Rudolph Technologies, Inc. (RTEC)

Q3 2008 Earnings Call Transcript

October 30, 2008 4:45 pm ET

Executives

Robert Koch – VP and General Counsel

Paul McLaughlin – Chairman and CEO

Steven Roth – CFO and SVP, Finance and Administration

Analysts

Patrick Ho – Stifel Nicolaus

Terry Young [ph] – CIBC

Peter Kim – Deutsche Bank

Sandeep Chandrasekhar [ph] – RBC Capital Markets

Megalia [ph]

Rafi Hassan [ph] – FBR

Presentation

Operator

Good afternoon. My name is Kim and I’ll be your conference operator today. At this time, we would like to welcome everyone to the Third Quarter Earnings Release Conference. (Operator instructions) Thank you. Mr. Koch, you may begin your conference.

Robert Koch

Thank you, Kim and good afternoon everyone. Rudolph issued its third quarter 2008 earnings release this afternoon shortly after the close. If you have not received a copy of the release, please call my office at 973-448-4306 and a copy will be faxed or emailed to you.

Joining us on the call today are Paul McLaughlin, Chairman and Chief Executive Officer, and Steven Roth, Chief Financial Officer.

As is always the case, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, particularly comments regarding the Company's future plans, objectives, forecasts, and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such estimates, whether expressed or implied, are being made based on currently available information and the Company's best judgment at this time. Within these is a wide range of assumptions that the Company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainty that can cause the actual results to vary materially. Thus the Company cautions that these statements are no guarantees of future performance. Risk factors that may impact Rudolph’s results are listed in the Company's latest Form 10K as well as other periodic filings with the SEC. Rudolph Technologies does not update forward-looking statements and expressly disclaims any obligation to do so.

I will now turn the call over to Paul McLaughlin. Paul, please go ahead.

Paul McLaughlin

Thank you, Bob. Good afternoon everyone and thank you for joining us for Rudolph Technologies third quarter 2008 conference call. Today, in our prepared remarks, I tend to deviate from our normal format. Instead we will discuss actions Rudolph has taken in respond to the current credit crisis and the resulting acceleration of the semiconductor capital equipment industry downturn. I will address three items, strategies, operations, and financials.

My goal here is to articulate our plans and show you why we have confidence that our tactics will as we have done before, emerge from the current downturn as a stronger Company positioned for renewed growth in revenue and earnings.

First strategies

Our long-term mission in strategy are intact as many of you may recall Rudolph’s mission is to enjoy the number one or number two market share position in our chosen niches by offering best-of-breed solutions. We currently enjoy number one market share in front end macro defect inspection; number one share in metal metrology; number one share in back-end inspection; number one market share in probe card test and analysis solutions, and we are releasing new products in our legacy transparent thin film business that are designed to capture the number two market share position in that market.

Our R&D spending which was $83 million this past quarter or 21.4% of revenues has been invested principally in new product development that support our best-of-breed strategy. Our steady stream of new products and services and our demonstrated ability to win business in these five chosen niches will be the engine to drive the recovery when the markets resume (inaudible).

However, with the deepening economic crisis ahead, going forward, we are lowering our spending rate by re-prioritizing our R&D programs and focusing those on our chosen niches that will be needed first when the industry begins its recovery. The R&D program re-prioritizing process has been driven by discussions with our customers’. We have eliminated very few programs, but instead have stretched the time line for final completion on some specific projects and market need had been delayed as the industry has slowed down.

None of this guarantees near-term profits, but it does weigh the odds of Rudolph maintaining its market leadership position, while delivering strong long-term returns in the quarters ahead. Bottom line here is strategic planning is front end centered at Rudolph at both the Board of Directors level and at the operating level as the growth drive is in each of our chosen niches are scrutinized and reassessed.

Another take away here from our discussion on strategy is that of our goal of growth by our collaborations, partnerships and joint ventures continues to receive a high degree of focus during these difficult times. You’ve heard us talk before about necessity to be open to working with other companies in our peer group in one market area while competing with that same peer in another market area, as both companies see growth.

While these are difficult to accomplish, we believe the semiconductor industry needs due with suppliers and needs suppliers with the scope and scale necessary to serve a consolidating customer base. Rudolph’s mission statement includes the requirement to maintain the scope and scale necessary to provide world class customer support and such peer collaborative relationship help address that part of our mission. You should be expecting to hear more from us in the near term about additional collaborations, partnerships and joint ventures as we strive to accelerate our growth.

In a final note in the strategy area is we expect to be consolidate as the merger and acquisition activity increases within the supplier base in semiconductor capital equipment. As you might expect, there are some very attractive M&A opportunities for our tech that could allow us to acquire the number one or number two position in new market areas adjacent to our current niches.

There are also M&A opportunities available to further strengthen our market leadership position in our five chosen niches. You should expect to be hearing more from us in the coming months on the M&A consolidation fund. We have the ability to finance selective acquisitions and collaboration activity with existing resources without the need to incur debt.

This financing ability comes from our strong balance sheet that was again strengthened in the third quarter with positive cash flow of an additional $9 million giving out cash and marketable securities balance of over $74 million. This balance is well in excess of what is needed even for a protracted downturn.

This puts us in an enviable position when new strategic opportunities arise. As an anecdotal, I’m sure you can well appreciate the fact that many venture capital investors have just recently reached the limits of their follow on investments in various startups in our space as they await some return and exit strategy have diminished. As this customaries downturns the companies are severely limited, their appetite for new startup company technology, not because their technology may not be good but rather for support and long-term supply viability issues.

Infrastructure cost often become prohibitive for smaller companies as customers demand longer tools and onsite support for extended evaluation periods there by limiting a smaller company customer penetration options just at a point in time when engineers have the availability to assess new technology. Also as discussed during downturns, product portfolio analysis is cash (inaudible) as there are several domestic and international companies that have decided to de-emphasize semis and focus on other markets. If markets were normal and investors calm, these unique investment opportunity would not exist. These all spells opportunities for RTEC and our investors.

Now, on to my second area for my prepared remarks today and that is operations. Let me begin by saying the credit crisis has hit our industry hard and we as a supplier of process characterization solutions are no exception. I will not discuss the macro issues as we are all embedded with a barrage of commentary on the current global problems and I could add little to those debates.

However, I can focus on our tech and what we are doing operationally to respond to the many challenges that we now face. Despite a very good third quarter where we grew revenues 2% quarter over quarter and 24% year over year and earnings well above guidance we had to scramble to get there. The breadth and depth of the changes occurring around us all are hard to overstate, so we began taking decisive operational action in September.

We already had a focus on approving accounts receivable collections and reducing inventory, but now the amount of cash is the rule of Rudolph. Discretionary spending is out and we scrutinize all aspects of our operations to find opportunities for selected cost reduction. We have a salary freeze in place. We had a resizing of our operations resulting in a reduction in force of over 10%. There’s a current hiring freeze in place. We have scheduled plant shutdowns for the up coming holiday season and non-essential expenses are mandatory.

We believe we have been able to lower our cash flow breakeven to a revenue level that is below $30 million per quarter. As the business dynamics have changed dramatically in the past few weeks, so did we. Operational efficiency is getting renewed attention across Rudolph, we focus on using fewer resources to achieve the desired results without sacrificing quality. This is critical as we’ve used a scalpel to fine tune our engineering and global support organization.

Now on to the third and final area for my prepared remarks today and that is financials. Let me begin by saying that we continue to emphasize sound financial discipline and we believe our results in Q3 are another indication for the importance we pay for this subject. We have a reputation for prudent fiscal management and we plan to keep it that way.

In our press release, you saw mention of the $9 million increase in cash in the quarter as our balance sheet began to yield good results. There is even more room for balance sheet cash generation. However, I will leave that discussion to Steve’s prepared remarks.

In my early remarks about operations, I did mention that cash (inaudible) here at Rudolph and the actions taken to bring our cash flow break even to below $30 million. Our intention is to add to our cash position to be able to take advantage of good investment opportunities that are arising on an increasingly frequent basis.

Further to our cautious outlook in approach to spending, we have a capital spending freezing effect, and in our corporate level we did not purchase any stock under our current buyback program. Discussions on financials during these challenging times would be incomplete without a mention of a potential non-cash impairment of goodwill and intangibles.

As has been mentioned by Steve in prior conference calls, during the fourth quarter of each year, Rudolph is required to perform impairment cash where in one cash consideration is the markets capitalization of the Company in comparison to the book value of our intangibles. Steve will discuss this further in his prepared remarks.

Before I turn this over to Steve, I wish to emphasize that I hope we have shown you that one, Rudolph has a strategy for and is operationally prepared for the current market conditions. Two, is uniquely positioned to take advantage of investment opportunities and three, plans to exit the current downturn a stronger force in the industry. It is more important than ever that we move forward on our mission even as we must be conscious of our using our resources wisely.

With that I will now turn the call over to Steve.

Steven Roth

Thanks, Paul, and good afternoon everyone. Let me start by first talking about revenues. Revenues for the third quarter 2008 totaled $39 million, compared to $38.4 million in 2008 second quarter and within our previous guidance range. The quarter included record sales from our Probe Card test analysis group since the acquisition in December 2007, but also included several push outs and cancellations as mentioned by Paul.

Looking at some of the revenue statistics for the quarter, back end revenue was strong at 50% of overall revenue, up from 31% in the second quarter. International sales represented approximately 76% of revenue of which 55% was from Asia, while domestic sales accounted for the remaining 24%.

From a product perspective, the revenue breakdown was approximately; inspection products 60%, metrology products 10%, and software products and product mix service the remaining 30%.

Approximately 13% of the revenues was from Memory customers, down from 40% in the second quarter, and 300 mm accounted for 56% of Tool revenue.

Switching gears, third quarter gross margin was 43% compared to 46% for the 2008 second quarter. Our third quarter gross margin was negatively impacted by 3% due to the inventory written up to fair value as a result of the recent acquisition. Therefore, our adjusted gross margin was 46% and in line with our previous guidance.

Our margins will continue to be impacted by the acquired inventory written up at the time of acquisition until it is sold. Excluding inventory step up adjustments and non-recurring charges, we expect gross margins to be in the low 40% range in the fourth quarter of 2008 primarily due to lower sales levels.

Total operating expenses for the quarter were $18 million, compared to $20.7 million in the 2008 second quarter and included the following. Research and development expenses for the third quarter totaled $8.3 million, $100,000 less than 2008 second quarter.

Selling, general and administrative expenses of $7.9 million in the 2008 third quarter were significantly elapsed when the $10.5 million occurred in the second quarter of 2008. The reduction is primarily due to foreign currency exchange gains as the result of the strengthening US dollar and a reduction of the Company’s incentive compensation plan. And amortization expense was $1.7 million in both the second and third quarters.

As Paul had mentioned, we implemented cost reduction initiatives at the end of the third quarter through the headcount reductions, plant shutdowns and project re-prioritization, all with the goal of reducing operating expenses. Those reductions all is up by what we believe will be reduced foreign currency gains in the fourth quarter will result in total operating expenses expected to be in the range of $16.8 million to $17.3 million in the 2008 fourth quarter.

For the third quarter, we reported a net loss under generally accepted accounting principles of $448,000 or $0.01 per share, compared to a net loss of $2 million or $0.06 per share in the 2008 second quarter. Excluding the impact of acquisition and restructuring charges, amortization of acquired technology and intangibles and share based compensation, our third quarter non-GAAP net income was $2.6 million or $0.09 per share.

Looking at our balance sheet, as Paul mentioned we continue to make good progress in accounts receivables and inventory reduction initiatives. In the quarter, we decreased the accounts receivables by $11.5 million and our efforts have significantly reduced our over 90 day balances.

We reduced inventory by $4.5 million in the quarter and that coupled with the receive able improvement contributed to the $9 million increase in cash for the quarter. Going forward, we anticipate continued improvement in receive able collections in the fourth quarter. We also believe we can improve on our inventory balances from the current levels by managing our supply chain and accelerating our outsourcing initiatives.

However, the industry slowdown will make those reductions more challenging. Our Q3 cost reduction and cost restructuring efforts are designed to maximize our cash balances to ensure that we can continue to invest in the appropriate areas. Those efforts have helped reduce our cash breakeven to quarterly revenue levels of below $30 million depending on product mix.

Finally, as mentioned in our last quarter’s conference call, for carrying purposes we carefully monitor our goodwill and tangible for potential impairments. Annually, in the fourth quarter of each year, we are required to form a detailed impairment test. We are preparing for a format test as of October 31, and with our stock price at an historical low is more likely than not that we will incur a significant non-cash impairment charge in the fourth quarter to write down our intangible assets.

With that I would like to turn the call back to Paul, who’ll discuss our guidance.

Paul McLaughlin

Thank you, Steve. As was mentioned in our press release today, we experienced order cancellations, push outs and delays across all market segments as our customers’ put the brakes on capital spending starting late in Q3 as the credit crisis starved cash out of their financing equations.

As we look at the fourth quarter and how we enter 2009, there was a lack of visibility we have not seen since 2001. The memory device market both DRAM and (inaudible) are suffering from overcapacity, and the overall markets waits the positive turn in consumer spending. Our customers look to consumer sentiment as the initial sign that consumer spending will again drive the growth of semis. The consumer segment now accounts for over 50% of semiconductor sales and therefore consumer confidence is crucial to the entire semiconductor supply chain.

The foundry business is faced with similar problems as fab utilization rates have dropped in recent weeks as orders from fabless semiconductor customers have fallen sharply. Visibility for 2009 is so uncertain that any forecast will have little credibility at this time. However, we do know that while demand for semiconductor capital equipment has been in steep decline with minimal investments being made currently, we do believe this leads to a shortage of supply in the coming quarters.

We are planning to be a leveraged beneficiary of the need to retool when that time comes. Nonetheless with lack of visibility at the backdrop and with further cancellations, push out and delays not only likely but probable, we will be guiding our top line revenues to decline by 30% to 45% with earnings excluding charges reigning from minus $0.06 to minus $0.10 per share.

I hope you had takeaway from these prepared remarks is that our Company has a solid strategic plan and we will emerge from the current downturn as a stronger Company positioned for renewed growth and revenue enterings.

Thank you, and now let me open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from the line of Patrick Ho.

Patrick Ho – Stifel Nicolaus

Thanks a lot guys. First a quick housekeeping question. Steve, in terms of the restructuring expense, I believe the $1.1 million, so that’s mainly in SG&A?

Steven Roth

No, it hit R&D and SG&A.

Patrick Ho – Stifel Nicolaus

Do you have a breakdown of that?

Steven Roth

Not in front of me, perhaps I can get back to you on that.

Patrick Ho – Stifel Nicolaus

Okay. Great. Paul, even with the slowdown in the overall environment, which obviously is not a big surprise. In the second or third quarter, you continue to have strength in the backend macro defect inspection business. I expect it to fall off in December. Are you surprised that how well that’s held up and do you believe part of that is due to market share gains or just demand out there for the products itself?

Paul McLaughlin

We’ve been encouraged, Patrick and I thank you for your question. We are encouraged with requirement we have for some of our newer products in the backend. But I’ll be very honest with you, we did fall off the cliff at the end of the – in the terms of orders for delivery in the fourth quarter, and we are seeing push outs in the fourth quarter into next year. So, while I’m pleased and I think we got some of that performance as Steve mentioned 50% plus of our business was in the backend. That was good. We were happy. But we see the backend starting to come around in the suffering mode. So, it’s a – the book to bill was down dramatically and we are experiencing some push outs.

Patrick Ho – Stifel Nicolaus

Okay. Fair enough. In terms of your customers and specifically the Memory customers, as they slowdown, their production – they are trying to get rid of their inventory and in terms of their transition to the next technology node, what do you see from them in terms of I guess the valuation especially for some of your metrology tools? Are these now – these are evaluation time periods being pushed out as they delay when they introduce their next product?

Paul McLaughlin

I think that’s natural, Patrick. I think when I was referring to smaller companies that are tough to weather the storm because I know we are being asked to extend evaluations and we can look at the tree for a little while longer kind of concepts. That is happening in real time. These people have it particularly in the Memory. They are trying to rationalize this – the players in the market, and all sorts of things are happening in Taiwan as you well know. And the packing order has changed a little bit in all of the Memory area. So, I do see some of the technology requirements being pushed out further to the right. But I do want to say that what is happening in the Memory area, and I think we could point to maybe 10% to 12% of the capacity in Memory has been taken out of the market in the last 60 days. That’s primarily 200 mm stuff. And it may reappear again in some places as used equipment. Steve mentioned the fact that our service in space business is strong. One of the reasons I was aware reinstalling and reinstalling some used 200 mm equipment. That will probably continue for some time. But what it does do is put a strain on the 65 nanometer capacity, and we think that will start to fill up sooner because of taking the 200 mm product off the line. And so those products will now have to be done on 300 mm lines, which are capable of doing to 65 nm. Did that make sense?

Patrick Ho – Stifel Nicolaus

It does. That’s why I just wanted a little clarity on that. That’s great. Final question for me. In terms of your services business, I know traditionally how much it’s been. Have you felt any significant impacts or is that held relatively steady I guess talking now as we look forward over the next few quarters?

Paul McLaughlin

I would say by definition it’s going up, in particular the percentage. People are trying to get more length of service out of their equipment, more preventive maintenance cycle. We are getting a lot more contract work. So, I think, I would say will go up, in particular proportion to the decline in fail [ph]. So, I think that is happening. Steve?

Steven Roth

No. I think – hope that’s the answer to your question. To get back to the question, I didn’t have the answer. I’ll dig it up for you. The R&D line got hit with about $700,000 of that restructuring and the rest is in the SG&A line.

Patrick Ho – Stifel Nicolaus

Great. And just a clarification in the services. I don’t see the (inaudible) as a percentage as the revenues decline as a whole. I guess are you seeing any impact from customers’ as their strap for cash going hay. I’ll try and extend my life time on this with what I’ve got. I want to use the inventory in-house and does that affects your services business? I do know that it’s going to go up as a percentage, but are you seeing any absolute changes?

Paul McLaughlin

To be honest with you, no. And let me reflect that in a couple of areas, one in the service area, but also – like in receivables. Our customers’ are actually believe it or not have cash in hand. One of the reason they have on hands, they are not buying any equipment. And they haven’t actually parked [ph] variable and collect receivables. Steve mentioned the tremendous improvement we had last quarter in receivables. Partly, that customers now have time and have some cash because they are not buying anything new. And that’s pretty much what they are doing with their money. They are putting it into service upgrades of various tools, all sorts of –. So, I don’t see that falling off, at least not in the next quarter or two, Patrick.

Patrick Ho – Stifel Nicolaus

Great. Thanks a lot guys.

Paul McLaughlin

Okay.

Steven Roth

Thanks.

Operator

Our next question comes from the line of Gary Hsueh.

Terry Young – CIBC

This is Terry Young [ph] for Gary. First question is, you commented about the breakeven level at less than $30 million a quarter. What’s your breakeven point right now, and when do you expect to achieve that less than $30 million target?

Steven Roth

We said in the prepared remarks that we bought the cash breakeven. So, that’s where it is right now. That really your question was.

Terry Young – CIBC

Okay. Got it. Second question is regarding the market dynamics, and you mentioned about some push outs and cancellations in the quarter and yet you meet your guidance. Actually that’s a pretty good performance on your top line. So, what brings the upsize of the market in line of the Memory push outs and cancellations, I guess it’s –?

Paul McLaughlin

I think the answer to that is the backend. We have a lot of very strong customer relationships. And to make our guidance, we did call a few papers in, where some people pushed out of Q3 and into Q4, and some pushed out Q3 indefinitely. We did call in a few papers and had people take some tools early on in the quarter so that we could make our guidance. That will obviously end. We did have a very strong backlog going into the quarter, particularly in the backend. But as I mentioned to from a earlier comment the backend fell off the table late in the quarter, and has gone down rather dramatically as people have ratcheted it back.

Terry Young – CIBC

Okay. Thanks. And the last question is regarding the current lead time, you’ve got a very low revenue level. What’s the lead time you are seeing now? And does that have any impact on your backlog or do you still hold any backlog at this moment?

Paul McLaughlin

To answer you last one, we do have a decent backlog. The question is, is it shippable, all the time we constantly scrutinize that. Your question regarding lead times, lead times really have not changed much because we have ratcheted it back on our staff. We are concerned, and we are trying to take necessary steps that when this turns – when the market does turn because there will such a shortage of supply of tools, and when it turns it could – I’m saying it could. It may not. But it could ratchet back quickly, will be high pressed to meet demand if that happens. Having said that, right now we don’t see that happening because visibility is almost non-existent. So, our lead times are about where they have been before. Having said that, we have some tools pretty close to completion that customers’ pushed out that are sitting in boxes at the moment waiting for them to take delivery later this quarter and into the first quarter.

Terry Young – CIBC

Great. Thank you.

Operator

(Operator instructions) The next question comes from the line of Peter Kim.

Peter Kim – Deutsche Bank

Hi, thanks for taking my question. With regards to the breakeven level, you said that you are going to be – you are currently less than $13 million this quarter. Given the present conditions, where are you aiming to go to in the next quarter?

Paul McLaughlin

You saw my guidance is below the $30 million because we are looking to 30% to 45% top line down. We fully expect that, Peter, that there is going to be more cancellations, and that’s really up close and personal news today we got couple of more cancellations today – not cancellations, push outs. I don’t think we had many cancellations, we’ve had a couple not as many as push outs. So, where is it going to go? Boy, I wish I had a crystal ball.

Peter Kim – Deutsche Bank

Again, where were the breakeven levels too?

Paul McLaughlin

I think we won it with – done the reprioritization of R&D programs. So, I don’t end – resized with a scalpel. We’ve gone and picked selected people, and here it is we don’t see growth as much, and done some adjustments in our customer infrastructure. We still have 250 people in the customer support infrastructure out there knocking on doors, applications, field service, evaluations. We still think that’s critical. That and engineering will be the last things to go. We’re down about as low breakeven as we could – we feel we have to be. That may mean as we guided that we have to put up a quarter or two of negative numbers.

Peter Kim – Deutsche Bank

Okay. Last thing is with regards to the (inaudible) acquisition, do you still remain the number one supplier macro defect inspection in 2008? And then how do you feel about your market position in 2009 given the acquisition?

Paul McLaughlin

To be honest with you, I think we will. I think the numbers will support that. We are in a little bit different segment. It’ll partly come – I think we’ve made some very, very good strides with our new AXi lines. Things have been positive out there. But to honest with you, people aren’t buying a lot right now. We’ve got a lot of our new stuff under evaluation right now. It’s several key customers’. I would actually hope that some of them would convert those demonstration pieces of equipment into sales. This past quarter, they did not. They are still sitting there. And so, we are working with each and everyone of the customers’ and that should help us maintain share going forward. We are getting very, very good feedback from the new tools we have in the market.

Peter Kim – Deutsche Bank

Great. Thank you.

Operator

The next question comes from the line of Mahesh Sanganeria.

Sandeep Chandrasekhar – RBC Capital Markets

Hi, this is Sandeep Chandrasekhar [ph] calling in for Mahesh. My first question is regarding the different end market you face Memory, foundry, Logic. As things comes out of downturn, which one do you expect to recover faster and give us some timeframes regarding this kind of a recovery?

Paul McLaughlin

Good question. We study that very carefully. Obviously, I think in the logic area is better off than others, mainly it is a major West Coast Logic supplier will go unnamed. Its business is in low-end processor is doing quite well. And we all know in our end of the business that it’s – we are measured not on by how profitable, how many dollars our customer is getting but on how much silicon goes through their factory. That determines how much equipment they need. So, I think the Logic section will be first. Having said that fab utilizations rate hit us in the foundry business are actually quite obsolete right now. And that’s one of the reasons why you’ve seen a number of people decommission 200 mm tools to try to bring back pricing. The foundries don’t have the luxury that an IDM has. They basically have a product to sell, the wafer. And that is plummeted in price that they can get for these wafers because there is too much capacity. They plan to take capacity offline, and thus helpful for everybody. So, I think that could come back relatively soon – relatively soon. By that I mean when the market turns. I don’t know when that is and I’m not going to speculate. But when it does, that will come back. The other part is the memory area. In that primarily is the consolidation that’s taking place. I think you have dog fight in there now for the number three spot. I guess I mean with Micron really ducking it out. Now that Micron has picked up the (inaudible) all this consolidation going on is happening real time. So, that could change the dynamics there, but memory has got its own unique dynamics. And I would bet – I would think that may be the third area to rebound and in that order.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. And you have mentioned that you cash breakeven is $30 million. I just wanted to get a sense of what that translates to in terms of non-GAAP breakeven revenue number?

Paul McLaughlin

Non-GAAP –

Sandeep Chandrasekhar – RBC Capital Markets

Non-GAAP breakeven.

Paul McLaughlin

We have non-GAAP breakeven; we are pretty close to that number. They are bit below the $30 million number.

Sandeep Chandrasekhar – RBC Capital Markets

It’ll be below $30 million?

Steven Roth

Before you get the depreciation.

Paul McLaughlin

Yes, depreciation. But pretty close to that. We believe we are running now at a rate of cash flow breakeven of below $30 million. And you could see from our last quarter that was up quite a bit higher.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. And your inventory levels are still somewhat elevated compared to your revenues, and especially with your revenues that is going down now. Do you think there is potential for write-downs in the near term?

Steven Roth

We’ve had breakdowns in the past for internal reasons over the years but we go through a methodology to make sure we keep monitoring that what’s in excess. Obviously, you can see we are still driving down the inventory level even though things are slowing down there. I think I said that in my remarks. It just tends to be hot, obviously hotter when your sales lines drop to get the inventory out of the door. But it’s something we have to look at all the time and we put up reserves for those amounts that fall into any excess buckets. But it’s something that’s monitored all the time.

Paul McLaughlin

Due on part of our cost monitoring program and try to keep an eye on the inventory levels. We are monitoring intake very much and working with our key suppliers are AA suppliers if they will, if you have A, B, and C type parts, we are working with our A people to try to paste thins a lot more better for us and for them if we can. So, we had a conservative effort to work with our suppliers, and we are going to continue that because the supply chain has been flexed, and we have stopped taking in lot of inventory.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. That’s all I have. Thank you very much.

Operator

Our next question comes from the line of Megalia [ph].

Megalia

Hi, just a follow up question. Paul, you mentioned about your news – new initiative in terms of strategy, operation and financial stability. So, a question regarding the M&A activities. This is actually a question for Steve. What you think is the acceptable cash level to support the M&A activities but also be very stable in light of another tumbling [ph] 2009?

Steven Roth

Okay. When we look at the cash balance, we typically internally use a quarter to quarter half the revenue in cash is our baseline level. So, again depending on where the cash is in at any given point in time. That’s kind of – where we look at the excess to do whether it is internal initiatives or external activity. So, we tend to use that quarter to quarter and a half with the revenue as the cash balance for those activities.

Megalia

Okay.

Operator

The next question comes from the line of Patrick Ho.

Patrick Ho – Stifel Nicolaus

Just following up on the inventory question just to get a little bit of color on I guess the composition of your inventory. A lot of these evaluation type of inventories, so they potentially could differ a lot or is it stuff that I guess are for volume or capacity buy that you could eventually write off?

Steven Roth

I would say on the demo inventory number. Demo inventory out in the field is probably about $3.5 million I think if I can recall tools out there. So, and – Patrick, to get an idea of what the tool – It is not that – but not a significant amount. And typically as Paul mentioned, we tried to find the periods of those demonstrations. So, we don’t – I can’t recall every situation where we’ve got a tool back and two years later we trash this thing. That typically doesn’t happen specific periods of time. So, I don’t expect to see write off of tools that are out in the field that are back.

Patrick Ho – Stifel Nicolaus

Okay. Now fair enough. Paul more of a strategic long term thinking question. I understand your position in terms of being a consolidator in the industry and obviously done a really good job with the cash balance over the past 12 months to 18 months. You’ve made some big acquisitions, you’ve made some small acquisitions over that time period, and it actually looks like they’ve done pretty well. As we go into a downturn period, as you play consolidator are there any concerns that you are going to stretch yourself and put yourself in actually a more I guess disadvantage position coming out of it because you are trying to balance too many projects. How do balance that versus becoming a bigger player in the process control space?

Paul McLaughlin

Good question. And it’s a valid concern and we look at that all the time. But I will say even with the downsizing in our staff itself that the volume levels we are talking about, our people do have some flexibility in their time schedules. We can use our people to participate in the various M&A activities. So, I’m not as concerned though it would have booming time. Right now, we do have some time availability, particularly dependent where we take of course as well because recently we had a couple of acquisitions in the – known as our inspection business unit in Minnesota, that one is very, very active and that’s been very, very successful. We’ve got a lot of lessons learned there. In fact we had a presentation at the Board of Directors by the Executive Vice President and General Managers there Nathan Little to our lessons learned during integration. And we’ve learned a lot of things and we expect to use those and how to manage that staff without unduly stressing the organization. So, I would say that it’s a concern. We are watching. Right now we think is actually a better time to do some M&A work than other times.

Patrick Ho – Stifel Nicolaus

Right. Thanks a lot guys.

Operator

The next question comes from the line of Mehdi Hosseini.

Rafi Hassan – FBR

Hi, this Rafi Hassan [ph] for Mehdi. I had a question on pricing. Can you tell me a little bit about your pricing for better production (inaudible)?

Paul McLaughlin

Good question. We’ve maintained the same policy on pricing and most customers’ are understandable. We give them the benefit on a beta tool of keeping it longer. Therefore, they are really getting a decrease in price because – an example of that, six months evaluation, we give it nine. And then they buy it. They’ve had it for nine months and then they get the warranty anyway. So, they’ve effectively got a price reduction. So, we haven’t run into too much problem on that. Don’t forget all of these evaluations are free evaluations. They are longer tools. And we support the tools with our people, standing by the tools and helping out. So, we don’t find the price issue too onus at this particular time.

Rafi Hassan – FBR

Okay. Regarding backlogs, how do you say your backlog is now related to your revenue?

Paul McLaughlin

How is our backlog revenue? Was that the question?

Rafi Hassan – FBR

Yes.

Steven Roth

We historically have not given backlogs. We don’t disclose what our backlog is, other than annually. So, I’m not quite sure how to answer that question.

Rafi Hassan – FBR

What about booking? Did you say your booking is right around where revenue is?

Steven Roth

Yes. Our booking is in the third – our book to bill in the third quarter was slightly below the average for the quarter but not much.

Paul McLaughlin

We did have some cancellations here.

Rafi Hassan – FBR

Okay.

Paul McLaughlin

– which had to come out of the bookings as well.

Rafi Hassan – FBR

Okay. Housekeeping question on CapEx. What is your CapEx currently and going forward?

Steven Roth

As Paul mentioned, currently we got a CapEx freeze in place. So, for going forward, I can tell your our CapEx is going to be minimum. Of course there’s something that can come up. CapEx year to date is about $2.5 million.

Rafi Hassan – FBR

And going forward for ’09, you want to keep it frozen?

Steven Roth

Yes, we actually haven’t completed the planning process for the 2009 financial planning process going on now. But I would not anticipate with the current environment in place and how you see that number going up significantly.

Paul McLaughlin

Much like our customers’ – we have a freezing effect if somebody can put together a tremendously compelling case. They may get something. But in reality it’s frozen at the moment.

Rafi Hassan – FBR

And you mentioned in your revenue mix, software and spares totally are doing 30%. How do you distribute them between software and spares? Your spares are obviously going up, right?

Steven Roth

Spares are going up. They have been going up a lot. I would say the software group – the software licensing is under 3% of the revenue, total revenue.

Rafi Hassan – FBR

Okay. Spares is 27% then?

Steven Roth

Yes. For – yes for the quarter.

Rafi Hassan – FBR

Thank you very much.

Operator

There are no further questions.

Paul McLaughlin

Thank you everybody for joining us in the conference call. We look forward to talking to you again next quarter. Thank you and good evening.

Operator

Thank you. This concludes today’s conference. You may now disconnect.

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