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Edited Transcript of XCRA earnings conference call or presentation 21-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Xcerra Corp Earnings Call

MILPITAS Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Xcerra Corp earnings conference call or presentation Tuesday, February 21, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Tacelli

Xcerra Corporation - President, CEO

* Mark Gallenberger

Xcerra Corporation - SVP, CFO, COO

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Conference Call Participants

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* Christian Schwab

Craig-Hallum Capital - Analyst

* Tom Diffley

D.A. Davidson & Co. - Analyst

* Craig Ellis

B. Riley & Company - Analyst

* David Dooley

Steelhead Securities - Analyst

* Patrick Ho

Stifel Nicolaus - Analyst

* Edwin Mok

Needham & Company - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen and welcome to the Xcerra second quarter analyst conference call. At this time, all participants are in a listen-only mode. Later, we'll host a question-and-answer session and our instructions will follow at that time. (Operator Instructions). As a reminder to this conference, it is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Mark Gallenberger. Sir, the floor is yours.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [2]

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Thank you, and welcome to the Xcerra's Corporation's second quarter fiscal year 2017 conference call for the period ended January 31, 2017. 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 second quarter and discuss the business outlook. Then I will provide further detail on the Company's financial performance during the second quarter as well as provide guidance for the third quarter fiscal year 2017. We'll take your questions after our prepared remarks. A replay this call will be made available through February 24th by dialing 855-859-2056, and the pass code is 66523985. Or, you can visit our web site at xcerra.com. As a reminder, the only authorized spokes people for the Company are Dave Tacelli, Rich Yerganian and myself.

Now, for our Safe Harbor statement. During the course of this conference call, we will make forward-looking statements regarding Xcerra's business outlook for the future financial performance of the Company.

We wish to caution you that these statements such as projected revenues, net income, earnings per share, operating expenses, gross margin, cash flow, non-GAAP measures and break even targets are management's current predictions and that these statements are subject to known and unknown risks and uncertainties that could cause actual results or events to differ materially from those stated or implied.

The statements provided during this call represent the Company's estimates as of this day and the Company assumes no obligations to update them after this call. 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. Dave?

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Dave Tacelli, Xcerra Corporation - President, CEO [3]

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Thanks, Mark. Good morning, everyone. Today on the call, I'm going to cover some highlights for the completed second quarter. I'll also go through how we're doing with some of our new product and market initiatives and then spend some time with an outlook for the next quarter. Following that, Mark will then cover some of the financials.

So first, highlight for the quarter. Total sales for the quarter are up 11% year-over-year. This was mainly driven by our semiconductor test solutions group which showed very good strength being up 16% over that same time period. This more than offset a weakness in our electronics manufacturing solutions group which was down 8% year-over-year. The positive thing here is we've already started to see some rebound in our EMS group, which I'll cover later.

Through the same time period, we maintained profitability, that was especially positive for us because this was typically and is typically our seasonally slow quarter. As expected, we saw a rebound in our RFPA tester market coming off a very low quarter in our Q1 rebounding quite nicely. And our low and analog business was the strongest it has been in over three years.

This is continuing into Q3 as well. As we look out to Q3 we look forward, Q3 outlook our revenue is up 18% year-over-year and just as important, it is up 21% over Q2. Some notables is we will ship our 500 pack tester early in Q3. We continue to see a demand for that product as we go out into Q4 as well. We are starting to see growth in our EMS business in all of the different business segments there both in our fixture service group along with our PCB test group.

And for the first time in a long time, visibility seems to extend past Q3 as customer sentiment remains positive and we're already getting indications from customers about their need for demand in our Q4. In our semiconductor's test solutions business, we're seeing very strong ramp across all the different products in that business unit.

On the tester side, we're seeing the investments we've made in products and markets really starting to pay dividends and drive share gains. In our flat panel display business, we're ahead of plan. I'll talk about that in a little bit. Both in customer adoption and production.

We continue to see new customers adopting our mems sensor test cell products. Not only new customers but also repeat orders from existing customers that we've won over the past 18 months. And China and Taiwan continue to play a major role and that's one of the reasons why we've continued to invest in that business and also make a decision to go direct in that region.

On the handler side, we're seeing strong demand for pick and place and strip products. Pick and place demand is driven by the automotive business along with mobility. And our strip handling products are really driven by our growth in mems and sensors supporting a wide range of IOT type devices.

In our contractor business, we're seeing very good demand, very good growth. A couple different areas. One is in our millimeter wave socket for high performance automotive radar. We're on track to capture 75% of that growing market over the next couple of years. We're also seeing a wide variety of customers in RF and automotive continue to buy and add us as a plan of record for their products.

In the RF Power Amplifier space in the tester group, as expected we saw a return to buying after very slow first quarter as a lot of the capacity that we put in place due to new instrumentation was absorbed. We saw a big rebound in Q2 which is continuing into our third quarter and the expectation right now from all of the customers we talked to is this will continue into Q4. And that's across all different regions and a wide variety of customers. So it's not one customer limited.

On our Diamondx side, although we saw a slight pause in our count in the late calendar 2016, we're seeing a reacceleration of shipments into our Q3. And if you note here on the slide, if you look from April of 2016 to April of 2017, we're going to be close to doubling our installed base for that product. And the expectation right now is early into Q4 we will pass 400 unit shipped mark for Diamondx.

This is related to a lot of different things. Customer growth for a wide variety of applications, new instrumentation roll-out that has the product expanding its reach, and new market penetration for things like flat panel display.

Speaking of flat panel display, we continue to see wide success and wide adoption of our Diamondx with our flat panel display options across a wide range of customers and a wide range of subcontractors as well. As we've said in prior calls, our expectation on this market which we believe is approximately $80 million in test equipment a year, was to be between 10% to 20% of this market in the first calendar year and then growing that as we move forward.

It is very likely that we'll exceed that expectation this calendar year with the adoption of our product, by a wide range of customers and a wide range of geographies, everywhere from China, Taiwan, Korea and Japan. And people are making the change because of a lot of advantages the Diamondx and our instrumentation bring.

Our Diamondx is not specifically targeted at just this market but the instrument is which gives customers initial flexibility as their portfolio changes. It gives them cost advantages. And it also gives them a competitive solution in the market with higher throughput. So again, a very, very strong success story for the Company.

If I look at the three unique opportunities for the Company over the next few years, I've already talked about the success story of flat panel display, we expect that to continue as we go through 2017 and 2018. Really, being a big driver, a new driver of revenue for the Company.

In addition to that, another growth engine is our expansion into mems and sensors with our complete test out. We've seen that become the case in all different geographies for a wide range of IOT type devices and that's happened in the US, Europe and in Asia.

You know, one of the third elements of our growth strategy moving forward is in the wafer-level chip scale package area. We have passed three different evaluations. We're waiting for our first order and we clearly expect that first order to happen sometime this fiscal year. And, we look at that as being another growth engine as we go into 2018 and beyond.

One of the I'll call it geographic growth engines for the Company has been China. We've been very vocal about talking about how China is a growth engine. How we had planned to open up a development center in Shanghai to support customers because those customers were asking us to have direct access to our engineering resources as they develop their next generation devices. We've done that. We've secured space. We've started to hire people. What that's led us to is a different change.

That change is we'll now be going direct in China and Taiwan for all sales, support, and service activities in addition to supporting these customers with our development center which is separate of those things. We have long since been a partner with a company called Spy Rocks and they've been a tremendous partner for us and a tremendous partner going all the way back close to 30 years for the Company. Together with Spy Rocks, we're committed to a very smooth transition for these customers as we ramp resources through the year.

And Spy Rocks is committed to that smooth transition not only for us, for themselves but for the customers as well. So what does all this mean for the second half of fiscal 2017? Well, we see it as a very favorable outlook as we go through the year. This is consistent with what a lot of other people in the space are saying as well.

We're look for continued growth in our semiconductor test products group. And this will be across a wide range of market segments and device types. Very broad-based. It will also cover core business as well as some new business opportunities like flat panel display in our test business.

It will also cover areas of opportunity for pick and place with a wide range of new customers and applications. We've talked about the millimeter wave and our connector space. It will cover new products in our PCB test group, our new grid array machine as well as some additional products and augmentation for existing products in our PCB test space.

And, we're look at new markets and new instrumentation to be able to grow our base over the next couple of years. What all this leads to is solid financial performance, our growth and EBITDA and profitability, our growth in top line revenue and our expansion into new markets in addition to the flat panel display, we think one of the drivers in 2018 will be our wafer level chip scale package solution.

With all of that as a backdrop, I'll now turn it over to Mark for the financials for the quarter. Mark?

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [4]

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Thanks, Dave. Our revenue came in at $80.1 million which compares to our original guidance of $77 million to $81 million. So we were at the higher end of our revenue guidance. Our gross margin work was at 43.4% which was also slightly better than our gross margin guidance of 43%. And our non-GAAP net income came in at $0.06 which was about $0.06 to $0.07 above where our guidance was.

When you look at the non-GAAP EPS, you could really break it down into two major buckets. Operating related and non-operating related. The favorability in the operating related was better tester group margins as well as lower SG&A and that accounted for about $0.02 better than the plan. In terms of the non-operating related, we had some foreign exchange gains as well as lower taxes. And those two items combined was about $0.04 to $0.05 better than the operating plan.

All in all, we generated positive EBITDA for the 12th consecutive quarter of $4.6 million. If you look at the revenue split for the quarter, it is largely in line with what we had presented last quarter for our fiscal Q1. We had 80% of our revenue coming from the semitest solutions business. And 20% coming from EMS.

And we had 54% of revenue coming from capital and 46% coming from recurring. We expect these percentages for STS and for capital to grow in Q3 given the strength that we're seeing in the semi business right now.

Moving on to our GAAP to non-GAAP reconciliation table, you can see from our GAAP net income how we reconcile to our GAAP, I'm sorry, our non-GAAP net income of $3.1 million. We simply add back the amortization of purchase and tangible assets of $200,000 and we add back restructuring charge of $300,000. The restructuring charge was related to our move tied to the Milpitas space that we moved in the quarter. I'm happy to say that move is now complete and that new location is fully operational.

Looking at the bottom of this table, you can see how we reconcile our GAAP operating income to our non-GAAP operating income which compares to our stated business model. The only difference here is we're adding back our stock-based compensation expense which was $1.6 million for the quarter. That compares favorably to our stated business model on the following page. And you can see how at $80.1 million, how that compares to our stated business model and we're running about $3 million favorable to our operating income.

So once again, the main reasons for why we're ahead of the plan or the business model is really the tester group margins and the lower SG&A expenses.

Moving on to our EBITDA chart, you can see that we're consistently generating EBITDA and we've basically hit the $100 million threshold since we did the Dover deal three years ago. So it is good to see that we're consistently showing positive generation of EBITDA even during the seasonally weak periods such as our fiscal Q2 which is the seasonally weak quarter throughout the year.

Moving on to the next page, what we wanted to do is really show you the impact of the Company going to a direct sales model in Taiwan and China. And really the punch line here is the impact is going to be minimal to the P&L as we go through the 12 month transition.

So for the balance of our fiscal year 2017, we're estimating about $950,000 of additional cost in Taiwan and China. However, that's going to be offset largely by the savings that we're going to achieve with the move in Milpitas of $750,000. So the net operating cost for the Company is going to be about $200,000 for the balance of fiscal year 2017.

As we get into fiscal year 2018, you'll see more and more of our fixed costs ramp up in Taiwan and China. But we're also going to start seeing additional savings on the Milpitas move and we're also going to start seeing commission savings in the back half of fiscal year 2018 as we get past the 12 month transition period. So, the net operating cost to the Company for the entire fiscal year 2018 will only be about $700,000. So, not very significant.

And a lot of it is attributed to the fact that we're getting some savings from the Milpitas move. We also added a fiscal year 2019 basically to show you what the run rates will be once the transition is fully completed.

You can see that by going direct as well as the Milpitas move savings, we should be able to get a combined savings of approximately $2.6 million per year on a run rate basis. Additionally, there may be some potential for incremental revenue.

Once we get through the transition period there are additional services that our partner in Taiwan and China, that they're providing to customers that we don't participate in today. And in the future, there is a possibility that we may be able to pick up that incremental revenue dollars going forward.

So moving on to the last page is our guidance for the quarter. We expect revenues to be in the $95 to $99 million range. Gross margins of 45% and the non-GAAP net income of $0.10 to $0.14 per share. The only thing we're excluding from the non-GAAP net income guidance is amortization of $200,000 for the quarter.

So all in all, we expect a strong recovery in Q3. Sequential growth estimated to be between 19% and 24% from the prior quarter. A lot of that is going to be largely led by the semi test solutions business. In particular, we expect a flat panel display driver market as well as the handler market to be some growth drivers for us in Q3. And the business model does continue to perform well. As you can see in the leverage in the business model as the revenue ramps.

Lastly, the EBITDA is expected to be approximately $10.5 million and that's at the midpoint of the guidance range.

That concludes our prepared remarks and at this point in time we'd like to take your questions.

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Questions and Answers

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Operator [1]

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Thank you, Sir. (Operator Instructions). Our first question will come from the line of Edwin Mok, with Needham & Company. Please, proceed.

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Edwin Mok, Needham & Company - Analyst [2]

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Great. Congratulations for a great quarter. Great guidance, too. First question I have is, on your (inaudible) you guys mentioned you have better visibility beyond just this current fiscal third quarter. Just curious, you sound pretty upbeat on the fiscal second half. Just curious, are you seeing continued strength? Do you expect that to go (inaudible) guidance (inaudible) give some color on that. And I think you mentioned RFP market, any other market that is driving that (inaudible).

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Dave Tacelli, Xcerra Corporation - President, CEO [3]

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Yes, Edwin. The visibility we're seeing is driven by a couple of things. One, customer sentiment seems to be much better right now with visibility by our customers out into that July quarter for us. And that covers a wide range of markets, that's not just the RFPA market. We continue to see low end analog strength, continue to see strength in the automotive market as well as other elements in mobility. That's one thing. The other thing is we have won a lot of business with our Diamondx product, flat panel display is one area that we talk about but it's in addition to that.

It is other customers in Europe that have now adopted the product and other customers in Taiwan and China that have adopted the product and they're giving us visibility to what their needs are going out several months. And on top of that, we're seeing a strengthening of our EMS group. So the PCB test group for the first time in a few quarters is showing some strength. And all of that combined gives us the visibility or the confidence that this will continue which is pretty consistent with some of our competitors in the space and what they've said.

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Edwin Mok, Needham & Company - Analyst [4]

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Great. That was helpful color. Since you mentioned Diamondx, I want to talk about that. Sounds like you guys are doing pretty well. I think last quarter you talked about 10/2 shift and it sounds like it is a lot higher. Just two things, first is looking at the Diamondx growth this quarter that you're guiding to, seems like there's a big acceleration in growth is it mostly from (inaudible) or are you seeing other as well? And then in the FPD area, are you seeing any competitors response? My understanding historically, one big supplier and now obviously you guys are able to take share from them. Curious if you've seen any competitor response from your big competitor there?

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Dave Tacelli, Xcerra Corporation - President, CEO [5]

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Talking about flat panel display market, we did talk about shipping a number of units, double digits in the last quarter. I think we'll more than double the install base as we go through this quarter and that will continue into Q4. From a competitive response standpoint, we've seen that competitor try to react with lowering pricing. But it is having no effect on us because we're already going in at a much lower price and a much higher throughput. We're not seeing any issue relating to pricing pressure for us as much as they're trying to respond by doing some pricing things.

And I missed the first part of your question, Edwin. What was the first part?

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Edwin Mok, Needham & Company - Analyst [6]

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I'm seeing a big acceleration based on what you guys guided for the April quarter. Just curious if it was mostly FPD and is there any other market you seeing driving that (inaudible)?

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Dave Tacelli, Xcerra Corporation - President, CEO [7]

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I think we're seeing a wide variety of markets. I said low end analog. We're seeing a lot of sensor applications both in the handling and tester space. We're seeing adoption of our new pick and place tri-temp handler at a wide variety of accounts. And, like I said, the return to growth for some of our EMS business is also helping us drive additional revenue. It is a wide range of markets. Wide range of devices. And across multiple product lines for us.

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Edwin Mok, Needham & Company - Analyst [8]

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Great. Thank you.

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Dave Tacelli, Xcerra Corporation - President, CEO [9]

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Thank you.

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Operator [10]

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Thank you. Our next question will come from the line of Patrick Ho, with Stifel Nicolaus. Please, proceed.

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Patrick Ho, Stifel Nicolaus - Analyst [11]

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Thank you very much. And, also, likewise, congratulations.

Dave, maybe as a follow-up to Edwin's question about the display drivers, you mentioned that you've seen better than expected adoption coming from multiple customers. Are they specifically with the sub cause or also I guess some of the traditional display driver IC customers themselves? Where are you seeing the better adoption, or is it coming from both ends?

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Dave Tacelli, Xcerra Corporation - President, CEO [12]

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That's a good question, Patrick. It is really both ends of that spectrum. It is drivers and a variety of locations. So we're seeing it out of Taiwan, we're seeing it out of Japan. We're seeing the beginning part of that in Korea and soon to be in China. I think there's still growth opportunity. In addition to that, we're seeing a wide range of subcontractors who are supporting those end customers put the product in play as well. So, I would expect that by the end of the fiscal year we'll probably have somewhere between four to five drivers of product and three to four subcontractors that have it in production.

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Patrick Ho, Stifel Nicolaus - Analyst [13]

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Great. That's helpful. Maybe as a follow-up question, you also note on the call the multiple customer adoptions of your MT2168. Can you provide some color on some of the markets or segments where you're seeing this adoption? It is coming from multiple markets or centered around one specific market?

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Dave Tacelli, Xcerra Corporation - President, CEO [14]

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I think the primary market driver to date has been automotive. But we're also selling that product covering devices in the mobility space as well. But if I were to give you a breakdown, I would say it is probably 75% automotive and about 25% mobility. And it is also a variety of customers in multiple locations, too. So that's giving us confidence that the growth will continue because the number of markets, the number of customers.

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Patrick Ho, Stifel Nicolaus - Analyst [15]

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Great. Thank you very much.

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Dave Tacelli, Xcerra Corporation - President, CEO [16]

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Thanks, Patrick.

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Operator [17]

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Thank you. Our next question will come from the line of David Dooley, with Steelhead. Please, proceed.

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David Dooley, Steelhead Securities - Analyst [18]

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Again, congratulations on nice results. Just a couple of quick questions. What percentage of revenue is China now and what would you expect it to be over the next couple of quarters?

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Dave Tacelli, Xcerra Corporation - President, CEO [19]

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That's a really good question. Because we have so many different products, Dave, you've got tester products, handling products, contactor products.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [20]

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If you look at our Spy Rocks revenue which is disclosed in our 10-K, it is probably roughly split between China and Taiwan. So that's the way you probably want to look at it. It's not like 80/20 or 90/10. It is more evenly split between those two regions, Dave.

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Dave Tacelli, Xcerra Corporation - President, CEO [21]

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And in addition to Spy Rocks, Spy Rocks doesn't cover any of our FSG products and doesn't cover any of our PCB test products. You also have China revenue and Taiwan revenue from those products as well.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [22]

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Yes. And I think, to answer your second question, how is that going to be trending? We don't see any material change going on. We're seeing strength in both regions and I would expect those to continue.

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David Dooley, Steelhead Securities - Analyst [23]

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Okay. And then you mentioned that you were, I think, won some, or had contactor business, millimeter wave automotive. I think you used to the talk about that as a tester opportunity, maybe handler opportunity. Can you chat about that a little bit? And then just talk about with overall IC unit volumes seeming to take a big step up in growth this calendar year versus last calendar year, which segments do you think that would show up in mostly for Xcerra?

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Dave Tacelli, Xcerra Corporation - President, CEO [24]

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Okay. So in the millimeter wave product, we've seen adoption in one of three ways of our contacting solution. We've seen adoption as a complete test sell for automotive radar at a couple of accounts. We've seen adoption of our handling solution along with the contactor solution. And we've seen adoption of just our contactor solution. We have sales and activities in all three of those areas.

The nice thing for us and as we said, 75% of the applications our contacting solution is the predominant choice. What customers do is based on what they have available to them, how intricate the combination is, they'll either choose us to partner with someone else in the handling/tester space or they'll choose us to support them in total. So the good news is we've seen adoption in all three different phases.

On the IC unit volume side, I think what you're going to see for us is continued volume demand in the PA space, low end analog space, the sensor applications and continued adoption of our products for automotive. And automotive is a wide range of different applications everything from engine control to infotainment to other type of sensing applications.

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David Dooley, Steelhead Securities - Analyst [25]

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Thank you, very much.

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Dave Tacelli, Xcerra Corporation - President, CEO [26]

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Thank you, Dave.

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Operator [27]

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Thank you. Our next question will come from the line of Craig Ellis, with B. Riley. Please, proceed.

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Craig Ellis, B. Riley & Company - Analyst [28]

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Thanks, guys, and congratulations on the nice quarterly execution. Starting with the clarification for Mark on gross margins. Another strong quarterly performance in the outlook as well. At least in the quarter, nicely above the target model. I know that target model was recently reset higher but we're already tracking above that. How do you think about the gives and takes relative to sustained above target model performance, Mark? What could push the business back towards the target model and what are the driving forces that might keep it a little bit above?

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [29]

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I think that the drivers there is really the product mix. And so right now, because we're getting some pretty strong growth out of the tester group, that's obviously going to give us favorability against the business model. And so that's really what we're seeing right now.

If you see less strength out of that business and more strength coming out of some of the lower gross margin businesses such as handlers or PCB test equipment, then that could get us more in line with the stated business model. But because of some of the additional traction and some of the strong growth that we're seeing inside the tester group area, that's really some of the favorability.

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Craig Ellis, B. Riley & Company - Analyst [30]

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That's helpful. Nice to get the longer term outlook on $30 million to $40 million in fiscal 2018 growth from display. Wafered level chip scale packing and mems. The question is as we look at the potential for incremental revenues there, how much visibility does the team have in capturing those? And do we look at those as things with high visibility or more aspirational targets?

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Dave Tacelli, Xcerra Corporation - President, CEO [31]

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So I'll take two of those because two are easy. The flat panel display and the mems, I think it is the growth in the number of applications put on our products, And I wouldn't call them aspirational, I think it is more execution related. As it relates to wafer level chip scale package, I would think that's not aspirational as much as it is customer changing a process inside their manufacturing operation. And I'm less in control of that variable than I am, or the Company is, in the other two areas.

So, two areas, where I call execution. One area where I call the a method (inaudible) mercy of the customer.

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Craig Ellis, B. Riley & Company - Analyst [32]

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That's helpful, Dave. Thank you. And then my last question, as we look at the distribution to direct transition, and it looks like the near-term costs will be outweighed by longer term benefits by about 2.5 to 3x, what are some of the more important milestones that we can look to over the next 12 months to just ensure that transition is on track and something that will sustain good growth in that region and a good return for investors as you move the business model?

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Dave Tacelli, Xcerra Corporation - President, CEO [33]

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If i were to start with the first, the number one focus and we've had this for awhile, it is the customer relationships which we already have. So, one of the biggest issues in a transition is to make sure that as you're transitioning from that (inaudible) distributor to direct model, you have those relationships in place which we already have because of the level of contact we've had with customers in Taiwan and China over the many years.

The second area is to make sure that we're hiring the right people to support the customers from an application and service standpoint. So I think a good metric for the people on the call is for us to give some type of indication of the number of employees that we hired and what kind of skill sets we've put in place. Not so much they'll be effective on day one but that they're going to grow into effectiveness over a 12 month period.

And the third thing is to track level of revenue for those territories. Everyone we've talked to, to date, I would say, almost every single customer has applauded our action. Nothing to do, please believe me, nothing to do with our partner Spy Rocks but a lot of our customers have wanted more direct access to our engineering resources. And what we found is not only China, but also Taiwan.

Those will be things to look out for. But again, it starts with relationships. The next step is making sure we have the right support as Spy Rocks kind of ramps down support over that year. And the third thing is make sure that we're able to get their products to market as fast as we did in the past and that there's no change in revenue which we don't expect.

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Craig Ellis, B. Riley & Company - Analyst [34]

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Thanks, guys.

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Operator [35]

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Thank you. (Operator Instructions). Our next question will come from the line of Tom Diffley, with DA Davidson. Please, proceed.

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Tom Diffley, D.A. Davidson & Co. - Analyst [36]

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Good morning. First a follow-up on the last question. It sounds like you previously were working with your Taiwanese and Chinese customers but just through an intermediary who made it less sufficient? Is that how we should look at it?

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Dave Tacelli, Xcerra Corporation - President, CEO [37]

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Well, Spy Rocks has and still does own the sales, service and support channel. A lot of the working relationships were built at not only higher levels with myself, Mark, head of sales and operations, but also marketing and engineering. Where we were making regular visits by the entire marketing team from across all the different market segments, in to see customers whether it was related to the RF power, consumer digital, sensing devices.

So we had direct contact with test engineering managers, upper level managers, buyers. And those relationships were built all the way from the top all the way through the engineering people that went over. So, it's not that we work through an intermediary. It was we had those relationships but Spy Rocks was a valuable partner related to the service application and sales side of the business and now we're just taking that piece over as we move forward.

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Tom Diffley, D.A. Davidson & Co. - Analyst [38]

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Okay. Great. And then Mark, when you look at the $950,000 and the off study and $750,000, are those concurrent or does the $950,000 happen first? What is the, over the next couple of quarters, the play out of the two chunks there?

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [39]

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The Milpitas savings, that's going to be effective March 1st. So the lease ends February 28th. So we're coming to an end there. So those savings will be immediate starting March 1. You would simply just take that $750,000 and divide by the remaining months in the fiscal year. And that's how you're going to be able to get to the Milpitas savings. Once you get into fiscal year 2018, it's the same thing. $1.8 million straight line because it is not going to be a ramp up in savings. Those savings will be on a run rate basis.

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Tom Diffley, D.A. Davidson & Co. - Analyst [40]

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Okay.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [41]

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In terms of the first column which is the additional Taiwan and China cost, those will be ramping up. And those are more difficult to predict because it is going to be a function of how we ramp up the resources in terms of the hires. So that's going to be starting slow and then building momentum as we get further and further into this process.

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Tom Diffley, D.A. Davidson & Co. - Analyst [42]

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Okay. Good. That's helpful. And then Mark, when you look at the I guess the $0.08 beat versus the mid point of your model, is it fair to say about half of that was from FX and tax, the other half was from the margins and SG&A?

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [43]

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Yes. I would say a little bit more than half was non operating. So you had FX and taxes. Those were the primary contributors.

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Tom Diffley, D.A. Davidson & Co. - Analyst [44]

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Okay.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [45]

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To the beat. So I would say it is more like 60%, 65%, 35% in the operating side of the house. So when you look at the guidance that we gave for Q3, of course, I'm going to be not using the run rates. I'm going to be going back to well there will be a tax expense. Instead of having a benefit in the quarter, you should probably be modeling $1.1 million or $1.2 million tax expense. That's $0.02 right there.

It is really difficult to predict the FX. So that flows through the other income line. We tend to be a little bit conservative there. So right now, I'm probably modeling other expense as opposed to having other income. So that could potentially be a pick up depending on where FX goes in Q3.

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Tom Diffley, D.A. Davidson & Co. - Analyst [46]

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Okay. Great. And then Dave, just stepping back and looking at the overall demand for you today, how much of that is driven by the end market units going up versus just a normal absorption of capacity you've had over the last year or two?

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Dave Tacelli, Xcerra Corporation - President, CEO [47]

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I think it is market segment driven. I think a lot of it is driven by the unit growth. For me to put a percentage on it, it is really hard. Again, I don't want to downplay the fact that there are several customers in several markets we didn't play in, in the past, that we're now playing that is also driving additional demand for us.

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Tom Diffley, D.A. Davidson & Co. - Analyst [48]

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Okay. Then finally maybe just specifically on the RF side of the business, the PA side, how much of that is the PA, the units grown in the end markets versus technology change or a new customer perhaps?

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Dave Tacelli, Xcerra Corporation - President, CEO [49]

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You know, it's coming from multiple customers so it's not just the end unit at one customer. I do believe there could be customers that have won sockets, which is one positive. But it is also multiple geographies. We're seeing the strength in the US. We're seeing a lot of strength in China as well from customers supporting end product demand at our favorite telephone companies.

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Tom Diffley, D.A. Davidson & Co. - Analyst [50]

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Okay. Great. Thank you.

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Operator [51]

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Thank you. Our next question will come from the line of Christian Schwab, with Craig-Hallum Capital. Please, proceed.

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Christian Schwab, Craig-Hallum Capital - Analyst [52]

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Hey, thanks. Guys, how big is the millimeter wave contactor market today?

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Dave Tacelli, Xcerra Corporation - President, CEO [53]

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That's a really good question, Christian. We expect that market, which is about $2 million today should grow to somewhere between $4 million to $5 million by 2019. I'm talking about just the size of the contactor piece of that market.

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Christian Schwab, Craig-Hallum Capital - Analyst [54]

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Right. You have guys seen any movement from the telco space looking at your contactors as the belief is a lot of 5G infrastructure may eventually go on millimeter wave.

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Dave Tacelli, Xcerra Corporation - President, CEO [55]

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All the growth today, all of the drive today has been by the semiconductor guys. At this point. (inaudible) (multiple speakers) Yes.

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Christian Schwab, Craig-Hallum Capital - Analyst [56]

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Okay. All right. Great. I don't have any other questions. Thanks, guys. Good quarter.

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [57]

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Thanks, Christian.

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Operator [58]

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Thank you. There are no further questions in queue. At this time, I would like to hand the conference back to Mark Gallenberger for closing comments and remarks. Sir?

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Mark Gallenberger, Xcerra Corporation - SVP, CFO, COO [59]

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Just want to thank everybody for taking time out of their day to participate on the call today. And have a good rest of the day.

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Operator [60]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.