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Mark J. Gallenberger - Chief Financial Officer

David G. Tacelli - President and Chief Executive Officer


Brian Lee for Timothy Arcuri - Citigroup

Patrick Ho - Stifel Nicolaus & Company, Inc.

Vernon Essi - Needham & Company

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

Mike Crawford – B. Riley Investment Management

LTX-Credence Corporation (LTXC) Business Update Call October 8, 2008 4:30 PM ET


Welcome to the LTX-Credence Corporation’s mid-quarter update 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 call over to Mr. Mark Gallenberger.

Mark J. Gallenberger

Welcome to LTX-Credence Corporation’s first quarter fiscal year 2009 mid-quarter update conference call. Joining me on today’s call is Dave Tacelli, CEO and President. After my introductory comments Dave will discuss the company’s merger integration plans as well as the product and market strategy as a result of the combination of LTX and Credence Corporation.

Then I will provide further detail on the company’s financial guidance for the first quarter of fiscal year 2009 as well as provide an update on the financial business model for the remainder of fiscal year 2009. We will take your questions after our prepared remarks.

A replay of this call will be made available through November 6, 2008, by dialing 888-286-8010, and the pass code is 72484979, or you can visit our website at 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-Credence’s business outlook, its merger integration plans, 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, gross margins, cash flow, and break-even levels 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 8-K filing today for more information on important factors that could cause actual results to differ.

Now on to the call. Dave.

David G. Tacelli

I would like to start my comments by saying the integration of the two companies is going exceedingly well. We have a fully-defined product road map, an employee base that’s positive about moving forward with the new company, and the difficult part of the integration already behind us.

Because we have acted so decisively, we can now focus our attention on the exciting part of growing the new company with our existing customers as well as expanding into regions and market segments where we have a competitive advantage.

The new team from LTX-Credence has worked extremely hard to make this combination a success. The team has spent the past eight weeks outlining a strategy that will reduce our operating expenses by $45.0 million annually, while positioning the company to compete aggressively in the key market segments we have outlined.

We have already met with many of our customers informing them of our plans and I am very encouraged by the positive feedback we received. Probably the most exciting aspect of the new company to date has been the energy and excitement among our employees and how well the various groups are working with one another. Ultimately our success as a company will be measured by our ability to work together as a cohesive team with the mission of providing the industry with the lowest cost of test solutions for the markets we serve.

In addition to the work we have done over the past 40 days on the product road map and integration plan, we have also taken some proactive steps to reduce our debt exposure and improve our net cash position. During this period of time we have already purchased approximately $70.0 million of Credence’s convertible bonds through private transactions at a discount to par value.

What Mark and I will now cover is the high-level overview of the new company, our product line up, the diverse customer base, and the financial model moving forward.

It is important to begin by revisiting the rationale for the merger, with three core elements that drove the decision, they were very simple. First, I saw an opportunity to bring complimentary technologies together. Both companies have a strong presence in select markets where overlap and instrumentation is minimal. This created an opportunity to combine the strength of Credence and LTX so the new company could take advantage of their internal capabilities and leverage the R&D in both companies.

Second, by leveraging this technology, the new company could expand its customer base and bring the most comprehensive test solutions to its customers.

And finally, the new company could streamline its R&D, manufacturing, and operating infrastructure, increasing its return to shareholders.

It’s that simple: combining complimentary technology, diversifying and expanding the customer base, and streamlining the operations, all resulting in a stronger company that provides significant value to its customer and greater return to shareholders.

The goal was to execute the plan quickly to ensure the retention of customers and employees and get on with the business of growing.

So how did we make the decisions on integration? Well, the first thing we did was we looked at the key market segments we wanted to be in, where we have an install base or technological advantage. The key market segments to us were computing, wireless, entertainment, and automotive.

But positioning isn’t just about markets, it’s truly about core technologies you can test and the specific applications that those devices get applied to. Being in the computing space means that you understand and can test devices like microprocessors. If you want to be in wireless, you better understand how to cost-effectively test power amplifiers, wireless LAN transceivers, Bluetooth, and a host of other complex technologies. If you want to be in automotive and entertainment you better know all there is to know about power management, micro-controllers, standards like DVB inserters, audio and video converting, and wide variety of DSP applications.

This simple slide formed the basis for all the decisions that were made because it outlines who we are and what we do.

So how do we grasp the challenge of combining the technologies? Like everything we do, it was very systematic and logical. Bringing together complimentary pieces of technology in a clear plan that could be understood and embraced by all our customers.

The first step was to make sure we protected our asset of customer incumbency, while at the same time clearly communicating a plan that minimized any overlap in our platforms. This was important, not only for our customers, but also our employees so that neither group was confused about what products or instruments we would be targeting for specific markets or devices.

In the second phase of our plan, we needed to develop and leverage instrument technologies across platforms, with the fundamental piece of this puzzle being the merging of our operation systems. The number one goal in this phase was to ensure smooth transition for all those customers that required it so that any money they spent today, or any money they spend in the future, would be protected.

In the final phase of the road map rationalization, this we termed the long-term strategic vision for the products that will build into the future. All the decisions we’ve taken over the past 40 days have had this future vision at its core. Although I won’t go into great detail today, we have already started to communicate with customers what this vision is and how it provides great benefit to them over the next several years.

This is the phase that combines the complimentary pieces of technology into a common cost-optimized architecture. By doing this we can then package that architecture into configurable pieces that satisfies the market areas and device types that we’re focused on.

After understanding the phases of the product roll out we had to make sure that the products that we have today could be targeted at specific market segments and device types. It was important to minimize core technology overlap so that our customers were clear on the best platform choice for the products that they need to test. By doing this we eliminated redundant R&D and re-used our IP in both hardware and software.

As you can see, we focused product platforms on core technologies, minimizing this overlap and establishing the basis for long-term vision of combining these pieces of technologies from both portfolios of Credence and LTX.

Looking at the technologies and the products this way allows us to see where the pieces of technology exist in one platform and how we might leverage that technology into another install base. For example, taking instruments already developed for the X-Series, importing them into the install base of let’s say the ASL 1K. This is a great way to leverage our IP and capitalize on the significant install base that already exists in the market.

It’s this type of planning that has gone on and will become the basis and core for the future product road map of the company.

As you look at the products today, what decisions have we made? And we have made them. Sapphire, at the top end of the digital chart will continue to satisfy core technologies in microprocessor, graphics in high-end SOC. We will look to add pieces of technology from other platforms to enhance its capability and presence in those markets.

Diamond will service the customer digital space, where it has already begun to establish itself with its capability for these type of products as well as its advantage in being the lowest cost of test in this space. We will look to expand the capability of Diamond so that it can grow into the micro-controller and other digital-intensive markets.

Let’s look at the X-Series. Today the X-Series is the de facto standard for testing a wide variety of RF wireless and mixed-signal devices. We will continue to expand the instrumentation suite for this product and combine the technology of X-Series with some of the other product portfolios we have today, like ASL 1K and Diamond, to create next-generation test solutions.

The ASL 1K is the number one install test platform in the world for testing a wide variety of low- to mid-performance analog devices. We will continue to develop instruments for the product building on its install base. That development will leverage technology already present in some of the products, thus shortening development time and reducing expensive IP.

We will not continue, as you can see in the chart, the development of ASL 3K or Diamond 40. These two products were direct overlap with other products in our portfolio and would have created a confusing situation for our customers and employees.

We have already begun communicating this to our valued customers and as part of that communication we have designed specific transition plans that are specific to each customer we deal with.

In the end, we’ve got a very clear path today and a direction for the future. We have communicated these plans with our customers, including a significant amount of additional detail on our long-term plan and future combined product offerings.

Now that I’ve described the pieces of technology that make up our product road map, and the decisions we’ve made, I think it’s important to look at who we do business with today. In looking at who we do business with, it’s not only important that it’s who, but it’s also important to take note of that LTX and Credence came together with very complimentary customers bases. There are very few situations where we share the same customer and even rarer are those where the customers, we compete in the same piece of business.

In most cases where we share an account it is typical that we are in different divisions inside that account. The greatest area of overlap was in the RF area and we’ve already made product decisions and put those in place with customers to transition and we’re beginning to address that.

Another important take-away from this customer slide is the reduction of a single customer dependency of both companies, LTX and Credence. With a broader base of customers and expanded presence in Asia, I expect a wide area of growth opportunities moving forward.

The best place to see this wider customer base is to look at the presence of LTX-Credence in the OSAT community. With the combination of the two companies we now have the broadest distribution of test equipment in Asia. Complimenting this wide customer presence in Asia is the addition of Spirox, our value-added partner in Taiwan and China.

We now have the strength and capability to compete and win the sales and support battles overseas. This is a significant competitive advantage for the company and gives us the confidence to grow our business not only efficiently, but profitably, in the Asian market.

Now that I have covered the first two drivers of the decision to merge, Mark will cover the third piece of the strategic rationale, which is how we consolidate the actions of the product road map and expanding customer base and turn that into a streamline operation.

Mark J. Gallenberger

First area what I would like to is cover the update to our Q1 fiscal 2009 financial guidance. Our Q1 ends October 31, 2008, and what we had done back in August is we had provided original guidance of $60.0 million to $64.0 million in revenue for the combined LTX-Credence company. That assumed three months of LTX revenue and two months of Credence revenue as a result of the merger completing on August 29.

As a result of additional weakness that we’re seeing in the market place, we are lowering that revenue range from $51.0 million to $58.0 million. As you can see, we are also widening the range to reflect more volatility and uncertainty that we are currently seeing in the market place.

We did not provide any net income guidance back in August but now what we are doing is we are providing some net income guidance for this quarter and based upon the revenue range, we believe the net income would be a loss of $13.0 million to $16.0 million and you can see on the slide there’s an asterisk which excludes amortization of purchased intangibles, restructuring and other merger-related charges.

The net income translates to an EPS loss of $0.10 to $0.13 and the assumption there for shares is 126.5 million. Going forward what we’re going to be doing is provide quarterly guidance for revenue and EPS. And for the EPS guidance we’re going to exclude amortization of intangibles. Given the diversity in the new product lineup, in terms of its product margins, we are not going to be providing margin guidance at this point in time. With the four different product lines, we are seeing more product margin diversity and depending on the product mix in any given quarter, it becomes a little bit more volatile in terms of the product margins. So at this point in time we will not be providing gross margin guidance going forward.

The other thing we will also be doing going forward is not providing bookings guidance, which we historically have not been providing. But we’re also going to take this opportunity to stop reporting actual bookings. And given the industry trend toward much lower lead times, which is driving a much higher book, ship, or turns business within the quarter, bookings is actually becoming a less meaningful measure of future business and more emphasis, quite frankly, should be given to revenue guidance.

So moving on to the next slide, what we would like to do now is provide a road map, if you will, of our business model going forward throughout the balance of the fiscal year.

And for those of you have been following LTX since 2005, you may recall that we’ve given similar data points and similar milestones throughout the year and so that way investors and analysts can track our progress. So with that in mind we are going to providing similar information that we provided three years when LTX had done some restructuring back then.

So the first column, what I’d like to do is point everyone toward the first column, which is the Q1 fiscal 2009 and what that column shows is pro forma net income break-even and your pro forma EBITDA break-even. And these two numbers is basically what I’m defining as the stake in the ground for investors.

What I mean by that is what is the summation of the LTX and the Credence stand alone break-even levels for this quarter, as if these two companies were not combined? And what you can see is pro forma net income break-even for the combined companies would be $108.0 million and EBITDA break-even is $88.0 million. Now, the pro forma net income break-even excludes amortization of purchased intangibles and the EBITDA also excludes the equity compensation expense.

And what you can see is with the cost savings that Dave had outlined previously, we are going to be seeing the bulk of those savings in the first six months, which would be the Q2 and Q3 of fiscal 2009. That’s where the majority of the savings will be kicking in. And you can see ultimately as we get into our fiscal Q4 the $45.0 million in annual savings, which translates to about $11.2 million in quarterly savings.

And that’s where you should be able to see the ultimate business model that we’ve laid out here really kick in. As so that business model going into fiscal 2010, these break-even levels is what you should try to model in your respective analyst models.

So what you can see is that ultimately the pro forma net income break-even for the company exiting the fiscal year would be approximately $80.0 million per quarter and that excludes just the amortization of the purchased intangibles as a result of the merger of LTX and Credence, and the EBITDA break-even is approaching $60.0 a quarter. We have it here at exactly $62.0 million per quarter. And that does exclude any sort of equity compensation expense.

And the gross margin assumptions that we believe we can achieve is approximately 50%, however that could fluctuate depending on product mixes in any given quarter.

The other information we would like to share with you is some of the non-cash items and a breakdown of those for your modeling purposes. For depreciation, right now it’s estimated to be approximately $4.6 million per quarter. The amortization of purchased intangibles, we are currently estimating that to be $3.0 million per quarter, however that is subject to change depending on the final results of the purchase accounting that we’re going through. And the stock-based compensation expense, we are currently estimating that to be approximately $2.2 million per quarter.

So with that summary of the break-even model and the milestones as we go through the fiscal year, we would like to turn it over to questions at this point in time.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brian Lee for Timothy Arcuri – Citigroup.

Brian Lee for Timothy Arcuri - Citigroup

First thing, if I look at the slide deck, it looks like there are four different test platforms that you will be supporting here for the foreseeable future, so I’m wondering if there isn’t any incremental savings opportunities here you are foregoing by not maybe completely phasing out a platform, like Sapphire for example, where share momentum is turning against you.

David G. Tacelli

It’s a pretty simple answer. Of course, if you were to decide to eliminate a platform completely, there would be additional savings. But I think we’ve outlined the road map today, the way we’ve outlined the customers that we want to be part of, and the devices that we want to test, I think we’ve built the right company to make sure that we can grow top line in these four market segments by the test requirements with the products that we have.

Now what we haven’t gone into today is a tremendous amount of detail on the future. And what I would expect is over the next couple of years you will see combinations of these products migrate into each other. I gave some hint to that with X-Series and ASL, I also gave some hint to that with X-Series and Diamond. So I would expect over the next couple of years that we will continue to refine, as we always have in the past, our expense based on some of the changes that we will make in R&D.

Brian Lee for Timothy Arcuri - Citigroup

And for the updated guidance for Q1, it’s about 12% lower than what you were talking about in August at the mid-point. And so can you maybe talk a little more specifically about where you are seeing the incremental weakness? Is it at the OSATs, is it on the Credence side? Maybe any more color there?

David G. Tacelli

I would say first of all, let me allay any fears, it’s not merger-related, so that there’s no issues with customers not buying because of the merger. If anything, the conversations with customers have been very positive. Beyond that, I think it’s pretty well split. I think it’s evenly split between the two, between the LTX side and the Credence side.

And I would think that one more factor here is that are some customers that were scheduled to take some products that actually were in backlog and have chosen to put those products on hold. So not to cancel or change anything else, but to put it on hold based on their internal business.

So, I think it’s split pretty evenly, it’s not merger-related and I think it’s pretty much all related to the economy and the situation we’re all in right now.

Brian Lee for Timothy Arcuri - Citigroup

Would you say the weakness was even a little more magnified across maybe the Asian OSATs?

David G. Tacelli

I think for us it’s been pretty well spread. If I were to break it down, I think it’s been pretty well spread against some of the major IDMs that we both deal with. I think there has been some weakness in Asia but no more significant than anyone else.

Brian Lee for Timothy Arcuri - Citigroup

On this black flag for the quarterly break-even business model, I just want to make sure I’m reading this correct. The gross margin of 50% for Q2 2009, that would be if you were at a revenue level of $93.0 million, is that the right way to read that?

Mark J. Gallenberger

That’s correct. That’s the right way to read it.


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

Patrick Ho - Stifel Nicolaus & Company, Inc.

In terms of the gross volatility that you mentioned, I think if you look at both companies separately on a historical basis, what type of volatility do you expect, depending on the product mix, because obviously you guys on the X-Series have really good gross margins and some of the products at Credence, they had lower gross margins. I mean, are we going to see the 50% levels that you are outlining or are we going to see swings, I’m just giving hypothetical numbers, in the 40% to 52%, 53% over a period to time, because of product mix?

David G. Tacelli

I think if you just take a certain revenue number, let’s just take one of these numbers on break-even business model. Those numbers could fluctuate from 50% to down plus or minus 3 points or so because of certain products that have different variable contribution margins in them. And so that’s the real swing factor.

Because like you mentioned, with the X-Series product line it was fairly consistent across the various flavors of the X-Series. Now when you introduce the ASL, the Diamond, and the Sapphire into that mix, some of those product lines have similar margins to the X-Series, but there’s one product line in particular that carries a lower product margin than the X-Series.

And that product line, I would say it’s fairly similar to what we used to have in the HFIs. And so when you have that kind of revenue mix, which is heavier, that’s going to tend to drag down the margins.

The only thing that I would add there is we have not changed our opinion of the market at all. LTX, for the past three years, before this merger, focuses a lot on two different market segments. We bifurcated into the kind of digitally-intensive and the analog-, or mixed signal, intensive markets. On the digitally-intensive markets, where you see more of the price pressure, you see more of the competition. And the analog markets, the ASL and X-Series you see more technology coming into play and you see a little bit better margin. And that hasn’t changed.

It’s just what’s changed for the new LTX-Credence is now we have incumbent positions in more of those digital markets. And that’s where we can’t tell the mix. It’s really in the market segments where we have incumbency.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Another finance and business model-related question. As you move forward, and I think you gave a little bit of color in terms of the product integration over time. Should we then expect R&D levels to remain at elevated levels for a period of time before they kind of trail off, as you get these products integrated, again, over a period of time?

David G. Tacelli

The way I would look at R&D is we’ve set the plan, the same way we did back in 2005, for now this new mission. And we will continually look, I will work with the R&D team of the new company, and we will either, over time, focus that in a different area or we will look to reduce that several years out. And that could come in a host of different areas. That could come in not as much in what I call a person reduction but it could also come with external R&D that we spend today. So we will continue to refine that as we go through the next mission and we will either reapply it or we will look to reduce it.

And as you know, one of the things we will do is we will be very open and forthright about our plans as we move forward. If we think that there’s more room to move down in expenses, then that will be a new plan that we will put in front of everybody.

Patrick Ho - Stifel Nicolaus & Company, Inc.

I think one of the benefits you have seen in the past was the relationship with Jabil. How does integrating the Credence side of products into the Jabil fold, or does it get integrated in the Jabil fold? How is that going to work?

David G. Tacelli

LTX has historically used Jabil and Credence has historically been using Plexis and Benchmark for their product lines. At this point in time we are not making any changes, for the foreseeable future. However, that will be one of the plans for us to review the entire outsourcing strategy and the outsourcing partners that we have and we will be putting a plan in place over the next several months to make a determination whether three is the right number or if we need to consolidate the number of outsource suppliers. But at this point in time we are not going to be giving any additional color.

However, I think as we go into fiscal 2010 that may be another opportunity for us to further improve this business model and some of the gross margin assumptions.

Patrick Ho - Stifel Nicolaus & Company, Inc.

I know you’re not going to give exact numbers, but in terms of the shareholder equity of the combined companies, what would be an estimated number I can use at this point?

David G. Tacelli

Are you talking about the number of shares?

Patrick Ho - Stifel Nicolaus & Company, Inc.

Shareholder equity, combining the companies.

David G. Tacelli

I don’t have that number with me. So let’s take that offline. I can try to get you a little more specific number for you.


Your next question comes from Vernon Essi - Needham & Company.

Vernon Essi - Needham & Company

I can’t see these slides so I’m having some trouble visualizing some of the things you’re talking about.

Mark J. Gallenberger

Just so you know, this presentation was filed late this afternoon in an 8-K so if you need to go grab a copy, if you pull up the 8-K you’ll be able to see it.

Vernon Essi - Needham & Company

Just moving over to sort of more current events, obviously visibility is absolutely horrible out there right now. What is your update on the current events of what’s going on in the industry? I don’t know if you’ve given out any formal comments on the combination of Teradyne and Eagle. Then also we’ve recently had the news out of AMD. How do you see that impacting your business?

David G. Tacelli

A lot of good comments. The first, if I talk about business outlook, and I hear people talking all day about when they think it’s going to get better, the first thing I would say is no one knows. So any comment that anyone makes on when they think business conditions will improve, I don’t believe that they know.

What I can tell you, from our business, is we continue to see small pockets of strength, mainly surrounding RF wireless activities in a host of different accounts where we’ve won business over the last couple of years. Outside of that, if you look at what I call pure digital markets, you’re getting a lot of words from customers like hold and stop and freeze.

As everyone knows the devices going into the automotive sector have slowed down because automotive production is way down. And a lot of other what I call consumer-type markets are very slow right now.

So when I look at the overall environment I don’t see a lot of growth but I do see some nice little pockets where LTX and/or Credence have demonstrated some customer growth over time.

Commenting on mergers and acquisitions, and you asked about one specific from another competitor, I guess the way I would put this, and here’s my comment. There are two ways to do a transaction like this, an M&A. The first way is you move very quick, you are very decisive, you are very clear on how you want to rationalize products. You communicate that effectively to your customers. Sometimes those are hard decisions that you have to make. You make sure that when you do that you take the customer into account first. You make sure that you provide them seamless transition wherever they need. And you make sure that for your employees that they have a clear vision going forward. And I think that’s the way that LTX chose.

The other way to do it is you combine two companies and you go out publicly and say that there will be absolutely no change. And in that situation I think customers never believe that there will no change and from an investor side, why not just buy two individual stocks versus buying a combined company that’s going to have no change. That’s the way other people in this space have done transactions.

So for me to comment on which one is going to be right and which one is going to be wrong, I guess the tale of the tape will show a year from now in how effective LTX-Credence has been in growing its customer base and how effective my competitor has been at growing its base with the transaction behind us.

The third piece you asked is about AMD. And AMDs decision to move and spin off some of its what I call fabs, mainly in Austin. I think their biggest fab in Dresden, and then eventually the new fab that they will be building in New York. For LTX-Credence, I like that plan.

I like the plan from our perspective because today we are the supplier of choice at AMD and specifically the supplier of choice for probe at their fab facilities. So I enjoy working with the group there, the senior people overseas. I have spent some time already in Dresden. We have a very good relationship with them and looking to expand my relationship with the other senior managers, specifically the gentleman that’s now taken over the entire entity as a new company.

So I like it, I think it’s good for the company and we will look to expand.

Vernon Essi - Needham & Company

And then during the merger phase you had that one covenant that was being raised, that issue being raised. Has that been resolved?

David G. Tacelli

One of the things we did is we identified that we’ve bought back approximately $70.0 million in convertible debt through private transactions. What I will say is that issue that was raised to Credence just prior to the deal closing, from a group of bond holders, some of those, and we believe most of those bond holders, were part of the transactions that we’ve accomplished. Pulled some back at under-par value. We’ve also done some people that weren’t part of that consortium.

And we did all that because we thought it was the right thing to do for the company. We thought that we could acquire this debt back at a discount and improve our net cash position. So at this point in time I think the majority of that is behind us.

And again, the one thing I would state is, you know we went into that whole negotiation with parties that were part of it and weren’t part of it, with the belief that we had structured the transaction in such a way that it wouldn’t trigger any of the debt. So we took advantage of the structure that we did to make sure we capitalized on the economics.

Mark J. Gallenberger

And the other advantage we had is we had purchased these bonds back at a discount from par. We could actually finance probably about half that number, with lower cost debt when you factor in the discount, through the SVB revolver that we have which is about $30.0 million, which we have not drawn down but if we want to we have the ability to draw into that and finance a portion of these repurchases with effectively a lower cost of debt.

Vernon Essi - Needham & Company

I can appreciate the move to eliminate some of the former guidance metrics you used to give out on a quarterly basis. Is there more to read into that? Most of the industry has no visibility and it seems in the last five to ten years it’s just getting more narrow.

Mark J. Gallenberger

I think you should not read into it. This is something we’ve been thinking about for a while, and the trend just has not reversed in terms of lead times within our industry. It just continues to contract further and further and this is not a phenomenon that has just happened in the last quarter or two. This has been going on for the last five to ten years I would say. Especially as most companies in our space have now outsourced, we all are becoming much more efficient at reacting to our customers’ short-term demands.

And as a result of that, that’s driving our customers’ behavior to react much more quickly on the upside as well as the down side. So providing bookings forecasts and booking actually results is simply not the leading indicator like it used to be. And I think with the additional volatility in the higher turns business, it’s more important for people to focus on revenue.


Your next question comes from Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

I’m looking for a little more color on each one of your space. Like for Credence’s space can you give a little bit of idea where chips [inaudible]?

David G. Tacelli

You’re talking about by major core technology, where the demand is?

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.


David G. Tacelli

I think the easiest way for me to define it is if you look overall, across all market segments, you’re not seeing significant growth anywhere, with one, again, one pocket that we’ve seen which is RF wireless. And it’s broad-based. Those companies that do RF wireless stand-along devices, whether they be custom PAs, whether they be Bluetooth, GPS transceivers, I mean a whole host of things, they’re still doing pretty well.

Outside of that I would say it’s pretty much a struggle. We have seen upticks in certain customers but I wouldn’t call it because of their overall business. I think that’s more related to devices that have been designed in our product that they just need to now start buying or driving into some of the OSATs to make sure they get tested.

But in general, whether it’s LTX or Credence, it’s a pretty rocky road out there right now.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

And you see the same for par management or mixed-signal products, right?

David G. Tacelli

Yes. I mean, some of the customers that we deal with, some of the largest players in the market, there’s spotty demand. And if you had gone back a couple of quarters ago, the analog pieces of their business, I’m talking about the major diversified manufacturers, was still pretty strong, that’s slowed down as well.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

Your test service business gross margin, how do you want us to think of your service business in terms of percentage of revenue?

David G. Tacelli

It’s hard to give you a percentage of revenue just because of the volatility in the product revenues, but I think the way you should kind of look at this is that’s fairly steady business and I would expect that the combined company is approximately $20.0 million in service revenue on a quarterly basis. This quarter, the October quarter, it will be less than that because you’re only including two months of Credence and a full quarter’s worth of service business from LTX. But I would say it’s probably going to be in the $20.0 million, $21.0 million range going forward, on a quarterly basis.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

And it will be half and half?

David G. Tacelli

No. it’s probably going to be about $6.0 million to $7.0 million from legacy LTX and the balance coming from Credence.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

You didn’t say anything about cap-ex. How do you want us to think of cap-ex in the coming quarters?

David G. Tacelli

Historically we have always tried to model about 4% of our annual revenues for capital expenditures. That obviously is a number that will fluctuate depending on where you are in the cycle. But cross-cycle I am always trying to model about 4% and we have been able to stick fairly close to that model over the last several years at LTX.

If I look at what Credence has historically done, they have done some pretty good work in terms of lowering their capital spend over the last few years. So I think that, from a modeling perspective, I think 4% is probably a decent assumption for you.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

And where do you plan to [spend], is it going to be across the board or more on X-Series than Sapphire and others?

David G. Tacelli

Well, most of the capital expenditures are typically as it relates to supporting the world-wide install base. As it relates to spare parts, spare boards, things of that nature. Internal capital spend is typically spent on capital testers to support your hardware engineers, software engineers, as well as application engineers. So based upon the fact that there’s more platforms from the Credence side, you would say that it’s going to be a little bit heavier on the Credence versus the legacy LTX side.

Rafi Hassan for Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

What is your headcount now, post merger?

David G. Tacelli

When I say post-merger I’m talking about what it will be because we’ve already identified the people that are leaving today and we have also talked to a wide group of people that will be leaving over the next 6+ months. At the end of that period, we will be down under 900, total head count.

And what that is from the start point today, it’s about a 33% to 35% reduction of headcount from the start point.

And you can see from the chart that Mark showed on break-even that the majority of that happens inside the first six months. If I were to give you an exact number, there’s probably about 50% of the headcount reductions already happened and the other 50% will be spread over that period of time.


Your next question comes from Mike Crawford – B. Riley Investment Management.

Mike Crawford – B. Riley Investment Management

With the shorter lead times in [inaudible] should we expect a reduction in working capital? Or maybe another way to ask that is what’s the kind of ideal levels of inventory, DSOs, payables?

David G. Tacelli

I think DSOs is not necessarily going to be impacted. I think customers will still pay according to the same cycle time there. I don’t think you’re going to see any material changes over from what you’ve seen. Because it has just continued to trend towards this period. So it’s not like we’ve seen a step-function change in the industry. The industry has simply trended down to where we are today. So with both companies, LTX and Credence, outsource, a little bit further down the path on the LTX side, I think if you look at the past inventory levels of both companies and you simply add the two, those should be the water marks going forward. And we continue to drive that down and become more and more efficient over time. But I don’t think you are going to see any dramatic changes to working capital.

Mike Crawford – B. Riley Investment Management

And cap-ex around $16.0 million this year?

David G. Tacelli

We haven’t talked on a dollar amount what we think the cap-ex will be. We talked about trying to target 4% of our revenues and if you look at historically what both companies have done, I think that’s probably where you should try to do some modeling, but we’re not going to give a dollar number right now.

Mike Crawford – B. Riley Investment Management

And what discount did you pay for the bonds?

David G. Tacelli

We haven’t disclosed that. Those were privately negotiated deals and we are not disclosing that.


There are no further questions.

Mark J. Gallenberger

I want to thank everybody for participating on the call today. We really appreciate you listening in on our mid-quarter update and we will talk again once the quarter closes and we will be announced results I believe the first week of December.

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Source: LTX-Credence Corporation Business Update Call Transcript

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