customers and may be heavily concentrated in one quarter versus another, but will smooth out over a longer analytical timeframe.

If you look at this metric over the nine month period ended June 31 for the years 2006, 2007 and 2008, you will see that our non-top customer revenues were $42.6 million, $45.4 million and $55.6 million respectively over this three year period. This increase in non-top customer revenue represents growth of 30.5% over these three nine month periods.

Over the same period of time, our top customer revenue was $45.2 million, $19.8 million, and $44.0 million respectively, and clearly shows that our growth for the last nine month period ending June 30 came from customers other than our top customer. We continue to be pleased with our diversification success with customers across product line and geographically, and believe we are making great strides to diversify our revenue base beyond our current top customer.

Moving to the balance sheet. We ended the third quarter with cash and marketable securities of $114.8 million. This is before the non-cash unrealized loss of $1.5 million and the long-term marketable securities recorded to other comprehensive income as discussed earlier. This is a sequential increase in cash of $800,000 and reflects $3.6 million in cash generated from operations and $2.8 million of cash used for capital expenditures in the quarter.

The increase in cash from operations for the quarter was principally from net income generated from operations of $6.8 million, plus depreciation of $1.1 million and $310,000 of stock option expense which are both non-cash items. Other sources of working capital during the quarter included an increase of $1.5 million due to an increase in accrued net income taxes, accrued compensation and accrued liabilities, and prepaid items resulting from increase in operating performance and timing of related payments.

These operating cash increases were offset by uses of cash of $7.7 million pay down payables from the balance at the end of last quarter resulting in inventory purchases last quarter. $740,000 was attributable to additional inventories resulting primarily from additional deferred revenue at the end of the quarter and $550,000 in additional accounts receivable resulting from current quarter increased revenue levels.

Total cash used by investing activities attributed to $2.8 million in CapEx expenditures during the quarter. These CapEx expenditures were principally capital equipment used in sales, application engineering, production and research and development functional areas and included $300,000 of facility leasehold in IT infrastructure enhancements for growth initiatives that were above those planned.

Accounts receivable represents 56 days of sales outstanding, which is down from 67 days reported at the end of the March quarter. This decrease is reflective of the increased revenue that was more evenly distributed across the current quarter. We ended the quarter with inventory of $36.8 million or 1.3 turns. Net amount invested in inventory is up $14.6 million from the end of last September. In reconciling this increase for you, we must buy stock parts based upon visibility and estimated build plans.

Last year to combine June and September, demand was at the $41 million level. This year, based upon demand in December to March timeframe we took much of our buffer stock down and the estimated range of June to September system business was up over 60% from last year. This would account for about $12 million increase in inventories due to this increase in business.

Additionally, we've decided to invest in stocking more long lead time items and stocking items 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 another 10% to 15% of the increase in inventory, not accounted for by the increase in demand over last years business levels.

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 continue to be in a position to responsive to our customer demand, given the lack of visibility we continue to have for the demand of our testers in general.

We believe being able to be respond to customers needs more quickly is in our best interest and also believe overtime we should be able to be better than two turn overtime on a consistent basis of our inventory.

I would like to now move over to offer some guidance for our fourth fiscal quarter of fiscal 2008 which ends September 30, 2008. We estimate net revenues will be between $31 million and $35 million for the quarter ended December 30, 2008. The company estimates that earnings per share will be between $0.19 and $0.26 per diluted common share based on estimated weighted average shares outstanding of $23.2 million diluted shares for the quarter.

Our fourth quarter guidance assumes returning to a more normal system configuration and implementation mix of product shipment and gross margin. SG&A spend continue to reflect some small increased investment in application engineers driven by demand for in-sales territories for technical support resources. Research and development spend which we guided to be up in the third quarter or increased to those levels above those levels in our March quarter to reflect some additional engineering prototyping spend and continued contract engineering engaged to assist on product development projects.

But we see R&D spending leveling off in our fourth quarter and continuing at this increased level for the middle of next year as we complete these product development which are future revenue enhancing project products. Our estimated consumer annualized tax rate of 35% as well. Our guidance policy is only to comment on the current quarter based on information available to us at the time we release our guidance.

We do not provide backlog or sales information for the quarter completed, since this snapshot type information can change rapidly and has historically not been a good parameter 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 after our auditors have completed their year-end audit work. This call is anticipated to occur during the third week November 2008 reporting the fourth quarter and year-end fiscal 2008 results.

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

Leonard Foxman

Thanks Steve. I am pleased about this past quarter's results. The market segments Eagle serves that continue remain strong for the first two quarters of our fiscal year and our customer diversification efforts that begin to payoff well. In addition, we have been able to deliver strong positive earnings while continuing to invest in the expansion of our R&D sales and support efforts.

As Steve mentioned earlier in the call we continue to see the demand from our largest customer Texas Instruments. As our largest customer, I'm also pleased to see that they continue to perform well in the business segments that we serve.

I feel it's important to recognize the significant spending across our broader range of customers that occurred in this past quarter. Eagle recorded over $35 million of revenue our third highest quarterly totaling company's history. While our largest customer accounted for only 28% of our revenues. This should be a clear indication that our customer base is not only broaden but it's capable of driving significant revenue and growth opportunities for the company.

In spite of looming on certainty in the broader financial markets, this past quarter Eagle's revenue grew for the fourth consecutive quarter and Eagle posted it's highest revenue since the fourth quarter of fiscal 2006 with the 7% gain in quarter-over-quarter revenue. We also saw an Intersil Corporation become a 10% customer for the third time in this many years. These metrics are good indicators that Eagle’s peak to drop cycle susceptibility is continuing to move in a positive direction.

By way of general overview, we continue to focus on investing further in our customer expansion efforts and new product development this past quarter. In particular, we continue to invest in R&D so that we can continue to expand the breath of our product offerings and decrease the time it will take to bringing important new products to the market. We remain committed to achieving the growth potential in both new products and enhancements that deliver significant advantage for our customers and we’re committed to focus heavily on R&D activities.

The markets we address, including automotive, care managements, high performance analog along with discrete and MOSFETs continue to remain the main drivers of our product sales. We continue to see increased opportunities at both new and existing customers in wide range of these device markets.

Additionally, we have begun to see more appreciable interests from a number of potential new RF customers and have already received positive results of this new product as evidenced by our linen and competitive evaluation conducted by [Bergreen] this past quarter.

We’re very encouraged by the interest our RF product is getting and believe this win is indicative of the results we expect to see in further competitions. We remain optimistic that this product carry a whole significant growth potential for Eagle.

We remain confident in our ability to capture further market share in the newest areas of our focus and believe our existing products and our target markets will allow us to remain competitive and plump future growth. In closing, we remain optimistic about the conditions of our market in general.

As Steve indicated from our guidance for the last quarter of our fiscal year, Eagle remains confident that customers spending in our markets will remain strong. In spite this optimism, we continue to pay close attention to our operating model so that we will be respond quickly in the event that the broader financial markets begin to negatively influence our industry. We will remain steadfast in the development of new products to remain ahead of the competition and will continue strengthen our infrastructure required for future growth.

I’d now like to turn the call back to the conference operator Maloney to open the call up to your questions. Maloney?

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions). And our first question comes from the line of Krish Sankar with Bank of America Securities. Go ahead.

Krish Sankar - Bank of America Securities

Hi, Steve. If I look at your guidance over the last couple of quarters, you have been pretty much guiding the same range in the $30 to $35 million revenue run rate. You hadn’t been able to grow the last three quarters. So, is this guidance of September, is it conservatism around being conservative in the macro environment or do you actually see like slowdown in analog spending going forward?

Steve Hawrysz

Well, I mean, I’ll let Len comment on the macro environment, but I guess my guidance, I pretty much look at what we have bookings for and what we anticipate we’ve seen again, some of the turns business, that comes in for the quarter and kind of set my range based upon anticipated levels of activity that I visibility to. The last couple of quarters we were at the high end, and in this quarter, we were above the top end of our range slightly. So, we did get benefit from some additional business that we didn’t have visibility at the time of our last conference call.

And so, my guidance is based upon the best information that I have available at that time. So, I continue to do that on a consistent basis and to the extent that we have better experience with our customers and then materialize in a given quarter and we’re able to respond to their inventory position. We’re able to respond more quickly as well. So, that also helps us having product available to get things outdoor in more expeditious fashion. Len, do you want to add any comments to that overall macro environment?

Leonard Foxman

Well, we try to listen carefully to what’s happening in the industry in general. But because of the nature of Eagle, we are not looking into the broader DRAM markets and some of the other portions of the semiconductor test arena that are experiencing other dynamics in that. One of the things that we like about our space is that it has, what we feel is, relatively predictable performance relative to the extremely viable environment that is present there.

So, I think all things being what they are, I think the fact that we hold the opinion that things seem to continue to be inline with the performance that we have been able to deliver over the last three or four quarters that we should be able to perform in a range that Steve has outlined. And maintaining with one of two, as ever happens. We don’t want to be disappointed. So, if you consider that to be conservative, then we are guilty of that, certainly, don’t want to disappoint on the earnings.

Krish Sankar - Bank of America Securities

And, just one last question for Steve, when do you think actually your R&D is going to come back to the normalized level. I mean, I am assuming some around the $2 million range. Is it going to be a couple of quarters from now or is it going to be more like back half of quarter ‘09?

Steve Hawrysz

Yeah, it will probably go up a little bit this quarter from actually our March levels. Our June was down, but we see is going up from our March level in this current quarter. And then we see a leveling off at that level for the next three quarters and then coming back down when the contractors free up from some of the major projects we have going on.

Krish Sankar - Bank of America Securities

Thank you.

Operator

Our next question comes from the line of Peter Kim with Deutsche Bank. Go ahead.

Peter Kim - Deutsche Bank

Hi. Thanks for taking my question. I was wondering the upside that you saw this quarter, I know it’s only a few million dollars, but that could represent a few tools. I was wondering if you can characterize where that upside came from. I mean, was it largely from your largest customer or of which products and technologies basis. If you could give us some color on that, I’d appreciate it.

Leonard Foxman

Well, if you look Peter, the fact, I think you will see 28% is relatively low percentage of our overall business for TI to represent. The fact to the matter is we have been working for several years to broaden the customer base. And that’s been working and number of those customers have finally started to drive some real capacity requirements that is transformed into orders for us. So, although TI was a smaller percentage than they have been for as long as I can remember, we’re still able to perform at the high end of the range and that says these other customers that we try to build as part of our family of customer have really stepped up. And just the analog market in general, power management, automotive as well as standard kinds of things you see with some of the telecom and our business they will all come up. I am glad today we’re involved with memory but we wouldn’t have this kind of opinion is where we are at today. It's continues to be good. Everything need power management.

Peter Kim - Deutsche Bank

Alright. And no doubt…

Steve Hawrysz

The only other thing I can allude to is the fact that we did have one customer that upgraded some of it's instruments with some of it systems as well. So, we benefited from that as well. So, we did have some orders for some instrument, but overall it doesn’t change Len’s comment just one additional item that would there.

Peter Kim - Deutsche Bank

Great. Overall, obviously you’ve made some very good strides in your customer base expanding it beyond your largest customer, and you characterize that well in the conference and your prepared remarks. I was wondering if you could kind of talk about where you think your top customer is, has your view on the outlook of that the business with that largest customer change recently because there results show that analog and mix signal is pretty strong area for them?

Leonard Foxman

Yeah, I think Peter, they were talking about 8% growth, and given the other areas of the market 8% growth at this point in the cycle it wasn’t pretty good. We feel that they have been doing a good job at executing on their plan to gain their market share. They have new facilities that are going to be coming online as they reported this over the next two or three quarters, and we expect where we given the opportunity to participate that, we look forward to it, we have plan to ramp it.

Steve’s remarks mentioned, some of the spends that we have done recently was to build out some of the infrastructure was our own production facilities, so that we can plan to do a good job of building the numbers of equipment that customers want and we would also whether it receives a good reaction or not we put ourselves in an inventory position to deal with the realities of the present day market and the realities are, customers are sitting close to the nest. They don’t want to spend money until they feel strongly and confidently that they are going to be able to get the return on that investment in the reasonable period of time. So, we feel we’re doing a good job serving them by being in a position to react quickly and deliver quickly, so they can capture market share. And certainly that should line up with the plan that our largest customer has.

Steve Hawrysz

As well as our other client, excuse me.

Peter Kim - Deutsche Bank

Okay. Thank you very much.

Operator

Our next question comes from the line of Gavin Duffy with Broadpoint Capital. Go ahead.

Gavin Duffy - Broadpoint Capital

Hey guys. Congratulations on a great quarter. I just have couple of different things here. Where you kind of have your gross margin up nicely I guess 360 basis points sequentially, and the Texas Instruments being down roughly 50% in dollar terms and you have your non-TI business grow I have this around 93% q-to-q. UGI I always have that TI like it took very fall systems in terms of instrumentation. So, I was just kind of you are seeing more kind of normalized kind of gross margin in the September quarter. I think you just kind of resolve that little bit with non-TI business growing so much, but the gross margin also growing. Is there something kind of little bit different in the June quarter.

Leonard Foxman

Well, Gavin it's really very sensitive to the mix of instrumentation that people purchased in the systems as they do. You might expect we would try to do everything we can to aligned as people would expect the pricing, the volume that we get obviously we have to give very aggressive pricing to our largest customers, because they find the greatest volume, so and that drives our production cost. But then as we get other customers then we have perhaps more sophisticated instrumentation that contains even more IP that differentiates us and is work with more or might be able to pick out a little more margin. But quite frankly 2% or 3% margin fluctuations to me is almost what I call ground noise in the radar business it's really flatters up there. There is anything there that is spectacularly changed our margin mix by 10% or something like that.

Leonard Foxman

Yes. I think our largest customer use to buy the most fully populated systems I think we are seeing there are other customers move to buying heavily loaded systems as well and they are getting more comfortable with the parallel testing. So, they are buying systems they are just as heavily populated with instrumentations as our largest customer now so they got to figure it out. And I think we are benefiting from some of that as well as we grow into these other customers.

Gavin Duffy - Broadpoint Capital

Okay. Fair enough. And actually looking at June where you had almost 72% of it being non-TI, it seems to me they are probably one of the broadest customer basis you guys had in terms of revenue contribution. It seems that only (inaudible) being 10% guide there that there will be lot of headcounts which seems like lot of different guys going into next year.

Leonard Foxman

That's probably accurate.

Steve Hawrysz

And that's what we have been trying to build over the two or three years.

Gavin Duffy - Broadpoint Capital

One last thing for you too, Steve. It seems I haven't really see much driving it but if you look at your share price, your appreciation on [Friday] and then if you look at the last couple of days and I just didn’t know if you had any commentary on that?

Steve Hawrysz

I guess, for the broader group I could point to one thing I became aware of just this morning I became aware that one of our former employees, who is a non-executive officer exercised and sold some stock auctions that were expiring over the last two days. These exercises were not insignificant to the volume over those last two days and may have contributed to some of the selling activity over the last few days. Other than other things, market softness that exists, that is one thing that I did become aware of and I just wanted to point out for the broader group. So that may have been creating some pressure on our stock.

Gavin Duffy - Broadpoint Capital

I appreciate it. Thanks very much.

Operator

(Operator Instructions). And our next question comes from the line of Gus Richard with Piper Jaffray. Go ahead.

Gus Richard - Piper Jaffray

Yes, thanks for taking my question. Could you just talk a little bit about the – you briefly mentioned RF, but I was hoping you give a little more color as to serve revenue contribution from RF, auto and discrete?

Leonard Foxman

The RF contribution at this point isn’t significant, if we’re talking about a relatively low percentage of the overall volume. The thing is getting in there and competing going through all the benchmarks, and displacing the somebody unfortunately in our business is measured in probably six months to one year increments. So, depending on how many adults we have started and what our performance is going to be I would just say that if we look into the coming quarter I don’t expect that to suddenly represent 10% of our revenue. I do not think that kind of a jump is quite tall. But this is something that’s going to build over a three to five year.

As far as automotive is concerned, automotive continues to be very, very strong. In fact that we have capabilities to do an excellent job across all of the different diverse products that are there. Some of that is starting to get recognized at a number of places. And the fact that I think in the marketplace we are kind of aware here we are as people who take control of thousands of volts and hundreds of amps as well as the low level signal things, is fairly unique.

And the automotive market as the need for that kind of thing, and we are making good inroads vis-à-vis the better [results]. So, although it’s a long process to get yourself qualified with the automotive market. We’ve been working on it now and those kinds of things are happening. Products being released, so we feel really good about that.

Power management just continues to chug along, if anything, that’s happening. There are some customers out there who are now doing a better job of integrating power management along with other functionality and that is going to allow us to take advantage of the fact that while we are strong on the analog side of things. We still have a lot of digital income capabilities in our systems and that integration process will help drive some of those larger systems. So, we feel pretty good about all of that.

Gus Richard - Piper Jaffray

Could you put any on the Auto and discreet portion in your business. Can you just sort of size it? I know Auto 10% of revs at this point and sort of where do you see it going and the same question for discreet?

Leonard Foxman

Well, I don’t think we generally talk very specifically about that. Power management in general represents, I am sure, north of 40% of our product usage, in fact regardless of the customer. If they buy a system from us for doing RAF one though very quickly notices that you need the same system for doing some of the power management product. And the next thing and all they find reason to migrate some of those things over there. Automotive is a smaller percentage of that kind of business, but it certainly in a 10% type of range for us. And as much as I would like to see automotive grow, it’s a tough thing for automotive to do in a relative framework because power management just is so relentlessly expanded in some many different fronts that in order time it chases it, the other one moves up further as well. So, the ratio is back to normal.

Gus Richard - Piper Jaffray

Okay, and then just finally for the discreet, sort of where do you see that as a percent of revenue?

Leonard Foxman

The discreet for us probably is 5% to 10% type. And those systems, generally are less expensive systems. So, when we are making revenue in those areas, it comes by greater unit volume and we are doing that. The other thing that’s happening in that area is that volume being concentrated on power MOSFETs, we will also be able to expand the offerings to take into grasp of IT duties and other types integrated power module business. So, I think that will grow as well. And the nice part about it is, because we have got so much capability in the power area, we can do that without necessarily having to invest a lot more in IT end of thing.

Gus Richard - Piper Jaffray

Got it, and then finally just on, you had mentioned the upgrade of the instrumentation by one year customers. Can you give some color as to how big that is, and also sort of what a spares and service, and upgrades run quarterly?

Leonard Foxman

Yeah, I would say that the upgrades, I mean just board sales in general which we have every quarter was a little bit more robust this quarter. I mean every quarter we have board sales. I say, this quarter ramp probably closer to $1 5 million this quarter versus a typical it's like $500,000 or $600,000. As far as repair revenue and maintenance and stuff like that that run typically above between $1.3 million and $1.5 million a quarter.

Gus Richard - Piper Jaffray

Got it. Alright, thanks so much for the breakdown.

Operator

Our next question comes from the line of [Chris Vancor]. Go ahead.

Chris Vancor

Hi, Steve just a quick question, what is the SG&A guide for September and where do you see that heading into '09 is it going to reduce back to $9 million level?

Steve Hawrysz

No, as I said in my prepared comments I saw SG&A picking up from recurring quarter levels just due to some application engineering support that I think we’ll need to add to do some customer support activities and we continue to add salesmen to the extent that we see opportunities in various offices. So, I see that SG&A incrementally going up slightly, I don’t see any big pickups in our SG&A spend. I think last quarter which our March quarter we benefited from a rebate that we did not book ahead of time because the rebate was uncertain. So and we became certain what we will receive we booked it. That is not reoccurring this quarter that was one of the other significant items that caused our SG&A to go up this quarter, but I see kind of our SG&A kind of trending up, we think that will give us the best opportunity to continue to grow our revenues. So, I don’t see any significant increase but I see that going up from where were we are at right now, but just slightly.

Chris Vancor

Okay.

Operator

And that does conclude our question-and-answer session today. I would like to turn the call back over to Mr. Foxman for closing remarks. Please proceed.

Leonard Foxman

Thanks Maloney. I would like to take this opportunity to thank all of you for attending and participating in our earnings conference call for the third quarter of fiscal '08. We are pleased with the continued success we've had in our current fiscal year, and we committed to addressing our opportunity in teen market with unique test platforms we bring to the targeted customers, key product markets and the geographical regions that we continue to aggressively pursue.

As Steve stated earlier we will endeavor to communicate any additional information simultaneously to all investors to the best of our ability. It should be noted, however, that we are under no obligation to provide an update to the information presented in this call.

With that I would like to thank you all for participating, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!