Verigy CEO Discusses F3Q2010 Results - Earnings Call Transcript

Cowen & Co.

Verigy, Ltd. (VRGY) F3Q2010 Earnings Call Transcript August 19, 2010 4:30 pm ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2010 Verigy earnings conference call. My name is Christine and I will be your operator for today. At this time, all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator instructions) as a reminder, this call is being recorded for replay purposes.

I would now turn the call over to your host for today Judy Davies, Vice President of Investor Relations and Marketing Communications. You may proceed.

Judy Davies

Thank you, Christine, and good afternoon everyone. Welcome to our financial teleconference for Verigy’s 2010 fiscal third quarter, which ended July 31. I am joined today by Keith Barnes, our Chairman and CEO and Bob Nikl, our CFO. Also joining us remotely is Jorge Titinger, our President and COO.

Our third quarter financial press release was sent out today via Business Wire and it is posted on the company’s website at verigy.com. If you are not able to locate the press release or need assistance in finding the information, please contact me directly at 408-864-7549. A replay of today’s call will be available via telephone and webcast from August 19 through September 2nd. You may access the replay by going to the Investor Relations section of our website. And as a reminder this conference call is being recorded.

We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Including uncertainties of the global economic recovery, the conditions of the semiconductor and semiconductor test industries, the strength of our customer’s businesses and foreseeing changes in the demand for our product and unanticipated delays and needing product demand and delivery requirements.

Additional factors that may cause our results to differ materially from the forward-looking statements are discussed mostly in our most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance, provided during today's call are only valid as of this date and Verigy undertakes no obligation to update the forward-looking statements.

In addition, during this call, we will discuss non-GAAP financial measures including non-GAAP net income, earnings per share, operating expenses and gross margin. You will find a reconciliation to the most directly comparable GAAP financial measures on our website.

Thank you all again, and now it is my pleasure to turn the call over to Keith Barnes.

Keith Barnes

Thank you, Judy. Good afternoon and thank you for joining us today on our third quarter 2010 conference call. Today I will review our quarterly financial highlights and market share data and Bob will provide more details on our Q3 financial performance and Q4 guidance. Jorge Titinger, our President and Chief Operating Officer will discuss his priorities as President and provide an update on our products.

We’re pleased to report our second consecutive quarter of profitability on a non-GAAP basis. And in Q3 we also returned to profitability on a GAAP basis. Further we exceeded both our revenue and EPS guidance for the quarter.

Total revenue for Q3 was $154 million, an increase of $34 million, or 28% from Q2. This growth was driven by continued demand for our SOC products. The last time we reported revenue of 150 million or more was in the fourth quarter of fiscal 2008. In that quarter, non-GAAP earning per share were $0.14 and on a GAAP basis we recorded a loss of $0.60 per share. With similar revenue in Q3 we delivered a significantly higher bottom line performance with non-GAAP earnings per share of $0.23 and GAAP earnings per share of $0.21.

Now I’d like to review some market share information. In the past we reported market share data based on hardware sales only while our competitors have included service and support revenues. To provide you with an apples-to-apples comparison we will now do the same.

When we took Verigy public in 2006 our overall SOC market share was 15% including service and support. For the first half of calendar 2010 our estimated overall SOC market share was approximately 21%. We expect to gain additional points of market share during the rest of this calendar year. By the end of 2010 we believe that we will have increased our market share by 8 to 10 points wherein our overall SOC share by more than 50%.

I would also like to point out that our share growth over this period of time has been almost entirely organic and reflects the success of our product development and market segment priorities. If we look at our core market, high-end SOC, our share was an estimated 33% for the first half of calendar 2010.

Before we move on to Jorge and a discussion of our products, I would like to give you some background on his new role. I joined Verigy over four year ago. I thought it was important to put a succession planning program in place, especially for our company officers. When Jorge joined Verigy in 2008 as our Chief Operating Officer, preparing him to assume the role of President became an important part of this succession plan. Since then Jorge has been instrumental in managing a large part of our company though the industry downturn. He has led the product groups that have maintained a very competitive product portfolio for Verigy and he has managed the successful transition from Flextronics to Jabil so that we could benefit from a more simplified outsourcing structure.

Additionally Jorge has developed excellent relationships with the rest of the executive team, chief customers and within his own organizations. For all these accomplishments plus Jorge’s extensive experience, I’m confident that he is the right person to help lead Verigy in today’s environment of change and opportunities. Jorge, again congratulations and thank you for everything you’ve done and are going to do in the future for Verigy. I look forward to continuing to work with you and the Verigy team.

With that I’ll turn over the next part of the presentation to Jorge.

Jorge Titinger

Thanks, Keith and thanks to all of you for joining us this afternoon. I’m excited to assume this new leadership role at Verigy and appreciate Keith and the Board of Directors’ confidence in me.

Today I will comment on two areas, first my priorities as President and second an update on our SOC and our memory product.

June, 2010 marked our fourth year as a public company. The priorities for the company during the first two years were to transition from Agilent and stabilize Verigy. The next phase of our plan was to focus on optimization. And while we made some progress in optimizing the company by moving to a more competitive cost structure and changing contract manufacturing partners, we had to quickly shift to keeping Verigy as healthy as possible during the downturn. We did this successfully and now that the industry is recovering we’re focusing on optimization again. This is a top priority.

Since becoming President we have taken some actions to further advance our product and operational excellence initiatives. For example, we moved all of the product divisions and worldwide customer team including service and support under my organization. This will enable Verigy to further leverage resources and strengthen the integration of our product development and customer oriented activities.

Second we are leveraging our R&D investments across multiple product groups and market segments. I believe this will help improve our cost structure, R&D efficiencies and responsiveness to customers as well as strengthen our technical foundation for future product roadmaps.

Ultimately these changes and others we are making will enable us to better leverage and align resources, increase our focus and accelerate execution of high-potential opportunities.

Now on to our product updates. I’ll begin with SOC. The SOC test market continued to show strength throughout the quarter and across our broad base of customers and applications. Including MPUs, GPUs, application processors, RF and consumer mixed signal.

In the quarter, we received multiple system orders from several customers who are ramping their devices into high-volume manufacturing to meet strong demand. This strong demand resulted in a record build from Jabil of more than 100, 93K systems during Q3, which exceeded the previous record set in Q3 of fiscal 2008.

Another indicator of strength was the utilization rate on the 93K, which remained above 90% throughout the quarter. In the wireless RF area, 93K sales continued to be extremely strong, driven by the ramp of our Port Scale RF customers. I will highlight three successes for our Port Scale RF product. Record shipments and growth, our new Direct-Probe solution, and willing sole source supplier status with our key customer.

In Q3, we set our new record for Port Scale RF shipments. Our installed base grew 20% quarter-over-quarter and doubled from one year ago. In Q3 Port Scale RF generated more than 50% of our total SOC revenue. Our Port Scale RF system has become an industry standard for wafer probe and package testing of 3G, 4G, wireless LAN and Bluetooth RF devices and RF transceivers.

It is being used to test a broad base of semiconductors ranging from low integration devices such as power amplifiers, tuners and transceivers to high integration RF devices containing integrated mixed signal, digital, power management and embedded and stacked memory. During the quarter, we received multiple system order from customers testing these types of devices.

We added a major fables company in China to our customer list due to Port Scale RF’s broad application use. This new customer will use our systems for high volume manufacturing of cellular transceiver devices. We believe this win is significant as it allows us to serve the fast growing RF market in China.

Now I would like to spend some time highlighting our Direct-Probe solution for the 93K. There is an increasing trend to move full performance testing from final test into wafer probe. We believe our Direct-Probe solution is the most advanced, totally integrated offering available for at speed functional test at wafer probe.

Our solution enables customers to meet technology and cost of test challenges required by 3D ICs, AGB

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