泰瑞達 (TER) 2001 Q1 法說會逐字稿

Please standby. We are about to begin. Good day everyone and welcome to the Teradyne corporation first quarter 2001 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice-President, Corporate Relations, Mr. Tom Newman. Please go ahead sir.

Thank you operator. Good morning everyone and welcome to our discussion of Teradyne's financial results for the first quarter 2001. After some preliminary remarks, I will introduce to you the agenda for the call and the other participants. Teradyne's press release containing our first quarter 2001 results was sent out by business lawyer and was posted on our web site yesterday after the close of the market. If anyone needs a copy, please call Marion O'Connor on (617) 422-2221 and she will provide a copy. This will also be simultaneously web cast over our web site at www.teradyne.com. A replay of this call will be provided on our site starting at noon today Eastern Time. If it is more convenient, you can also access the replay of the call by dialing 1-888-203-1112 afternoon today Eastern Time and providing the access code 577987. Replays from both sources will be available through May 2nd. It is our objective to use this call to comply with the requirements of the SEC regulations. Therefore, investors should accept the contents of this call as the official guidance from the company for the second quarter 2000 and beyond. If at anytime we communicate any material changes to this guidance, it is our intent to do so simultaneously to all investors to the best of our ability. Investors should note that only the field participants in this call George Chamillard, Gregory Beecher, and myself could supply company guidance. The matters that we will discuss today other than historical information includes forward-looking statements relating to future financial performance made under the safe harbor provisions of the Private Security Litigation Reforms Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from expectations. Some of those risks and uncertainties are detailed in accordance with the Securities and Exchange Commission including, but not limited to the Form 10-K for the year ending December 31, 2000. Any forwarding looking statements should be considered in light of those factors and we incorporate here a discussion of those factors. Now, let us get on directly to the agenda. First our CEO and Chairman George Chamillard will review the state of the industry and of the company and will provide guidance for the second quarter of 2001. Then our Vice President and Chief Financial Officer Gregory Beecher will review the details of our performance in the first quarter. We will then answer your questions. George!

Thanks Tom and welcome to all of you on the call, especially those of you who are in some early morning time zone somewhere. I am glad you are able to join us. The numerous pre-announcements of sales and earnings reductions for the first quarter are a clear indication that many, if in fact not most technology companies today have less than one quarter's visibility. Going into January, Teradyne had a clearly deteriorating environment in semiconductor test, though we had businesses in some other segments that were bucking the trend and that we thought might escape the fall-off. Most of our European customers in all businesses were relatively bullish at that time, as were the customers at our Backplane connector business and our EMS business. But over the course of the quarter, those conditions changed. By the end of March, the combination of a weakening US economy, concern for the health of the economies of Japan and Korea, excess production capacity and weak demand, they all increased inventory levels, which drove our customers for all of our businesses in every geographic region into a defensive position.

So, on March 8th, we lowered Teradyne's estimates of sales and earnings for the first quarter. This was only the third pre-announcement, by the way, that we have had in our forty-one year history and the other two were back in 1981 and 1988, so it's been a while since we, and our dependent customers, have had such a lack of visibility. Teradyne's results were in line with that guidance. Our sales were $605 million, including about $100 million in revenue related to non- recurring SAB 101 adjustments. Also, we earned $0.33/share, before taking a special charge primarily related to the work loss reduction.

We had orders of $357 million in the first quarter, that is our lowest level since the third quarter of 1998. Tera's customers continue to struggle with excess inventory and with excess production capacity and as a result, we had about $25 million of cancellations in the first quarter and rescheduling of deliveries remains at a high level. We do not know if the current fall-off has bottomed, or more effect how long it will last. Any definition of recovery would have to involve capacity buying from our semiconductor customers and will have to involve increased inventory flows from our EMS customers. Based on that definition, there is no recovery in sight at this point. Given all of this uncertainty, how is Teradyne dealing with the business environment? Well, our priority requires us to position the company to capitalize on the next upturn. To do that, we need to stay focussed on three things: supporting our customers, driving our new products into the market place, and controlling expenses. Our customers need for support has not decreased in times like these. They are still running systems in production albeit at reduced levels and they are working very hard to bring lots of new products to the market. They also often have fewer engineers, sometimes with less experience than they have had in the past.

It is crucial that we do not cut back on support of low payroll, but in fact we are increasing the investment in programs like the low paragraphics and web-enabled support. The objective ofcourse is to improve the support levels while lowering costs. The second issue is to stay focused on is getting new products out. Over the years we have benefitted from having the broadest line in semiconductor test and also from other growth businesses outside semiconductor test that helped Teradyne enter these cycles. In fact in 2000, we introduced the largest number of new products across all of our businesses. A data power connection systems business with the new product focus has been a first in developing new connectors like GBH. And second, working with customers during the detailed design work, such as lowest connectors, design into their future products. In the last quarter we have 56 new designs and that ofcourse provides the pipeline for future shipments.

In semiconductor tests, we also had a great quarter for designing with 25 occurring in the quarter. The practice here that was a little bit different from TCS. Customers in semiconductors have to buy for two reasons; they need more capacity or they need more capability. Unfortunately, there seems to be plenty of capacities while providing capability needed to test new devices, which is most critical right now. By getting the new sockets that require new capability, the company positions itself for gaining share as though it devises ramp up in bargains. There has been a lot of talk about the changes going on in the front end and some of those changes create technology needs for testing at the back end. So one question will be what are some of the technologies and applications that require new capabilities from the tester. And where do we believe that we have products advantage that will lead to share gains. Let me give you one example. In the network areas, speeds have increased rapidly over the last two or three years. Chip, our 10 and 100 basis internet, OC 12 and OC 48 standards have given way to one gigabit internet speeds, for the new architectures 2.5 gigabit in thinner band. And 10-gigabit performance is not far behind. Now all of those devices use an architecture called Serdes. The Serdes is an acronym to a serialized deserializer, which simply converts parallel data strings with a high-speed serial data strings and vice versa. It enables a giant leap forward in the network performance by reducing the cost, by having smaller device packages and fewer pins. And thinner band is the next generation of that technology. Now what functionality is lacking in existing systems to test these Serdes devices. On the surface these look like straightforward data devices but in their heart it is a very complex system or chipped devices. The three-gigabit operating speeds are very close to the design limit of today's CMOS processors.

This results in several inbuilt new salient mechanisms. In fact they can only be detected when testing at speed. Specifically the noise that naturally exists within these devices or structures can be too high as these rise up the operating speeds causing the devices to fail in the end applications. This noise which is called gitter is therefore critical for us to examine in order to assure the devices performance little bit raised. But due to carefully simulated software has to be measured in the device and you know, measurements take a very long time to make. Consequently, in volume production, time saving shortcuts are taken to the shortcut that cannot reliably test failing devices and too many failing chips can get through to the end customers. Now, Teradyne's high performance as far as these tests are considered is capable of measuring ___ 10:59 at production speed on devices operating above two and a half megabits. That means, a customer can do this very complicated historically long tests at production rate. And at the architecture of high-speed the differential digital pins delivering the capability can make through the measurements below 2 picoseconds at production rate typically less than two seconds per device. Now this compares with test time that will be greater than 30 seconds, if you use alternative approaches. They were not making ____ 11:34 measurements directly. If you assume that Serdes building block are becoming standard parts of every communications devices in the future Teradyne is well-positioned to continue its standing out share in the high growth segment. And so far we have designing with eight customers and we are gaining more and more every day.

That would be an example of where I think the front-end changes that have cut an impact on tests on the back end, and an example where we think we have good positions. So far, we talked about two of the three priorities we have in the long term; peaking up support and bringing new capabilities. The final issue is managing expenses. On the one hand in order to position the company for the eventual upturn, we need to continue or even accelerate our new product development, as well as keeping our pool of talented people in place. On the other hand, we have to sharply reduce outstanding. On March 20th, we announced some of the actions taken to reduce expenses and these actions included laying off 650 regular employees, reducing our temporary work force by over 1500 people since the peak, delaying our annual July pay increases until the start of 2002 we have been working for a loss across the company and we have given the salary reduction for senior mangers. And the impact of all these actions takes force in the second quarter and we will have to reduce our break even level in Q2 and beyond. As I am sure you will understand I use the fair loss pay reductions for management, delayed salary increases, they all fit into our strategy of keeping customers support high and keeping new product development on track. We will not permanently cut that too far. Our current plan for the second quarter is to ship between $425-450 million. We are working to reduce our expenses to break even at that volume. I mentioned earlier in this discussion that it was important to keep our organization sharply focused in these sides and Teradyne recently announced a major organizational change to help assure that focus. We have appointed Mike Bradley, who is our previous CFO as President of our semiconductor test division as we promoted Richard Schneider as President of our Connections systems division. These businesses are very different in an operational sense, yet in some ways that are more similar. If they are both were running at about a billion dollar or more on sales, they both are worldwide businesses in scope, and they each employ more than 4000 employees. The appointment of these divisions' presidents is designed to help to assure the future success in those segments. Those changes also enable us to bring on board very experienced executive and CFO Gregory Beecher. Greg was previously with Price-Waterhouse and is well versed in the financial issues of technology companies in general, and of Teradyne in particular. I would like to turn the meeting over the Greg to discuss the details of the quarter just completed.

Thanks George. Good morning everyone. As you remember from last quarters call, there is a one-time carrier for impact of SAB 101 from Q4 to Q1. Our guidance was that this SAB 101 carryover would result in an incremental $100 million in sales with a report in Q1 above the earned revenue otherwise reported in the first quarter. This item is the result of changing our practice of retaining title until customers' payment. Under SAB 101 you must have title document shipments to our customers to recognize revenue along with satisfying other criteria. In late 2000, and into the first quarter we changed our standard practice of retaining title interests payments, and passed title to our customers in Q1 on certain shipments that occurred in 2000. This increased our revenue and profit in the first quarter and will not reoccur. Our standard practice now is to pass title to customers up on delivery. In our January call, we mentioned that we will report results with and without the impact of the SAB 101 carry over item as it is not first material. After Q1, however we said that we would no longer highlight the impact of SAB 101 since the transition ship by that we understood that remains our plan.

We have provided two columns in our press release to highlight the impact of the SAB 101 carryover in to the first quarter. The first column includes our actual results with revenue of 605 million; the second column is on a flow basis and excludes the SAB 101 carryover sales of approximately 99 million. In order to help you better understand our Q1 results with the remainder of this discussion, we will only refer to financial results, which exclude the SAB 101 carryover impact that increased our first quarter revenue and profit. Our orders for Q1 were $357 million. This amount is net of cancellations of about 25 million by comparison to Q4 2000, orders were down 45% sequentially, and down 65% from our record setting of $1 billion quarter in Q1 of last year. Sales of 506 million were down 36% sequentially as compared to Q4 sales of 789 million. In the year-to-year point of view, sales were down 22%. Our orders for the quarter reflect the shift away from Asian semiconductor test customers. They continue to experience an excess of test capacity.

The details of the geographic distribution of orders are 55% from the US, 27% from Europe, less than 3% from Japan, less than 1% from Korea, 7% from South Asia, 2% from Taiwan, and 6% from the rest of the world. Our corporate book-to-bill are 0.7 was comprised of about 0.5 for semiconductor tests, about 1.0 for connection systems, and about 0.7 for our other automatic tests for ATE businesses. The end of the quarter was backlogged at about 1.13 billion, which is down about 10% since our last report. The competition of our order-buy product line was 33% for semiconductor test, 58% for connections systems, and 9% for broadband test, and PCB test and inspection combined. The semiconductor test orders were down about 55% sequentially, bookings for test of system on a chip, image sensor, memory and high volume logic devices were down more than the average. Our best performer was high performance logic, which was down about 16% quarter to quarter. If a proportion of our overall semiconductor test bookings the average subcontracts was less than 15% of the total, down from almost 40% in the same period a year ago and down from our longer-term value of 20-25% per quarter. Finally, orders for both connection systems and for our other ATE businesses were down 34% sequentially.

Looking at the income statements, revenue of 560 millions were distributed geographically as follows; 39% in the US, 25% in Europe, 6% in Japan, 1% in Korea, 11% in South Asia, 5% in Taiwan, and 5% in the rest of the world. Our gross margins was 30% which reflects both decreased unit volumes that cause our fixed manufacturing costs to be less lavish, and a mix change away from our higher margin semiconductor test products. Connection systems revenues were 41% of total Q1 revenues as compared to 31% of total Q4 revenues. R&D expenses decreased about 8.1 million to 71.2 million with 14.1% of the sales, SG&A sale 21.8 million to 69.1 million with 13.6% of the sales. Both R&D and SG&A were impacted by the sale of showing interest in insurance, our software test business, to a group of investors in the fourth quarter of 2000. Reduced performance related compensation also contributed to these spending decline. Interest income fell to just under 6 million or 1% of sales and our tax rate remained flat at 30%. The end of the quarter was about 9800 regular employees and another 800 temporary employees for a total of about 10600 employees. We decreased our work force by about 10% during the quarter as part of our cost reduction action.

On the balance sheet, we ended of the quarter with cash and marketable securities of 356 million down 108 million from the previous quarter. During the quarter we consumed about $83 million in cash from operations, accounts receivable were reduced by about 75 million from Q4, to 344 million for 62 days sales outstanding. Excluding the terrible decrease in inventory related to the SAB 101 share of the items from Q4 to Q1 discussed earlier, inventory in fact increased by about $28 million to $506 million at Q1, both 25% of our annual sales. Our inventory continues to be higher than our total levels as we balanced the transition from existing products to our newer products in the phase of a balanced air level. Infact we increased our new products inventory and reduced our existing products inventory in Q1. Capital expenditures were 97 million and depreciation was 13 million in the first quarter. During the quarter, the investor principle in previously launched capacity expansion by connection systems and support the new products in semiconductor tests. Looking forward, as George said, we will be reducing our sales in the second quarter by 10-15% from the 506 million of the first quarter. We should be about break even at that level of sales, gross margins are expected to go to under 30% as the business mix shift towards a higher proportion of connection systems products and again, lower unit volumes most of which provide less leverage on our fixed manufacturing cost. R&D and SG&A ratio continue to trend dollars and dollars and a tax rate should remain at about 30%. Capital expenditure should run at about $100 million again in Q2. We expect to generate about 50 million cash during the quarter as receivable get paid down and as we reduce inventories. Now let me turn back over to Tom to open the session for questions.

Thanks Greg. Operator, can we have the first question.

Thank you Ladies and gentlemen. This question and answer session will be conducted electronically and if you would like to ask your questions you may do so by pressing the *key followed by the digit 1 on your touchtone telephone. We will proceed in order that you signal and will take as many questions as time permits. Again press * and 1 to ask a question. We will pause just to assemble our roster.

Our first question comes from Gunnar Miller , Goldman Sachs.

One quick question on the various levels of customer utilization that your semiconductor customer by product type, that is the question 1, and then question 2 whether or not on the back front side, you are seeing any inventory issues emerge that could slow the rate there?

Let me talk about the PCS side first and then talk about the factory utilization. I think that the issue on the EMS is this of the inventory has two aspects. One aspect has to, what I think was seen from CISCO's announcement the other day. Writing off a large amount of inventories implies that you have a big obsolescence and by way of earning that is good to the industry but to a company like PCS, I think that it is particularly good because the issue is, if you design into the new products which would have launched, your major customers are going to try to drive into the market place, then I think that it will become a big portion of even of the declining customer business, it gives us the opportunity for shipments. So I think we have a double line resource there. There are some signs that there are excess inventory on some of the existing products that we supply backplanes do EMS work for, but at the same time, that there is a strong demand for getting the next product items shift. I think imbalance, I do not know, probably a flat slightly up business reveals where we see most of those in PCS. In terms of capacity utilization, the biggest under utilized installed basis in test houses and we have a broad base of equipment in the test houses whether it is from catalyst or VLSI systems. Probably Tom could add some more to that.

I think, it is always a tough question to answer, because the range is pretty broad and as you pointed out it is not only by customer, but it is also by product line. I think you would probably average out to somewhere between 50% and 70% depending on the customer and the product line, the only thing that I think that has come up in the last couple of weeks that we know are in the score as whether or not utilization might have stabilized, I think it is hard to tell, and we are hoping that that's true. Some information itself that it is does not appear to be getting any worse but it is at a pretty low level at this point. I do not know if that has helped with your question or not.

Yeah. I just will go for a quick followup and misunderstanding specifically at this sales announcements, Whether they brought the capital spending and said that majority of the cut will be for back end. And I am trying to figure out whether our IEM utilization is starting to fall from the level that we saw the same fall of in test houses a few quarters ago.

I do not have any current information on that indicates the gap is getting smaller between the two.

Thanks

Our next question comes from John Pitzer, Credit Suisse First Boston.

Just a couple of questions. First, a clarification on _____ 002735. When you look at the _____ 002740 business and look for growth and the flat is slightly up.is that only on a year-on-year basis or from the current-quarter run rate?

The current run rate. This is one way you say, "What does `up' mean?" Is it going to be up in 2001 versus 2000? The real question is, "Are you going to be able to have a trick to sustain the kind of shipment rates you had in the second half of the last year?" And the incoming order right now has been somewhat softened from that, there is no question. On the other hand, if you take the rates we are running at now, if you are able to hold those rates, it will be a growth year next year.

On the bookings level for the second quarter. If you do not want to give guidance on a quantitative level, may be qualitatively, you just talk about when do you think the booking in your semi past and then backplane connector business that are going to begin to stabilize here.

Well. Lets talk about them separately. If you think about the, what can get full bookings up and what can full bookings down. On the positive side, the current bottoms up forecast we have, which would suggest things have at least stabilized and they maybe be up slightly. The extremely low buy rate that we have had, we can talk about buy rates, but the extremely low buy rates the industry is running at, would suggest that some pattern manners which should to start to show up soon. We see we are having growing momentum with the new product design and similar through the Serdes one we talked about, and we see a building market for the DSL network tester products as one areas of upside and so forth, and by the way the Intel announcement yesterday of a low capital expenditure for the year still sounds totally positive. So low expenses say, may be thinks have bottomed and may be, they are starting to move the other way. On the other hand, the overall economic environment seems to be getting worse. There is lots of key end markets that is still very soft. There is extra test capacity is higher certainly in the test houses, I am not sure about the idea, but there is certainly more than we have had in several years and but the big one, is most of our customers would say that they have no visibility and I think we have a lot and that the fact is we are now in much certainty, this is a period with adjusting to much vision. On the EMS side I think it is a different issue. The issue was the EMS would streamline the back price into the capital assembly and total, there is one level further up to full chain by making the semiconductor if you go into the more in detail into those capitals. Then if you say most of the issue there is in inventory correction then our inventory correction tends to come back sooner than if you have inventory correction and capacity correction. In semiconductor test you have got an inventory problem, then you have excess capacity problems. I think the PCS in business, the customers have inventory problems was not an issue of the capacity.

Could you follow up this question or pass it on to somebody else. When you look at the rate of cancellations throughout the first quarter as well as rescheduling. Can you just tell us on month-on-month basis were there any stabilization at the end of the quarter or are we still sort of week-by-week?

Well. First I think, we have try to quantify what it means 25 million is, going to win their shipment orders in 50 million is a big number. So it is not an insignificant issue. But 25 million is about 2% of the total backlog in the area and if you say that we have booked on net 357 million is about 6% of the incoming order. Both of those levels whether you measure it against the historical calculations that we have had in back log. What portion would be of incoming orders or higher rates that we see in the past is no question. We did not see any significant. The last month of the quarter or last week of the quarter was this significant event. The rescheduling and cancelling pressures went on through the quarter fairly consistently. I think there is no question as to the risk of rehab of backlog, somewhat greater risk of what we have had in the past. But there was not anything I saw, that was a you know, one thing came thing in this week, that are pretty stable of all of the rescheduling during the first part of the quarter and now that has fell down. I think it is just, you know the business is so broad based in terms of subcontract houses, foundries, IBM, and all those companies and it is so broad based geographically, that to say unique story, pretty much that we account and I do not see any change in the pattern of that as we have gotten in to the first month of this quarter.

Thanks.

We are going next to Breth Harris, Merrill Lynch.

Good morning. First a clarification on the outlook for the second quarter, the 425-450 shipments would lead out the same of about $100 million on to get the SAB 101 revenues?

No you would not. There will be no further SAB 101 adjustments. When we speak about revenue shipments, we are really talking about the same numbers. So going forward, there would be no 101 complexities is what we are pleased to say.

Okay. So the 425-450 is including that issue. And then secondly, on the backlog number that you gave 121 and 3, was that a gross backlog number before cancellations and what not?

That is after cancellations.

After cancellations! Okay. And then final question, back on the product side, George you had mentioned on the general testing for instance, with the Tiger and the fact that shift be need to be moved to production, can you give us a sort of an update on what we see the competitive front there? Are the other companies ready to measure ___34:40 production rates or do you think this is a new capability that Teradyne is coming up with that other folks who lag on?

We think we have a real advantage there right now. The sole question everybody is going to work on the same problem. The issue is, as you make all of these changes, into the process fees that make the devices and you go to copper and you go to more layers and you shrink the lithography if focus is on, the process itself, some fundamental characteristics of the process, which are not well characterized yet. That will become problems in the devices. This is one of them that has come out fairly soon and I think we have on old products, ways where you can sort out test if you are a sort of into stimulations that gives most of the fault coverage, but as you see this characteristic becomes much more critical, I think right now we have a real advantage, where we said we can do the _____ 35:36 test at production rate and if you can do what would be thought of as engineering lab measurements on the production line, on an area that is becoming more and more important, then you have real advantage. I think, we do hold on, we will have that advantage, you know, who knows. Right now, I think, we do have advantage.

Okay just quickly, that is an internally developed?

Right.

Thank you.

Could I just come back on the first question that you had Breth, which was

Does the $425-450 relate to another $100 million. The release we set out has three columns on it. It has actual set of numbers, $605 million for shipments in Q1. It has a Proforma $506 million. In that column of $506 million, is close to what you should compare results when you think of Q2 versus Q1. Is that right, sir?

Absolutely 506 is the operating results of this quarter with no unusual accounting impacts on prior periods so I think that is the number that will go up when you compare to our next quarter on a sequential basis.

Thank you.

We are going next to Min Pang, SG Cowen.

Min Pang, SG Coven? We will go next to John Geraghty , Gerard Klauer Mattison .

Gentlemen, good morning. Maybe George just a question followup on the PCS business, you talked about this before, maybe in an EMS segment. Do you have any precursor insight as it were as to how long the inventory corrections might take place in those types of businesses is it still cloudy, a sort of as you said in press release?

Well, I agree obviously that it is cloudy, but if you look at some examples of - there are two kinds of inventory corrections that had to be dealt with, one is where the product is still very current. There is not much of technology and the end customer needs a demand pick up to eat that up Those are extreme situations, if you say, where are the major customers we have in the PCS business. It is CISCO, Lucent, AMC, Ericsson and each of those, I think has a different flow form of how much of the old product they will sell and how quickly they will sell it and what is the new product right now and how quickly those will launch. I think it is a situation of reaching those accounts that is with us to day, but I think for sure that business will pick up before the capital equipment of semiconductor will.

Okay. That is fair enough. Just one thing, I guess a sort of going out with Breth's question, which was competitive situation overall. Do you see the competitive situation changing one way or another as a result of the downturn in this industry?

Well, I think in terms of, lets say, the yearly balance we see in terms of what market shares ended up in 2000 versus 1999, I would say, we held our market share. We did not significantly increase it nor did we significantly decrease it and that is what makes sense to me. The problem in trying to gauge where you are in this part of the cycle of course, is the data is statistically not relevant, may be it will be felt much when we have backlog, so right now it is not. So you gauge yourself on what is the topography we are getting into. That is just a new device of the old technology, but what are the new products that you are going to drive volume going forward. And we tried to track that with designing, now designing are nowhere near as good as tracking we are looking for. We are looking for those good as tracking the shipments, but designing at this stage are much stronger and based on that we feel like getting the penetration in the account that will help us certainly a full share in 2001, but I think it ought to be gain share in 2001. The question is going to be, how pervasive the things like Serdes and how much of advantage we have and for how long. You know, building blocks are like that, that fills into many families, devices, could give you real advantage for a long period of time. On the other hand, tomorrow somebody might invest something different in Serdes and different sort of brand and the advantage that you have disappears, but I think right now, I am feeling good that we have the new product design as part of the business in pretty good shape.

Great! Thank you very much.

We are going next to Min Pang, SG Cowen.

Good morning, fault in telecommunication just a few minutes back. A couple of

First of all, I know certainly in the front-end business service the extent of your total sales runs about 20-25%. Can you give some idea, what that figure might run for Teradyne?

The service percent fluctuates depending upon the level of our shipments to our equipment revenue. In a period like this, the service is a higher percent. It is not as high as it is in the funding companies, but in a period like this it could be around 10%, they are about a little bit higher.

Then the second question relates once again to SAB 101. I think this is going to, been bugging us for long time, but I guess, if the P&L is restated historically, that would also change the balance sheet. Do you have any funds to release revised balance sheet numbers for the quarter for last year.

When we have filed the Q's you will see the restated balance sheet for the fiscal year 2000.

But not for the specific each individual quarter?

For each individual quarter?

Yeah. In the year 2000?

I need to take a look at that. I have not studied that myself and it has been focussed more on the P&L and the impact is really related with it be more revenues referred. At the end of the day, we have been more focussed on the P&L and get new revenue models down, but we will take a look at the balance sheet when we follow the Q.

Then, final question, the company has seen a lot of design wins____42:50, typically in the PCS business and typically in the ATE business. How long would it take before those designs will translate into meaningful revenue?

Well, in PCS the first things, the design-win is not as good a metric as bookings and shipments by a launch off, because all design-ins are not created easily. If I give one design-ins at the hottest new program that Sun is coming out with and I get one design in at a small start up that is sending me to segment, they are both equal to one in terms of design-ins accounts and they are worth, you know, respectable at lower degrees of volume. So, but in general it takes one to two years from the time you have an engineer to select your connector system and start drawing up the motherboard and the packaging of the whole system, before that gets into volume production. It is not quite as bad as growing a __43:59, which I think is a two- year cycle, but it is in one quarter that you win a design and the next quarter you have volumes.

So, really what you are seeing in terms of design-win revenues is a legacy of what happened in about the beginning of the year 2000.

We had a wonderful period. A broad range of people adopting the high- performance connector systems, the PCS design. I mean the key to that business is the functionality as we have been referring, is the technology that is in the connectors themselves, regarding the connectors that we form, we rate the best, at high speed and high density. And once you have that as technology, and the record fits into the system and then you expand that to do these, for summary of the backplane, for summary of the rack and you get in to the EMS side of the business and the product positioning we have had, and the leadership position that we have had in those types of connectors and that type of interconnect was very strong till the last two or three years and therefore we have a large historical design-ins that is still growing as we go forward. In the light com. it was the 56 design-ins provide the pipeline to the future, that pipeline, you are right, is one to two years away and that is in volume, but you have equally great pipelines that we have had buildings for the last several years.

Great! Thanks.

We are going next to Susan Billat, Robertson Stephens.

Yeah some, couple of questions: One, do you stick with the PCS business, if a culture customer, that is right, in CISCO, Lucent, PMC, Ericsson, and Sam. Most companies have obviously seen some troubles, as far as their business levels, which have adjusted and yet I understand that PCS business is based on, if I believe, I understand you correctly base them is all of 2001 versus 2000, should be a growth year? Can you help us understand, given what is going, the turmoil with those customers you are seeing or why that is and how it plays into perhaps those design-ins that you had before. Just trying to make the numbers work, can I have a couple of follow on questions?

Okay. Well, as you first said, I could not tell because we have a lousy connection. If you said PMC as all the customers, that is wrong, EMC is the storage company is the company that I mentioned. I think that there is two things to the issue, one is that, let us take a company like EMC. If in fact you have been involved in a third of their products, some past generations and we have won design-ins in the past two or three years. That fits your position in the product that is up to design 80% of the shipments this year. Even though, the total business may be down you will have great growth from that account. In the accounts I named, that is pretty close and that the numbers on scale exactly right although they follow on, two fair amounts. The point is those world customers while they were great business for us in 1999-2000, we were not in 100% of all the programs in those accounts, but for the new connector systems we had and design-ins that we won in two years ago went in to a bigger share of the account and even though their total business might be stable or down, we think that it is a chance for us to have some growth.

That is good news. I just wanted to make sure you have understood and I am sorry the connection is bad. I can hear you quite clearly. By the way, I do go with __48:12, is they say it takes, but it really takes three with the wait. The second is on the semiconductor side, coming back the competitive landscape, we know during the last up cycle you spent a lot of time focussing on in probably self course the patient health courses and broadening your penetration there versus good IBM's. You talked about Tiger in one particular application, but can you talk in a broader sense on the semiconductor test business. How you see the competitive landscape, you said that some of your logic testers were jobless and others. Can you just give a sense of what is going on and where it is going on?

I think in the, first half we have to say I am not blown away with the success we have had with flash. We had first half of it when we were late getting our product out, we have it out, it has been accepted, and in some accounts it is a great product, but demand there has fallen up dramatically too. So, in terms of us getting the close in gains i.e. we hope to get. I think the flash memory would be less than honest, if we did not say I am not pleased with the results we are getting in. In logic, we still have a very strong growth in the flash card business at $750 million, near the 750, and it keeps pushing into new applications. Subjectively, as we start introducing some of the enhancement that go with the J-750, the MSL for example, which is a mixed signal option that broadens the use of it. VOM testing, we introduced from 1 and the product is in evaluation and design is there, we have good system there, but that business is not particularly strong now, and so, the other new product introductions have not been quite as, we are not having quite the results, we would like to get there. The image testing product from Japan, the IP750, that is strong we announced this quarter, a European design when most of that was designed for the Japanese market, and has been expanded, and we are penetrating outside of Japan on that. So, that is going okay. But, tiger has been sellout for 750RFD and the MSL750 are doing well. The IP750 is doing well. Flash has not launched and demand is falling off for flash products period right now. So, we do not feel good about that. In broadcast, you did not ask about broadcast, let me take this question and talk about broadcast and broadband testing, and telephone testing business. Solarity, which is the product that helps qualify lines to DSL testing is getting closer to some _____00:51:36 including that in Q1, we did not have the life booking orders we thought to get some of that. Horizon is on a evaluation looking at that, the ____00:51:52 and we expect to have an announcement soon, I think on that, but that will not be a big announcement of millions of dollars of orders. It would be describing the success for the product, how helpful it is to them, and how they are getting ready to __ 00:52:10. The big story was introducing the 7000 series AOI machines. We have two products there, one for sort of reflow testing, and one for placement of computer components on SMT lines before you start it. Both are in trial and both are doing okay. They will provide some upside for us going into the future, but in Q1, we were not below the world level than any of those, but primarily because the people you sell those products to have had such declines in their business.

One final question, as we pull out our crystal balls, it sounds from your comments that perhaps June would be the 12th revenue month, will it kind of flourish after that for a while or is that or do you have your ways of calculating what your revenues would be based on your formulas, and what not, as we used to have in the past, should we look for June to be the 12th month or might that be September?

Well, I certainly hope it's June and it might be September also.

Fair enough thank you.

We are going next to Ed White Lehman brothers.

Thanks. A couple of questions: First, you talked about the prospect, you know, the outlook for the next quarter on revenues, and you expressed the view that you hope to be able to get to break even there. Can you talk about the product mix assumption that goes into that and how much sensitivity there is to product mix at this point in achieving break even on that revenue level next quarter?

The mix is, as you can understand, an important element to it. The connection system sales are expected to be at a higher percent next quarter, or the quarter we are in now given the bookings that we have just had, and the semiconductor products, are at higher margin products, but keep in mind, having said that the fixed cost are not being more leveraged currently. But, each additional sale of a semiconductor-reflecting product those drop much more profits to the bottom line. Though, yes probably while we give the mix, you know, among other reasons is that we cannot tell how much will be semi versus connection systems, but it is rather sensitive to the mix.

Okay. Then, my next question is more on the technology side, you know, I had a common discussion on genre testing but often, also which we are hearing about is as we get to these next generation devices is the more need for things like built-in soft test and technologies like that. How do you see that? How do you see your work in that area progressing?

Well, I think on the one hand there is no question on the complexity of devices to that and increased capability in this, and this is certainly helpful in terms of the industry keeping up with the technology world map. By the way, we are trying to facilitate that rather than fight that. On the other hand, there are some areas where just it would not help you. The similar things we have talked about on this networking devices, for example, the ability to do analog test is much less developed than digital test, and as you get more and more complicated SLC devices, you have got to put whatever capability you can in to the machines and then in to the devices, but I do not see short term, that is going to significantly change the buy rate in the short-term for example. I think that is needed for the industry to keep up with the world map. At that time itself, we will not change it much.

Okay and then, primarily putting your cycle in the historical prospective, you know that 1996-1998 down cycle was in a way, you know, that is difficult for you than some other cycles have been, and this one certainly seems to be in, you know, about the same level of difficulty, if not more difficult than some of the previous cycles if you go back in the history? Can you contrast what the big difference is looking at this cycle compared to 1996-98? I know that the Taiwanese test houses are one of the big differences in the fact that their business is particularly weak, but are there other differences that you see between the environment we are looking at today, and the environment that we were looking at back then?

Just a couple of things. I will get a couple of numbers on the table first and then talk about why and what that means differently because the peak quarter for us in the 1998 cycle was we shipped $130 millions Q1 1998, as on the track was $316 million, which is down 27% three quarters later.

What does this cycle look like?

Well, we in Q3, although we shipped almost $850 million, and if we ship $425-450, that is about half and that is four quarters later so deep and long was the first thing. The second point is the fall-off in Q4-Q1 was tremendous, $760 million or so in Q4 to the $506 million. I am using them, as we are comfortable, with the stop SAP 101 confusions. So, the 35% drop in Q1 is a phenomenal drop so it is phenomenal drop, but now you have to say why is that, then I think if we say test houses, we are missing the points. The point is that every time on inventory management, there is a principle that says every time you add an inventory amount, the complexity of managing inventory goes up by some factor greater than double. You cannot believe that if you add one more inventory node in a stream of five, the complexity does not go up by 1/6, it is a very big impact, and what has happened is IDM's have gone to the foundries, then foundries have gone to subcontract packaging houses, and so forth. There have been more inventory nodes into the system, and with that mapping and understanding, then I think we have given the industry, tremendous inventory problems in this cycle much more than any other in fact. That is the whole out-sourcing, rather on one hand, helps with the inventory management because it consolidates a lot of buying and the large people doing the subcontracting. It creates more inventory nodes and assistance to handle that at your starting place. I think that is really the big thing going on. Now, the question here ofcourse is what is that due to the buy rate, and you know buy rate we said the last time was what the customer's spend on average a little less than 3% on their ICU revenue, and on test systems. Now, it is so clear that it is not unusual for customers to spend say an amount of 2. But, if you look at what people are projecting, a sort of last quarter is so and next couple of quarter is out, it is well below too, and so you have to say it has been an opportunistic game in the system from out-sourcing, that it could be that low, or we could say it is the opposite i.e. more nodes put in place, and therefore it really is below or between 1 and 2. There has to be a fed up in the end, that is why the common place here, you know, sometime and that is the, I think the inventory node argument has created an awful lot of problems that people are working with today and they got off the second time and that coupled with obvious under buying is going to create a big opportunity, one that starts going the other way. I wish I underwent.

Thanks. That was a good explanation. Thank you.

Operator, I will take one more question.

I feel the last question comes from Eric Ross, Thomas Weisel Partners.

Thank you, most numbers have been asked, but can you just quickly talk about some of the synergies between PCS and the test business, why are these businesses really not going together?

Well, there are a couple of reasons depending on the, you known, the level of obstruction you are talking, and I suppose they have defined, we are talking more for the interest of the employes of the___ 01:01:33 if at all they come together at some point. The issue in both businesses is talent, acquiring, and keeping the best talent, and for example there is an argument here from the parent side, that by being together helps us in both businesses. It helps the people in PCS because they say that the value of their options, the financial log, they can create in spite of the dynamics of the semiconductor business, so therefore its pretty appealing, certainly in 1999 and 2000, if that was the case. At the same time, it helps us recruit and keep the talent we need in PCS. On the other hand, from the semiconductor side, the talent reserves you to keep, because we can demonstrate, we have been able to maintain our investments and get the project finished and we can take on new on even as the industry goes into down cycles. If there is one thing engineers fail, it is due to uncertainty i.e. the project going to be finished and if they are going to enjoy the next project, and as I have said we may have a better story there, and this certainly helps us a lot. And also there are some of the practical ones, the customer base is becoming more and more common everyday. If I look at the companies that are designing the hottest products, they will require the hottest devices. The list of the new start up accounts, the PCS was dealing with was wonderful companies for us to be selling equipment to, whether it is low test equipment or whether it is semiconductor test.

Thank you.

Operator, I think we are done. I want to thank everybody for participating in the call and we look forward to talking to you in July. Thank you very much.