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Executives

Mark J. Gallenberger - Chief Financial Officer, Vice President, Treasurer

David G. Tacelli - President, Chief Executive Officer, Director

Analysts

Analyst for Timothy Arcuri - Citigroup Smith Barney

Vernon Essi, Jr. - Needham & Company, Inc.

[Jason Bernstein - Quattro Global]

Patrick Ho - Stifel Nicolaus & Company, Inc.

LTX Corporation (LTXX) F4Q08 Earnings Call August 26, 2008 8:30 AM ET

Operator

Welcome to LTX Corporation’s fourth quarter and fiscal year analyst conference call. (Operator Instructions) Speakers for today’s call will be David Tacelli, Chief Executive Officer and President, and Mark Gallenberger, Vice President and Chief Financial Officer. At this time I would like to turn the conference over to Mark Gallenberger.

Mark J. Gallenberger

Welcome to LTX Corporation’s fourth quarter fiscal year 2008 conference call for the period ended July 31, 2008. Joining me on today’s call is Dave Tacelli, CEO and President. After my introductory comments, Dave will discuss the company’s performance for the fourth quarter and discuss the business outlook. Then I will provide further detail on the company’s financial performance during the fourth quarter of fiscal 2008 as well as provide guidance for LTX’s first quarter of fiscal year 2009. We will take your questions after our prepared remarks.

A replay of this call will be made available through September 25 by dialing 888-286-8010 and the pass code is 62613242. Or you can visit our website at www.ltx.com. As a reminder the only authorized spokespeople for the company are Dave Tacelli and myself.

Now for our Safe Harbor statement. During the course of this conference call we may make projections or other forward-looking statements regarding LTX’s business outlook or the future financial performance of the company. We wish to caution you that these statements such as projected revenues, earnings per share, operating expenses, and gross margins are only predictions and that actual events or results may differ materially. The guidance provided during this call represents the company’s estimates as of this day and the company assumes no obligation to update this guidance. Please refer to our Safe Harbor statement in our earnings release for more information on important factors that could cause actual results to differ.

Now on to the call.

David G. Tacelli

While we met our EPS guidance, our fourth quarter revenues reflect a softening in the SOC test market. Our business model continues to perform at or ahead of our external expectations and resulted in a close to break-even fiscal year on a GAAP basis. Certain market segments that showed strength the previous quarter pulled back slightly during Q4. The cause for the pullback was a combination of seasonal affects and broad economic conditions. While several key customers had been bullish in a strong second half of the year, many are now unsure and are waiting to see the strength of the upcoming holiday season. The result is customers delaying purchases until absolutely needed, which is forcing semiconductor test companies to a higher reliance on turns business.

Of course the big news for us during the quarter was the announcement of the merger with Credence. While there isn’t much more I can report on the merger than what has already been publicly disclosed, our original schedule was for a vote by shareholders in late September and it is now planned for August 28. Assuming we receive shareholder approval, we are prepared to move quickly with the new company that combines the strength of both LTX and Credence. This new company will have the products, the world class support, and the global reach to be a major player in the SOC test market. We’ll be communicating more definitive news about the merger in the coming days and weeks to employees, customers and investors.

But now back to LTX’s fourth quarter and fiscal year results. Included among our accomplishments for the fiscal year were:

Our customer concentration dropped significantly during the fiscal year with growth outside our largest customer expanding year-over-year. We had three greater than 10% customers for product revenues and four greater than 10% customers for product bookings during the fiscal year. We had 15 customer wins including a win in the fourth quarter for a significant Next Generation RF test platform decision. This win contributed to revenues within the quarter. After an intense technical evaluation between LTX and two incumbent suppliers, we won a strategic decision in the high performance analog group at our largest customer providing a significant long-term growth opportunity within the account.

We introduced a new X-Series products, the MXC, that offers better performance and improved throughput compared to the CX yet is hardware and software compatible. In addition to the MXC there were several new instruments and capabilities brought to market for the X-Series expanding its market reach with new power, DSP and higher performance digital instruments. The transfer of X-Series production from Jabil Billerica, Massachusetts to Jabil Penang, Malaysia was completed with all new test systems now shipping directly from that facility.

We achieved a $35 million break-even level, lower than we had originally targeted, and we’ve been EBITDA positive for over three years generating positive net cash for the last two years. In addition, we paid off the remaining portion of our $150 million convertible debt.

Now for a few comments on the fourth quarter. Revenues just shy of $36 million were at the low end of our guidance but we still remained profitable. Our business model continues to deliver good results including gross margin at 50.6% and break-even slightly below $35 million and positive EBITDA for the 13th quarter running. Bookings for the quarter were $30 million with a high percentage converted into revenue.

As mentioned above, current market conditions have led to avid uncertainty on our customers’ ability to forecast capacity requirements accurately and therefore they continue to push for very short delivery schedules. Even with high utilization rates, customers are still hesitant to add capacity until they are certain of the business. In normal business conditions, existing utilization rates would normally trigger an increase in capacity but in today’s environment customers are not purchasing equipment until the last possible moment.

With several new technologies introduced during the year, we expanded our share with our top five customers as well as one next-generation decision at new customers including several significant RF wireless companies. During the year we were selected as the RF wireless test platform by 12 new customers. In aggregate these 12 customers have the potential to drive more than 50 test systems during fiscal year 09 with eight of the 12 already contributing to revenue and the other four expected to ramp through the fiscal year.

We have developed some new technology for testing high precision data converters that was directly responsible for share gains at certain customers. This technology is compelling enough where we have applied for several patents. We have already received over a dozen orders of this instrument and it is expected to drive over two dozen tester sales during the next fiscal year.

As mentioned earlier, we introduced a new member of the X-Series, the MXC. The importance of the MXC is that it provides an upgrade path to higher performance digital in multi-site capabilities that are offered on the MX but with the interface and compatibility with the existing CX production duct boards and software. Customers adopting the MXC can leverage the large install base of CX testers in the market place while protecting their investment for the future by having a path to enhance performance and capability of the MX. The performance, reliability, and cost of ownership delivered by the X-Series is resonating in the market place and we expect an accelerated expansion of the install base as we continue through the fiscal year.

From an operations perspective, we’re excited to report that we successfully completed the transition for our product manufacturing to Jabil Penang. In fact we completed the transition ahead of our internal schedule with a few testers shipped out of Penang in Q4. Being the first in our industry to outsource the complete manufacturing process provided us the experience needed to make this smooth transition. I want to personally thank the LTX and Jabil teams for such a successful project.

I’m sure there are two important questions on everyone’s mind when you think of LTX. First, when do we expect to see business conditions improve? And second, how are the merger plans with Credence progressing?

As I stated at the beginning of my remarks, earlier in the year customers were bearish on the first half of the calendar year but bullish on the second half. For certain markets and even more so for specific customers business is good. But in a general sense the optimism for the second half has given way to extreme cautiousness. For customers to add capacity they must have confidence and/or clarity in the future, and until they do they’re holding back all capital spending. The days of ordering equipment in the event business materializes is long gone and has been replaced by ordering at the very last minute. The good news for LTX is that the business model we have is firmly in place and is specifically designed to react to this type of business environment.

With regard to the proposed merger of LTX and Credence, the plans are progressing very well. We’ve been in the planning stage for the past month and I expect to roll out the new organization and company road map in the next couple of weeks. Because of the timing of this transaction, we plan to provide a full update on the merger for investors during the first full week in October. As a near-term market indicator we’ve chosen to provide LTX stand-alone revenue guidance as well as revenue guidance for the combined entity which includes LTX’s full quarter revenues and two months of Credence revenues with our press release and earnings call today.

In addition to this revenue guidance, when the merger was first announced we identified $25 million per year in cost savings that would be achieved with this combination. After the intense planning sessions that have taken place, the expectation is now for cost savings in excess of the $25 million target.

All other questions related to the merger will be addressed during the October update. We are nearing a significant moment in the history of both LTX and Credence. Assuming shareholder approval, we plan to move aggressively to merge the two companies taking advantage of the benefits both companies can bring to the market.

Until that time we’ll continue to move LTX forward by supporting our customers with leading test technology, superior global support, and low-cost solutions.

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

Mark J. Gallenberger

Total incoming orders for the quarter were $30 million. Revenue for the quarter was $35.8 million which is down 9% from last quarter’s revenue of $39.3 million. Gross margin was 50.6% which is down sequentially due to lower revenue volume. Operating expenses were down sequentially approximately $600,000 due to tight controls over all expense items. R&D spending was $11.2 million which includes $241,000 in stock-based compensation expense. SG&A was $6.5 million which includes $574,000 in stock-based compensation expense. Net income for the quarter was $630,000 or $0.01 per share on a GAAP basis. EBITDA was a positive $3.9 million or 11% of revenue for the quarter. The EBITDA calculation excludes depreciation of $2.7 million, net interest income of $303,000, stock-based compensation expense of $842,000, and $54,000 in tax expense.

For the 12-month period ended July 31, 2008 sales were $135.8 million compared to $147.6 million in the prior fiscal year. Net loss was $600,000 or $0.01 per share on a GAAP basis which included a tax benefit of $3.1 million or $0.05 per share. For the prior fiscal year net loss was $10.7 million or $0.17 loss per share on a GAAP basis which included inventory and restructuring charges totaling $3.8 million or $0.06 per share. EBITDA for the fiscal year was $11.9 million or 9% of revenue versus $11.6 million or 8% of revenue for the prior fiscal year. Net cash increased by approximately $2.2 million during the year which is the second year in a row of positive net cash generation for the company.

Next I’ll provide a breakdown of bookings and revenue for the quarter. 57% of bookings were from [IDMs] while 43% came from subcontract test and fab less companies. 94% of bookings for the quarter were for product and 6% for service. In terms of revenue 65% came from IDMs while 35% came from subcontract test and fablis companies. 83% of revenue was for product and 17% for service.

Now on to the balance sheet. For the quarter net cash increased by $2 million or 6% of revenue. We ended the quarter with gross cash of $71.5 million and net cash of $53.6 million. Accounts receivable increased by $2.8 million to end the quarter with a balance of $24.2 million. As a result DSO was 61 days versus 49 days in the prior quarter. Inventory decreased from $23.4 million last quarter to $22.5 million this quarter due to tight controls over the manufacturing build plan. Net capital expenditures were $1 million for the quarter primarily driven by capital testers and spares to support the worldwide install base. Depreciation expense was $2.7 million, accounts payable increased by $3.8 million to end the quarter with a balance of $14.1 million. Stockholders’ equity increased $1 million to end the quarter with total equity of $117.3 million.

Now on to the backlog summary. We started the quarter with a backlog balance of $44 million. During the quarter we added $30 million in new orders and shipped $36 million to customers. There were about $2 million in cancellations, therefore the ending backlog is $36 million with about two-thirds shippable over the next six months.

Guidance for Q1 2009 is as follows: We expect revenue to be in the range of $30 million to $34 million. Gross margin is expected to be 49%. The GAAP reported net loss per share is projected to be in the range of $0.06 to $0.02 assuming 63 million shares outstanding. Assuming the proposed merger between LTX Corporation and Credence Systems Corporation is approved and closes later this week, the combined company revenue guidance for the quarter ending October 31 is expected to be in the range of $60 million to $64 million. This guidance assumes three months of LTX revenue and approximately two months of Credence revenue.

In summary, our business model continues to generate positive net cash even during this period of industry weakness and our manufacturing move to Malaysia was completed on schedule with new tester shipments now shipping directly out of Penang.

This concludes our prepared remarks and at this time we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Timothy Arcuri - Citigroup Smith Barney.

Analyst for Timothy Arcuri - Citigroup Smith Barney

Can you give us any sense for the gross margin on a combined basis in Q1?

Mark J. Gallenberger

At this point we can’t give you any color like that. What we plan to do is give you additional information below the revenue guidance that we have provided today, which would be gross margin and EPS assumptions, at the October mid-quarter update call that Dave alluded to.

David G. Tacelli

One thing that I’d like to add is that in that October call we also plan to talk about the new structure, give some color on product road map, and also talk about the road map as it’s been rolled out to customers. So not only will there be some financial pieces of that update but there will also be color on the markets, the customers, and how the merger plans have been executed to that point.

Timothy Arcuri - Citigroup Smith Barney

Maybe as a follow up, I guess I’m just trying to get my arms around it a little bit just for the model, but can you give me any sense for what the gross margins are for just the service business at Credence?

David G. Tacelli

Any discussion of the Credence business we have to stay away from at this point. You know that.

Mark J. Gallenberger

We’re two separate companies still so we really can’t be commenting on Credence’s business at this point in time.

Timothy Arcuri - Citigroup Smith Barney

Fair enough. Maybe a bigger picture question then. If I look at the Credence side of the business, they reported their results for this quarter obviously and it looks like there’s very little product left there and it’s mostly service at this point. Is the big deterioration in share there a driver of the need to realize additional cost synergies beyond the initial $25 million target and does any of this incremental savings, I know you guys haven’t put any fine comb on it, but is it coming as a result of plans to maybe shutter certain product lines once the merger’s complete?

David G. Tacelli

Yes. The first thing, let me talk about the cost synergies. All of the planning process was done when we looked at the markets and when we looked at the products that we wanted to go after, none of the cost synergies has to do with any kind of deterioration as you mentioned. So it was all part of the planning cycle as we went into this integration process. As far as any other comments on pieces of business on the Credence side, we can’t comment at this point as we’ve said before.

Operator

Our next question comes from Vernon Essi, Jr. - Needham & Company, Inc.

Vernon Essi, Jr. - Needham & Company, Inc.

Just a housekeeping question here Mark. On the balance sheet, the other assets grew a little bit there and I’m wondering what’s in that line item?

Mark J. Gallenberger

The other assets grew this quarter because of deal specific costs so anything that’s related to the merger is going into that line item. So that’s why it grew this quarter.

Vernon Essi, Jr. - Needham & Company, Inc.

Should we expect that to continue to trend upwards in October?

Mark J. Gallenberger

Trend upwards in the October quarter balance sheet? No, I wouldn’t expect it to because once the deal closes then what we’ll get into is purchase accounting so we just have to put these expenses this quarter somewhere on the balance sheet until the merger closes. At that point we’ll get into purchase accounting.

Vernon Essi, Jr. - Needham & Company, Inc.

To back up and look at this from a much more macro intensive view, Dave, and I appreciate the comments earlier but things obviously are changing, people are pushing out their decisions, you’re looking for more turns based business, you did have it looks to be the first real cancellation in about six or seven quarters, what do you think really is triggering this response? Because there’s definitely from the device perspective sort of a polarized set of news out there. Some manufacturers are doing very well. I’m not too sure their capital budgets are ever really promising this day and age but they seem to be having two separate tones, and that’s what I’m looking for. Is there any milestone or event that turned for you in particular over the last couple of months that caused this reversal?

David G. Tacelli

No, I don’t think it’s any one specific event. What we’ve seen I would say for the last nine to 12 months is a very cautious outlook. What we’ve also talked about is it’s on a customer by customer basis. There have been customers and still are customers today as you mentioned doing very, very well and continue to drive capacity. There are some of our larger customers that have gone into what I call flat mode and I think it has to do with where they are in their market segments and their business. But there’s been no one triggering event. I think it has to do with how they’ve launched products to the market, how successful they’ve been, and it’s really been customer specific. As you mentioned there are some that have done well and some that haven’t.

Vernon Essi, Jr. - Needham & Company, Inc.

At your larger customers, there is a very sizable footprint being put into place and a new strategy. Have you seen any changes in their tone regarding that and their capital budgets? Are they keeping most of the vendors somewhat at arm’s length distance to some of those plans?

David G. Tacelli

Again, not to comment on their overall strategy but what I can say is that as it relates to us we’ve seen no change. I think they’re being, just like everyone, cautious in the market, waiting to see how demand gets realized through what I call the holiday season. But no change in their behavior.

Vernon Essi, Jr. - Needham & Company, Inc.

What was the split between product and services for the revenue number?

Mark J. Gallenberger

The breakdown for revenue was 83% coming from product and 17% from service.

Operator

Our next question comes from [Jason Bernstein - Quattro Global].

[Jason Bernstein - Quattro Global]

Was there any impact to the pending merger on your revenues? [SEMO] seemed to indicate that maybe there was some indecision on some of their customers’ standpoint.

David G. Tacelli

No. As it relates to the customers that we’ve talked to and how we’ve discussed the merger, there’s been no impact at all to our bookings or revenue.

[Jason Bernstein - Quattro Global]

My second question may have already been answered or you may not be able to answer it, but with regard to the SEMOS convertible bond, is that something that you also can’t comment on until post-merger?

David G. Tacelli

The thing that I would say is we structured the deal purposely looking at not triggering the bond conversion. What I can say is that in the last 12 hours Credence has received communication from select bond holders that believe that a change of control provision has been triggered and I know that Credence will be dealing with that.

Operator

Our next question comes from Patrick Ho - Stifel Nicolaus & Company, Inc.

Patrick Ho - Stifel Nicolaus & Company, Inc.

In terms of the overall SOC test business environment, are there certain applications or market places where you see this pullback more than others or as you mentioned Dave is it very customer specific? Do you see any overall trends in select market places?

David G. Tacelli

I think overall anything related to RF wireless has stayed pretty stable. As a matter of fact I commented earlier there are a lot of customers that leave wondering here that in the fourth quarter actually drove revenue. So we’ve seen a far more stable environment out of companies in the wireless space. We have seen what I call some lightness on some pure digital consumer applications and we also have seen some lightness in areas related to automotive. But one of the strong suits for LTX and a lot of area of expansion over the past year and it will be over the next fiscal year, the wireless area has been pretty strong.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Now that the transition to Asian manufacturing is complete and I know you briefly mentioned that on your prepared remarks, but can you give a little more color on your ability to ramp up once the man trends do improve? Because I guess from my perspective if you get a sudden surge in demand and you’re getting more turns business, do you feel that this is ready to meet that sudden surge comes whenever it comes?

Mark J. Gallenberger

I think that the Jabil Penang facility is their largest manufacturing facility worldwide. We’ve been very impressed with their ability to ramp up not only the product but also the talent in Penang to service the TLX account, so I’m very confident that this new location is going to be able to service the ups and downs as the Jabil Billerica plant has been able to service us. I’m very confident that they were able to leverage their copy exact model and move this business over to Penang in a relatively seamless manner.

Patrick Ho - Stifel Nicolaus & Company, Inc.

A final question on a broader level about the Credence merger and Dave I’m not sure how much you can go into detail but I’m sure you’ve had discussions with current Credence customers. At a high level can you just comment how those discussions have been? What’s your take on your conversations with them at this point in the game?

David G. Tacelli

The thing that I would say Patrick is all of my discussions to date have been with LTX specific customers. None of my conversations have been with Credence specific customers. Now there are situations where we share the same customers and all of my discussions with the LTX customer base and I think I described this on the merger, it’s probably been 80% positive and 20% neutral. 80% positive because they see a bigger company, they see a wider reach, they see a bigger global support footprint, and they see some of the interesting pieces of technology that we’ve combined together. On the 20% neutral it’s more “Make sure that you don’t affect how I buy and what I buy.” So it’s not negative; it’s just neutral. I would rate it overall as a very positive rollout to LTX customers. What I plan to do in the October call is now begin to discuss the combined company and all customers. That’s something that I can’t do today because I have not approached their customer list.

Operator

At this time this completes our question-and-answer session.

Mark J. Gallenberger

Thank you very much for joining us today. And as Dave had mentioned, we plan to have a mid-quarter call in early October so we can discuss more specifically about the merger integration with Credence and other plans going forward. Thank you for your time today. Have a good day.

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Source: LTX Corporation F4Q08 (Qtr End 07/31/08) Earnings Call Transcript
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