泰瑞達 (TER) 2002 Q1 法說會逐字稿

Good morning, my name is Michael and I will be your conference facilitator today. At this time I would like to welcome everyone to the Teradyne first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question you may do so by pressing star and the number two on your telephone keypad.

As a reminder, if you are on a speakerphone, please pick up your handset before presenting your question. I would now like to turn the call over to Mr. Tom Newman, vice president of corporate relations. Thank you. Mr. Newman you may begin your conference.

Thank you michael and good morning everyone and welcome to Teradyne's discussion of our financial results for the first quarter of 2002.

After some preliminary remarks, I'll introduce the agenda for the call and the other participants. Teradyne's press release containing our financial results for the first quarter was sent out by a business wire and was posted on our website yesterday evening. If anyone needs a copy, please call Teradyne's corporate relation's office at (617)422-2221 and we'll be happy to provide a copy. This call is being simultaneously web-cast over our website at www.teradyne.com. A replay of this call will be provided on our site starting at 2:00 p.m. Today, eastern time. If it's more convenient you can also access a replay of the call by dialing 1(800) 642-1687 and providing the access code 3725649. Replays from both sources will be available through may first.

It is our objective to use this call to comply with the requirements of FCC regulation FD, therefore investors should accept the contents of this call as the official guidance from the company for the second quarter of 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 George Chamillard, Greg Beecher and myself are authorized to supply company guidance. The matters that we discuss today other than historical information, include forward looking statements relating to the future financial performance, economic conditions, improvements in the company's business, statements as to bookings, backlog, design ends and demand for our products, as well as other opinions of management, these are made under the safe harbor provisions of the private securities litigation reform 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 our filings with the securities and exchange commission, including but not limited to our form 10k filed on march 29th, 2002. Any forward-looking statements should be considered in light of those factors and we incorporate here the discussion of those factors.

Now let's get on with the rest of the agenda. First our CEO and chairman George Chamillard will review the state of the company and the industry and will provide guidance for the second quarter of 2002. Then our vice president and chief financial officer Greg Beecher will review the details of our performance in the first quarter, we will then answer your questions. For your information, George is participating in this call from our office in Munich Germany while Greg and I are here together in Boston. George, how are things in Munich?

Well first good morning to everyone on the call. I am here in connection with the Semicon Europa show that started yesterday and the feed back that I'm getting indicates that our customers are more upbeat than they were a few months ago.

As we reported last night, our first quarter results represented the first sequential increase in revenue in six quarters, after our peak in the third quarter of 2000. Hopefully these results and the improving customer sentiment, being that this is the start of a recovery. Let's go back and review our quarter for everyone. Our guidance for the first quarter was for sales to be between $200 and $250 million with a loss of between $40 and $50 cents per share before any special charges. We delivered sales of $248 million and we lost $40 cents per share before special charges. We encouraged special charges in the quarter of $5.9 million, resulting in a total loss after special charges of 42 cents per share.

Comparing Q1 to Q4, our gross orders were up, our cancellations were down significantly and we had an increase in pull-ins from backlog. As a result we plan to increase sales in the second quarter by approximately 20 percent, to between $280 and $310 million. We expect this to result in a loss of $31 cents, plus or minus 10 percent, before any special charges. Now given this guidance, how do things look for the year 2002? Well it's difficult to tell that far out, but at a recent investor conference in new york that some of you attended, I said that if we had a flat '02, I wouldn't be blue. Meaning that if we achieved the sales level in 2002 of $1.4 billion, flat with 2001, I would be pretty happy. I won't go so far as to say that that is the most likely scenario, but a ramp of 25 percent per quarter is not inconsistent with history. And if that were to occur we would move into the black in the fourth quarter. How likely is this scenario? In the first quarter demand increased in four out of five of all businesses. However, these improvements were not across the board.

While several customers ordered in volume in each of our businesses, we still have many customers with excess capacity and weak demand for their products and services. So obviously we'll have to wait to see if the market demand continues to improve enough to support a 25 percent quarterly sales increase. It's interesting to note that in addition to the improvement in bookings in the quarter, there was also additional demand in semiconductor tests from customers accelerating deliveries in backlog. Customers asked us to take $34 million of backlog, which was not scheduled to ship within the next six months and to deliver that by the end of June.

Over the last several calls we have focused part of these discussions on our design in progress. That progress continued in the first quarter with 46

and connection systems and a record 41

in semi-tests. There was significant design-ins for VHDM and GBX connectors and significant design wins for catalyst and catalyst

test systems. Obviously yesterday's design wins may not have a significant impact on shipments for a few quarters, so what are the programs driving the sales volume in the short term? And what are the programs that might provide the momentum needed for a recovery?

At our connections systems division, we are seeing a surprising amount of strength in two and a half and three g wireless base station business. This is driven by an initial deployment of base stations to support trials in Europe and Japan. There currently is very little next generation base station infrastructure in either of those locations. Our sales in this area increased over the course of the first quarter and should remain strong in the second quarter.

In our assembly test business, the

segment is strengthening in the current environment, which is not surprising.

is running at a higher rate than at anytime in the last five years. In the quarter we received follow on orders for the

program, which is the standard test system for

and for the ICBM program of the Air Force. Additionally we delivered a key new analog functional test systems to Boeing, the first that we expect of many.

On the commercial side of our assembly test business, the biggest growth opportunity is in inspection products and specifically in our high-speed automated X-ray inspection systems. In the quarter, three customers placed multiple follow on system orders in connection with programs to improve the quality of the surface mount technology production lines.

The primary end market driving those purchases was automotive electronics. In our broadband test division, our Solarity product won orders from two major customers in the quarter. British Telecom, the first customer force for Solarity, elected to expand their use of the product over a larger portion of their network. In addition Verizon west placed initial orders to deploy Solarity for DSL pre-qualification testing.

In all, Solarity is now installed on 30 million lines in the U.S. and in Europe. Our automotive diagnostics solutions division, which came from the acquisition of Genrad in the fourth quarter, our backlog increased from about one quarter of our sales to over two quarters of sales, due mainly to orders from an automotive OEM based in Japan. This order is for portable diagnostic test systems to be deployed for use by service technicians within the OEM dealer networks in North America and Europe.

In semiconductor tests we saw a number of events that we think represent future trends. In dram tests we shipped an additional probe one system to our initial Asian customer and we currently have probe one trials underway with several other Asian customers. Probe one's ability to test 90 256 meg drams on two test nets at the same time gives us the lowest cost to test in the dram market today. And ultimately the PC market is growing and costs of tests is a major issue for d-ram manufacturers.

In the SOC market we saw significant capacity buying for our catalyst SOC test systems. Driven by applications as diverse as next generation cell phones, wireless lans, mass storage disk drives, cd rom controllers, data communications and consumer products. Our large subcontract customers were responsible for essentially all of the 34 million of semi-test backlog pull-ins. They moved to put capacity in place to meet an upturn.

Also in the quarter we had a large volume of tiger orders for testing complex SOC storage devices on up to four sites. Capacity buying extended to the j750 high volume test system, where we had the highest level of orders in four quarters. One of the most interesting events in the quarter that will impact future j70 volume was the fact that we won all of the design-ins awarded for the smart card to be used for the Chinese national id system. Volume systems should start for that design-in before the year is over.

The most significant event in our semiconductor test business however, was the introduction of a test platform called Integra Flex. Based on the same technology as our highly successful Integra j750 product line, it employs cmos circuitry and is controlled by a personal computer using the Windows NT software platform. The new Flex platform targets the most cost sensitive devices and it provides customers with maximum test floor flexibility so they can respond quickly to the rapidly changing mix and volume issues that are common with SOC device manufacturing. We shipped the first of these Flex systems to an IBM customer in the fourth quarter of 2001. In the first quarter we've received multiple system orders from two other IBM customers and we have already shipped to one of them. This week marks the first public showing of the new platform.

Here at the Semicon Europa show, we are demonstrating the high parallel test capability of the product by testing 12 mixed signal devices at one time. We're also demonstrating multiple site testing of a 16 bit micro controller and embedded ram tests of a complex SOC device. We believe that the system has a compelling combination of capability and price that customers will find appealing. And I think it's likely that Flex will be able to add significantly to our momentum over the course of 2002. So in summary, where are we? In the first quarter we saw an upturn in most of our businesses.

The main drivers of improvement are related to wireless and broadband applications for the internet. We don't know the shape or the ramp or the duration, but we are increasing our shipments in the second quarter. As the upturn evolves we are also very well positioned to benefit from our strong product portfolio across all of our businesses. It's the new products, such as Integra Flex, GBX, nexlev, Solarity, automated X-ray inspection and

. And now I'd like to turn the discussion over to Greg and provide some details on the financial performance. Greg?

Thanks George and good morning everyone. As we discussed last quarter we've organized our financial reporting around four business segments. Semiconductor test, connection systems, assembly test and other. Other includes the broadband test business and our diagnostic solutions business.

In this discussion I'll be referring to those segments. But first, let's start with the overall company. Teradyne had sales of 248 million, at the top end of our guidance. Sales increased 13 percent over the fourth quarter but were down 59 percent from the first quarter of 2001.

Of the $28 million increase in sales from the fourth quarter, $21 million came from the connection systems division. We had an operating loss off $73.4 million, or $40 cents per share, on 182.3 million shares. We took special charges in the quarter of $5.9 million before taxes and $3.8 million after taxes, related mainly to workforce reductions. We therefore had a net loss of about $77.1 million, or $42 cents per share.

As George discussed, our gross bookings were $238 million, up 12 percent from the fourth quarter. Net bookings were $210 million, up 65 percent from Q4 and down 41 percent from the Q1 2001 level. From a product point of view, semi test net bookings were 43 percent of total net bookings. Connection systems were 22 percent, while assembly test and other represented 17 and 18 percent respectively. Cancellations in the quarter totaled $27.2 million, compared with a total of $84.5 million in the fourth quarter. In Q1 2.9 million of the cancellations were in semi test and $23.9 million were in connection systems. The connection systems cancellations were primarily from telecom and data com customers.

Our book to bill ratios by segment were 1.0 for semi tests, 0.5 for connection systems, 0.9 for assembly tests and 1.5 for other. At the end of the quarter our backlog was 725 million and our headcount stood at 8,412. Gross margin the first quarter was 12.7 without a special charge. The improvement was due mainly to increased shipment volume. R and d expenses were $69.3 million or 27.9 percent of sales, up 1.2 million from Q4.

expenses were $75 million excluding special charges for 30.3 percent of sales, up $4.1 million. The increases of expenses were due to the inclusion of a full quarter of Genrad's costs. You may recall that in the fourth quarter we acquired Genrad at the very end of October, so therefore including three months of their expenses is first seen in the first quarter.

Net interest expense in the quarter was $1.1 million, a swing of $4.7 million from the previous quarter, due to both the reduction and our fixed interest income and to an increase in the interest expense attributable to our recent debt transactions. The tax rate in the quarter was 36 percent.

From a geographic point of view our bookings for the first quarter showed a pickup in orders from Asia. They were distributed as follows: U.S., 52 percent, Europe, 15, Japan, seven, Korea, one, south Asia, 18, Taiwan, four, the rest of the world, three. The geographic distribution of our sales in the quarter was: U.S. 54 percent, Europe 20, Japan three, Korea one, south Asia 13, Taiwan six and rest of the world three percent.

From the point of view of the balance sheet, we ended the quarter with cash and marketable securities of $616 million, an increase of $30 million over the previous quarter. Our cash position was aided by the fact that we received an $85 million refund from the IRS in the first quarter. Our receivables were $176 million, or 17.7 percent of sales, a 6 million increase over Q4. This represents 65-day sales outstanding. Inventory was $373 million, or 37.6 percent of sales, down $34 million from the previous quarter. Reduced net

by $23 million in the quarter. We used about $66 million of cash in operations, excluding the $85 million tax refund. Capital expenditures in the quarter were $22 million and depreciation was 36 million. Looking forward, as George said, we expect sales in the second quarter to be between $280 million and $310 million and to lose about $41 cents, plus or minus 10 percent before any special charges.

The growth in the forecasted revenue from Q4 to Q1 is heavily concentrated in our semi test division. Gross margins are expected to run between 18 and 22 percent. R&D and SG&A should each run between 23 and 26 percent, our tax rate should remain at 36 percent. We expect to reduce inventory during the quarter by about $30 million and we plan to spend about $24 million in capital issues. Depreciation should run around $37 million. We expect our cash balance at the end of the second quarter to be just under $600 million. And now I'll turn it back to Tom for questions.

Thanks Greg. Michael, we'd now like to open the discussion for questions.

Thank you Mr. Newman. I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad at this time. If your question has already been asked and answered, you may withdraw your question by pressing star then the number two on your telephone keypad. As a reminder, if you are on a speakerphone, please pick up your handset before presenting your question. Please hold for your first question.

Your first question comes from Jim

of Goldman Sachs.

Good morning. Couple quick questions, the first would be any kind of order guidance going forward or maybe just some kind of idea on what kind of book to bill we could look for in the june quarter? And secondly, maybe a little bit of discussion on the operating leverage that you think that Teradyne has coming out of the down turn? Thanks very much.

Well, why don't I comment on the bookings and then Greg you could comment on the other.

OK.

First, I think the, if you look at what is letting us increase our shipments almost 20 percent in the second quarter, it's a combination of releases from backlog. A significant decline in cancellations and new orders coming in. So book to bill is a bit of a confusing number. By having said that though, I think the question is going to be are we going to get from all of those sources pull-ins et cetera, enough orders for us to continue these increase in shipments in Q3 and we'll just have to wait and see. But I wouldn't, I wouldn't focus on book to bill because I think it--at this time of the cycle it isn't very formative.

On the operating leverage we've taken many actions to improve our cost structure. We reduced headcount from the peak by upwards of about 38 percent from mid part of last year. We also have done a lot of things in operations, including top sourcing, printed circuit board assemblies up to above 90 percent, we've consolidated locations. We also have a second source for our contract manufacturer and we're also deep into putting in

which should be in our operations by about may. So we think we've done a lot of things to position ourselves better for the next cycle and we continue to look at costs across the company and selectively prune where appropriate.

OK. Thanks very much.

Your next question comes from tim

of Deutsche Bank Alex. Brown.

HI guys. A couple things. First of all, George can you give us any idea of potentially could we see book to bill greater than one next quarter?

Sure we could. We stay away from trying to give guidance on bookings and so I would just as soon not try to comment on that.

OK, OK, great. Fair enough. Now judging from your comments that you just made, it sounds like bookings might kind of trail revenues here out of the downturn because customers, particularly customers on the semi test side are shipping out of backlog, is that an accurate statement?

Yes.

OK. And could you give some idea of what either orders or revenue breakdown was within ape, you know either qualitatively or--or otherwise, be it mixed signal, be it logic, be it memory?

I think Tim, maybe I can deal with that. Let me give you a point of data however on your looking at the past at least on book to bill. Greg said it but I wanted to make sure you got it that the book to bill in the first quarter for semi tests was one to one, that did not include the additional demand reflected by the 34 million in pull-ins that we had in semi tests. So depending on how you looked at that you could conclude that an equivalent book to bill was much higher than one to one, that's the first point. I think that the, in terms of the order front, the orders were overwhelmingly for the SOC business, although we had some order rate for j750s, for 973s and for memory testers of a couple of different flavors. The predominance was the resumption of catalyst buying and some ongoing tiger buying.

OK. And I guess, I guess one last thing. Can you just talk a little bit about how you're going to migrate from the tiger catalyst solution over to the tiger Flex solution? And kind of what the timelines and milestones there will be?

well I think the customers will ultimately determine how that works. And then the customer interactions we've had so far, customers see them applying to very different applications. And all of the orders that we've had so far are not overlapping with anything that catalyst is doing for the same customers. So it's fitting into, let me say lower-end, higher-volume applications, if you will. Kind of the top end of the analog and the mainstream of the mixed signal market as opposed to what you might think about catalyst is serving more traditional SOC requirements. And the advantages here are things like high parallelism, you know, testing 12 devices at a time, give you the ability to test some jellybeans where customers currently have legacy testers deployed and expands the market available to us. So, so far there's no overlap and we think that's going to be the case for quite a while yet.

Thanks guys.

Next question comes from John Pitzer of Credit Suisse First Boston.

Just a couple questions. I hate to ask the booking question again, but do you expect to see sequential growth in bookings going into the second quarter? And maybe you can help just qualify it a little bit by division, which areas you expect to be the strongest versus less strong? And then I have a couple follow-ups.

Well we're expecting the growth in revenue next quarter to come from is largely concentrated in the semi test division, upwards of 80 percent of the growth from Q4, excuse me, from Q1 to Q2, is the semi test division. That's where we see the revenue growth coming from. And it could be bookings or it could be backlog pulls, but we certainly see the growth in semi test.

And then I'm not sure if you guys gave this out, but did you breakup the semi test business

versus IDNS?

We didn't, let me see if we can find out a quick way to give you a flavor of that. Yeah, hold on just a minute john.

OK.

Is it 70-30 IDMS.

And then lastly a question for George. George when you look at a scenario where you have flat revenues this year in 2002, in order for that to happen, is that a possibility just on the strength of semi tests coming back? Or do you need to see the TCS division also start to see some pickup in the back half of the year?

Well I think you could find, you know you could make a bunch of excel spreadsheets that would show you could do it without semi. But to have it flat with next year, let's say we shipped next quarter around $300 million, we would have to have in the second half of the year, each quarter grow 25 percent more in total. Now we've certainly seen in the semiconductor side of the business when things turn on very fast that we've had quarterly growth rates equal or greater to that. So that certainly is possible, but I think, and I would expect to see that that would also, that would come from--you know, the demand for the semiconductors ultimately goes to the people who make the routers and the servers and the racks and the switches. And so I'd expect to see that some of that showing up in board testing and certainly in TCS as well.

And then one last question. You guys typically have some pretty good data on what the utilization rates are of your tools in the field, wondering if you could give us an update there? And kind of curious as to whether or not you believe some of the existing installed base, given that most of this recovery is happening at the leading edge, is going to be obsolete? So that some of these utilization numbers are not necessarily valid, i.e.: People going to have to spend even though overall abundant utilizations are low?

Well, maybe I can help there john, let's take a look at the data first of all. If you looked at the data from let's say February through the middle of April, the last three months, I think the--what you'd see is that the device manufacturers, we've seen an increase over that period in the j750 utilization, up to about 78 percent from 70. And the other systems catalyst and the 973 have been pretty flat. Catalyst, it's about in the mid 70s and the 973 in the low 80s. And that increase in the 750 is reflected in the buying that I think we saw resuming here in the first quarter.

If you look at the

the data has been pretty flat since February with the exception of an eight or nine point jump in catalyst from February to April and again that's reflected in some fairly large orders that we had from the

in the first quarter. And the other systems have been kind of in the mid 60s. If the data's a little bit odd to look at, because it's fairly bimodal and--especially in the

space with the

, you're talking about a group of manufacturers who are running at 85 or 90 percent and desperate for capacity. And then a bunch of others that are in the 60 percent range that aren't close to ordering at this point.

So one of the points we made in the discussion is that it is not certainly a universal improvement in business so far at least. But I think your point's valid on utilization. I think it will be hard to look at the averages and project order growth coming out of that because what we see so far is it's a customer by customer and product by product, in terms of their product, driving the upturn that we saw in the first quarter. And that would appear to be, or likely to continue for some amount of time into the future.

And I don't want to monopolize you guys, but just quickly, breakeven levels and--or do you have any plans to try to take them lower or do you feel pretty comfortable right now?

The breakeven level's around $450 million, and we don't think that it's--we're going to change it much. We continue to selectively cut, but we think that's about the right level for now.

Great thanks guys.

Your next question comes from

of wit soundview financial.

Yes. Good morning, and it's actually soundview. I have a couple of questions. First of all could you talk about excess capacities that you'd talked about and add some color where exactly you see that excess capacity?

help me with the question a little, what excess capacity, in what regard? Inside utilization?

In your remarks, introductory remarks you said that although you've seen significant orders coming in for some products or some businesses, but there's still in other areas, there's still some excess capacity. So I'm wondering if this is semi test, what areas in semi test you've seen there's still excess capacity?

I think it's--as I was trying to respond to the utilization question, you have as an example subcontractors at 60 percent utilization for catalyst and no good prospects for the next few months for needing to order. And you've got others that are at 85 or 90 percent and that have been ordering. And that kind of bimodal distribution is true with a lot of our IBM customers depending on the applications of the strengths that they have in the device market and it's also their aligned subcontractors who are in the same situation. And similarly I think we've added in connection systems. I think we've got customers in that business which have much more capacity than they need at this point and their business is not ramping at this point. So it's narrowly based at this point and not universal.

Sure. And to that extent would it be fair to say that the up take in your, the out taking demand in your connector business is basically focused on only a handful of customers, the ones that are exposing in the two and a half g to three g build up?

I think that's fair.

yeah.

This issue of it's being spotty when it starts to recover, is in my experience, how every recovery is. It isn't the you know, rising tide, raising all boats equally. And sure if the customer demands, you start seeing a spot here and a crack there and a capacity bottleneck there. But then pretty soon it starts filling up across the industry.

Sure. One of your largest customers in the connector business still had huge cancellations in the third and fourth quarter of last year. And we're expecting them to come in and place orders in the first quarter, that doesn't appear to have happened. Would you expect them to come in sometime in the second quarter, or is it more like second half of the year story?

Well, I don't think I'm going to be very specific about a particular customer. I think that the--one of the things I would say is that in the connections business particularly, orders may not be the most helpful thing to look at. I think if you were looking at sales in the quarter in connection systems, that you would see large increases in sales from all of our traditional customers and market segments. So if you look at the top few customers that we have, you would see very healthy increases from essentially all of the big ones.

Sure. Thank you.

You know, this gets to the issue we were talking about earlier on the bookings and book to bill. We all agree that in the connection business, the EMS part of it for sure, it's a pull business. customers pull orders and you know, pull shipments and you have large orders and they, they just pull them when the demand is there. And we also talked a few meetings back that the--it was similar, that I felt it was similar in the semiconductor test equipment business. That customers take the product when they want to take it. Now when--you know, so you may have orders in backlog or you may have to have orders come in, but it is the pulling of the orders. I would be--maybe I wouldn't be happy, but if we could double our shipments in semi tests and have a 0.5 book to bill, I guess I'd be OK with that. Because I don't think it would mean much.

Our next question is from

of prudential securities.

HI good morning. Just a couple of questions. Could you give us what's the percentage of your background is semi test? Also if you could share what's the TCS mix by end market? And then I have one more question.

Yeah, the semi part of backlog is a little over 40 percent, about 44 percent.

And TCMS business mix by end market?

Hold on a minute, we'll see if we can get you some--

Maybe we should go onto another question while you guys look for that.

(multiple speakers)

Yeah, let's try to go on. I think you're right.

On the semi test side, on the last cycle, you know the most overwhelmingly successful products have been the catalyst, at least that's my recollection. What product do you think in this cycle, upcoming cycle, where you have the most confidence that we're going to see significant growth? Any thoughts on that?

Well, I mean, I think that if you looked at the semiconductor test market and our positioning in that historically, you would have to bet that the SOC market, Catalyst, Tiger, Integra Flex, et cetera, would be the drivers for that. It's the biggest market, it's projected to have the highest growth going forward and we have the highest share in there in that market by almost a factor of three. So, I think the interesting thing about this recovery could be that we may have a larger participation in memory than we did in the last cycle. But I think that remains to be seen, but there are some signs that that might be the case. And also, you know, we're pretty well positioned in the high-volume logic market as well as the high-performance logic market. So--but in the non-memory market, that's where, that would be the things would improve the most the fastest.

And are you folks quite comfortable that 2.5 g, say of testing of the chips that

require in tester base, or is it more like an upgrade cycle?

I think it depends on the product, but I think in general there's a lot of upgrading of options to catalyst going on who addressed that issue. And there's some buying of tigers who addressed that issue also. But I think so far, what we've seen is upgraded catalyst with some higher performance options to address that.

I think one point there is the--I think as you know, we shipped the one thousandth catalyst a few months ago. And so with a thousand of catalyst machines out there that with upgrades can do, depending on the device configuration, can do two and a half g. I think, I think there'll be a lot of pull for that on catalyst, either through upgrades or new systems to do that.

How much does the upgrade chips cost?

ballpark?

A hundred to $200,000.

Great. I don't know if you have the TCM business mix or not?

Well, let's see. The leading sector is telecom at about 35 percent of the business, telecommunications. Second is data communications, including networking. And third is storage at about 20 percent. And computers and servers are about 10.

And you know when you said that your leading customers you are seeing increase, that includes telecom at this point?

yeah.

OK, great, thank you.

But again, remember that there are customers, you know with great upturns in terms of business with us in telecom and others that are still not very healthy. So--]

Right. Thanks.

Yep.

Your next question is from glen young of the Solomon Smith Barney.

Thanks, just a quick question on the TCS utilization rate, is that something you can share with us, where you are right now in utilization?

Oh you mean in terms of factory utilization?

Yes, exactly.

Well, first an aggregated number would be misleading, so let me try to disaggregate it. In the TCS business we have a PC capacity, the shops that make the back panels. We have connector manufacturing and assembly and we have what you would think of as more

or selectron ems kind of assembly. And the capacity in each of those is quiet different. BC shops are probably at about 40, maybe a little more, 40 percent, 45 percent utilization. The connector assembly depends on the product you're talking. We're pretty near 80 or 90 percent capacity on GBX connectors. And somewhat less on vhgm and some others. And the assembly capacity in terms of back plane assembly and classic ems is probably 60 to 70 percent utilization.

And a similar question on the test side actually, what the utilization rates are in your test factories?

Well it, Greg, I don't know if you want to try to answer that. I think to--the flip answer is to say we would have--we have plenty of room to grow. A good bit of that comes from the fact that we have continued to expand our outsourcing. In terms of not just board assembly, but in terms of the cabinetry and some other work. But we have, I would guess we have, in terms of facilities, we're probably 40 or 50 percent utilization. And in terms of people and staff, we would have to--oh maybe we're not quite at the level, were probably nearer to 60 or 70 percent of capacity.

Right, the people level would be higher, we tend to use temporary people when the demand comes back, and keep a base level of folks to continue with new product introductions. So I think you'd find the people were at a much higher rate, but the fixed assets and space, much lower rate.

So would it be fair to say that given your revenue guidance for the second quarter, but as we look beyond that, we're looking at the second half of next year--or of this year and into next year, that the margin leverage is really coming off the TCS side of the house?

We see margin leverage, I mean it's true TCS does have significant amount of fixed assets, particularly in the printed circuit board shop, that are depreciating. So any incremental sale certainly contributes to

capacity there, to grow that business. But you can also look at the semi test business and there's enormous ability to grow that business as well. And the semi test business generally drops higher profits than the connection systems business. So I think when you look across our businesses, I think we feel comfortable that we're poised to grow them rapidly and we have used, again, outsourcing much more in each of the businesses to try to keep some Flexibility.

OK. And just one other thought for George. You talked a little bit about the potential for the business to grow 25 percent a quarter in the back half of the year, given historical norms. If you were sitting here today and comparing the situation that you're looking at today versus previous cycles, recognizing that there's a lack of visibility today and there probably was then. Can you talk about some of the similarities and differences that you're seeing today either in discussions you've had with customers or perhaps from your own perspective?

Well one big difference in this cycle than in the other cycles, if you look at the

going down, it went down 70 to 80 percent. And as a general statement, conventional wisdom would say that the steeper down, the steeper up. The - so that certainly is one major difference between the cycles. I don't know if we will see anything like on the return side the way we saw it fall off. Because clearly what drove the downside of the cycle was the fact that we were selling capital equipment to the people making devices at twice the rate they were growing their businesses.

The

industry front end, back end grew about 70 percent plus, when the customers business grew at about 35. So we were way ahead of the curve at that point. But - so it's arguable whether we would expect just the normal recovery, which certainly has had 25 and 30 and 35 percent per quarter for a few quarters in the steepest part of it. Or would you have something greater than that?

OK, thanks.

Hey Glen?

Yeah?

One other point that relates to your question about leverage in TCS--

Yeah?

It just maybe a useful data point. It fell off less than the semi test business and was a 30 percent growth that we saw Q4 to Q1, the business is essentially back to break even at this point and it's generating cash also. So I think those would back up the point that you asked about.

Very good, that's much appreciated.

Your next question is from Steve

of Morgan Stanley.

Great thank you. The book to bill numbers that you gave on a product basis, were those gross or net?

Net.

Those were net. And then the backlog cancellation you answered, I think it was

saying 44 percent of backlog was

, what would be the TCS on circuit board components?

I'm sorry, you said backlog cancellation?

No, the backlog composition.

Composition, OK.

ATD would be about seven percent and the other would be about five percent.

I'm sorry, what was TCS?

TCS would be about--

Forty-three or four percent.

Forty-three percent.

OK. And then out of $450 million in revenues to get to break even, what kind of gross margins do you assume to get there?

Entering gross margin variably gets you into the mix of the business and the $450 is an estimate that could be a little bit lower or a little bit higher depending upon is it more semi business, more BTD business, or is it more ATD business? It depends upon the mix. The gross margins we generally would think would be--that a product level would be consistent with our past experience. There is some pricing pressure, but we've also taken some actions on cost to lower our costs so we don't see dramatic changes at a product level.

So what kind of range are we talking about here, is it mid $30s or--?

Oh, I see it. At the $450--I think I need to check that, I don't have that calculation.

OK. Now that we're on the, what appears at least to be the other side of the inflection point, is there any room for any operating expense reductions? Do you finish in the R&D programs, or any other consolidation say with some of the Genrad cost that were brought on board, is there any room for operating expense reduction?

Yeah, I think there is. I think on the semiconductor side, Greg mentioned earlier that we don't see that we're going to be, you know, there'll be some room for some small improvements. So we're not going to make significant changes in the structure on the semiconductor side at this part of the cycle. On the other hand, on the board test side, the combination of Genrad with our group, I think there's some improvement that'll come there. But that won't drive the break-even point very much.

I guess, can you remind me, you know, what your long-term business model is for R&D and sg&a? And maybe, and has it changed relative to adding Genrad.

Genrad generally would spend a little less on r and d and a little bit more on sales than what you might expect Teradyne without Genrad to look like. But Genrad by itself, adding to Teradyne isn't going to materially change what Teradyne as a corporation looks like given its relative size. So I think once you get past the peaks and troughs I think you're going to find we're going to be at the similar levels that we've been, that we have been at the past.

And at the peak of the last cycle, I think using the full year number, about 3 billion, 45 percent gross margins, 23 percent operating margins. Can you hit those type of margin structures again at a much lower level on this next ramp?

We think it's certainly possible, but it's you know, you've got things that would help to improve that. We have had some structural improvement in the--within the company in terms of cost structure. And--but we also have the mix issues to consider and the outside environment. And in many of our businesses things are getting more competitive. But if you stand back from that and look at the overview, we see no reason why it would be substantially different than it has been in the past. And therefore these sorts of margins should be possible. It depends on you know, the revenue levels and what the market will allow us to achieve there.

OK. And then last, it may be one for you George. You said flat in 2002 you won't be blue. What kind of assumptions are you making for '03?

You're going for it, I see that Steve.

Look, I think the question is the--you know, no one knows what the upside--no one knows if we've started into a sustained big buildup, if it turns out we ended with a flat '02 we certainly be ending the year at a very high shipping level. Certainly in the area that has us breakeven. And I wouldn't think that's the peak. I would think that--that we would have some expectations, it would be more like traditional cycles where there's certainly a few years up that you have some - some fun.

Well I guess the way to look at that is then if you were to exit the year at somewhere near that breakeven rate, you end up making an assumption that assuming things continue to grow that you're getting near 2 billion or more in 2003. So that's a pretty good flip, or a pretty big uptake into '03. I don't know, what would that be, 50 percent, 45 percent or something, that seems reasonable at this point?

Well it certainly--you know we went from in, let's see, '99 to 2000 and then to 2001, we went from one-seven to 3 billion and then we went 3 billion to one-four. So halving or doubling,

not far off from what we've achieved in the past and I think we still have plenty of buoyancy in our broadband test business and the assembly test business and in semiconductor and TCS. I think, I think any--you follow the business and stop firing on four cylinders or eight cylinders, whatever the right number is at the same time. I think that's--if we end the year at the rate that's close to breakeven, I think we'd have a very healthy 2003.

I'm going to try and sneak a couple more in. Clearly this next cycle may have some issues at least relative to the last cycle where we were firing at all eight of those cylinders. Have there been any other structural changes in the at market? Is the pricing going to be different, or anything that would allow for the potential to you know, I guess have a higher peak or at least mitigate maybe not having it be down as much from the last peak in the next cycle there? You know what I'm trying to get at?

Yeah, well I think you have--if you say that some average earnings, let's say over a cycle in tests, you have some anchors that'll drag that down. And you have saloons that could pull that up. On the dragging it downside, there is the issue that during the down cycles you have tremendous pricing pressure and can you reestablish decent pricing when you get on the upturns? If you're not able to, that pulls it down. There'll be some part of the business that will be substituted by some design for test, style of testing, whether it's

, or whatever it is, that would tend to pull a portion of the business down. On the other hand, pulling it up you have the fact that the, if you look at the international technology roadmap and you see the kind of challenges facing people in testing the new devices, if you have very rapid rate of change that creates a technology cycle, that certainly pulls it up. And I think there's you know, if you put all those together, I don't know, I think there's enough evidence that you could have a worse than last time and there's a fair chance that you can improve the earning power over a cycle the next time as well. I don't see the rate of change has slowed down anywhere.

All right and the last question is just that you were hinting that it looks like the probe one and the memory area, looks like you guys can maybe gain some share here in this next upturn. I'm curious if you could just talk a little bit from a 50,000 foot level and the shift to doing more, more final at probe or, essentially just doing more probe level intense vesting?

OK, maybe I can tackle that Steve. I think the--we have traditionally had bigger advantages at testing and memory devices at

probes than we have at package tests. And it looks as if the industry is undergoing a fairly strong shift from the majority of testing taking place at package stage to over some amount of time the majority of testing taking place at

probe. And we built this product called probe one to try to capitalize on that shift. And the data continues to reinforce the fact that that product does give us the lowest cost, it does give our customers the lowest cost to test for drams that's available on the market today.

If in fact that is broadly demonstrated to be the case, then we ought to see more memory business in this upturn than we had in the '99-2000 period, as a percentage of our business. The memory market, as I think everybody knows, is a brutally--pretty brutally cost driven market. And any advantage the customers can get in terms of lower cost to test is key to their success. So we would expect that if the product continues to get the results that it has demonstrated with customers so far, that we would do relatively better in terms of share and memory in this upturn.

Thanks guys and thanks for being patient and entertaining all my questions.

Your next question comes from

of Merrill Lynch.

A couple of questions. First, when you gave the percentage of orders by the different product lines in the beginning, was that the percentage of net or gross orders? Do you remember?

Net.

OK, net. And then secondly, on the broadband test side--you won the bt and the verizon business orders this quarter. Historically that business has been somewhat lumpy, do you see it being more stable now, or is it still more you know, you get a big order and then maybe not for a bit? Comments on that?

Well I think the issue on Solarity product, which is the, one of the two major products in that division, it is driven on the on how rapid DSL is deployed. And as we all know DSL deployment has been the greatest promise yet to come in the broadband industry. So I think the issue is, if you really believe there's going to be a pickup in mass deployment of DSL, which we think based on the trials we're doing and the interest customers show, we think there's a chance to be. It could be a big lumpy upside piece coming. But we've been waiting for the rapid DSL deployment for a long time and it is dependent on that. On the other hand, that division has a second product,

which really tests the customer premise through the internet and helps isolate where the fault is. And that product is applicable to whether it is broadband through DSL, over your phone lines, broadband through cable, or broadband through wireless. But we're trying to broaden the product portfolio of that division so it becomes less DSL dependent.

And then--

Go ahead

.

Just a quick last one. On Integra Flex, you mentioned basically it sounds like you have three IDMS already that have placed orders to this quarter one, and the previous quarter. And it seems like the kind of product that would really be a sweet spot for the

given that they were ordering a tremendous amount of you know, these lower priced, you know system on chip mix single type of systems last time around. Can you comment on what the outlook on that side is?

I think overtime it will be great. I think that in the short term, the

are going to wait until they get pressure from the IDMS to order, they're going to want to see that, that the tooling decision that has been blessed by one of their customers, the IDMS. On the other hand or in addition to that, what we've seen so far is that the

that ordered in quantity in the first quarter were driven to get capacity in place in the short term. And in that kind of environment you certainly don't go out and retool around the new machines. So they were driven to do, to expand with catalyst because that's what the--the tooling that they had in place at the time. I think over time it is in many ways an ideal machine for that market and I think that will evolve over the next year or so.

OK. Thank you.

Michael, I think that we've overstayed our time here, so I think that we will let that be the last question. Operator?

Yes sir.

OK. So I'd like to thank everybody for participating in the call. And we're looking forward already to having this call in 13 weeks and talking about hopefully good results for the second quarter. But thanks for participating.

Thank you.

Thank you for participating in today's presentation. You may now disconnect.

END