泰瑞達 (TER) 2002 Q2 法說會逐字稿

Good morning.

My name is Latisha.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Teradyne second 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 session period.

If you would like to ask a question during this time, simply press star and then the number one on your telephone key pad.

If you would like to withdraw your question, press star and then the No. 2 on your telephone key pad if you are on a speaker phone pick up the hand set before asking your question.

Mr. Newman, you may begin your conference.

Thank you.

Good morning everyone and welcome to our discussion of Teradyne's financial results for the second quarter 2002.

After preliminary remarks I'll introduce the agenda for the call and other participants.

Teradyne's press release containing our financial results for the second quarter was sent out by business wire and was posted on our web site yesterday evening.

If anyone needs a copy, please call Teradyne at 617-422-2221, and we will provide a copy.

This call is being simultaneously web cast over our web site at www.

Teradyne.com.

A replay of this call will be provided on our site starting at one p.m. eastern time.

If it's more convenient you can access a replay of the call by dialing 1-800-642-1687 within the U.S. or 706-645-9291 outside the U.S. and providing the access code 4600790.

Replays from both sources will be available through July 31st.

It's our objective to use this call to comply with the requirements of SEC regulation.

Therefore, investors should accept the contents of this call as the official guidance for the company for the third quarter of 2002 and beyond.

If at any time we communicate a material change 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 and Greg Beecher is allowed to provide guidance the matters we discuss today other than the historical information include forward-looking statements relating to future financial performance, economic conditions, improvements in the company's business, statements as to bookings, backlog design ends and demand for our products and other opinions of management are made under section 21 E of the securities exchange act of 1934.

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 10-Q filed on May 14th, 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 state of the company and the industry and provide guidance for the third quarter of 2002.

Our vice president and chief financial Greg Beecher will review the details of the second quarter and provide additional details for guidance in the third quarter.

We will then answer your questions.

We intend to limit the call to one hour and we will have to cut off questioning at that point.

George.

Thanks, Tom and good morning to everyone on this call.

While no one is happy reporting losses, we were pleased with our performance in the second quarter.

Our guidance was for sales to be between 280 and 310 million dollars, with a loss of between 34 and 28 cents per share.

We came in right on the top of both ranges, with sales of 310 million and a 28 cent loss per share.

Improvements of 25 percent and 30 percent sequentially, respectively.

Our gross orders for the quarter totaled 273 million, up 15 percent from Q-1.

In all of our test businesses we had negligible cancellations while we had 42 million dollar cancellation in connection systems from a few large telecom customers.

The total net orders in the quarters were therefore 228.3 million dollars.

In addition to the 273 million dollars worth of new orders, semi conductor customers during the second quarter continued to ask us to accelerate delivery of orders and backlog.

Consequently, our guidance for the third quarter is to increase sales to between 325 and 350 million dollars with a loss of 29 cents per share, plus or minus three before any special items.

You may ask why we are not forecasting improved sales while our sales are increasing during the quarter.

This guidance reflects the fact that we have created salary increases to our employees effective July 1st.

The first increase in two years.

We also have ended our temporary pay cuts for all except our 300 most senior employees.

Looking at the individual businesses for the second half, our connection systems business, which grew 40 percent in the first half of 2002 will likely see only modest growth due primarily to pricing pressures.

An example of the pricing pressures we're seeing in that business might be reflected by the fact that the number of square inches shipped from our PC facilities from Q-4 to Q-2 has increased about 60 percent.

While our sales from those products has increased about 30.

While we're somewhat buffered from the price wars that are occurring in the high volume commodity segments, we're certainly not immune.

Although we continue to lower costs, this market environment is not aiding us to achieve any meaningful improvement to the top and bottom lines in the short-term.

Our product front connection systems continues to consolidate its technology leadership in the storage server data come and telecom industries our products allow customers to achieve significantly higher performance at the same or lower cost.

There is, therefore, a continual trend towards our technology.

For instance, one problem that customers have in building high performance networks is that the signal path from a semi conductor business from a (inaudible) to a back plane to a device on another dot con is difficult to model.

We've recently announced some joint work with Cadence and (zions) to help our customers address this problem.

We expect to make more announcements in this area in the second half.

On the contract manufacturing side of connection systems business, we made two changes in the second quarter.

Geographically we started shipments from Shanghai.

We also transferred the system integration and tests of our J 750 product to our group at TCS.

We believe we have an opportunity to make a unique contribution to contract manufacturing customers in the future by providing more system integration and test capability.

Particularly for complex systems.

The transfer of the J 750 integration allows us to accelerate the expansion of TCS's skill in this area.

As in the past.

TCS is fully engaged with our customers and their new products.

Our best measure of this is design ins.

We have 41 design ins in the second quarter and 300 in the last four quarters.

With about 75 new customers since the beginning of 2001 and 300 design ins in the past four quarters we've planted the seeds for growth in that business.

With the addition of Genrad our assembly business in the three areas traditionally manufacturing test systems, dual AR and x-ray inspection systems and (millaero) testing.

For the manufacturing test area the major customers are contract manufacturers.

And in spite of the unit volumes going up for these customers, they are cautious about adding to their production capacity.

There's relatively stronger demand however for new inspection technology.

Our optical inspection sales are growing in China and Taiwan, driven by the PC, PDA and the RF wireless markets.

While our x-ray inspection sales are growing due to new automotive electronic applications.

We have a fast growing (millaero) business which is not surprising in this current security conscious business.

We have secured new business in two strategic important military programs the joint services writer and the upgrade program for the U.S.

Air Force B 1-B bomber.

So for assembly test, we have a soft manufacturing test sector, improving product acceptance for our new technology inspection products and a strong (millaero) business.

We therefore expect modest growth for assembly tests in the second half of the year.

In broadband test, we continue to conduct customer joint trials for both our DSL deployment product, solarity and high call center product net solarity.

While in general these validate the cases put forth by the customers they continue to postpone spending.

We are still optimistic about deployment of high speed high bandwidth capability over the telephone network particularly in international market.

However, to expand our available market we have extended our net flare products to the broadband cable providers and have successfully completed our first trial.

After essentially no growth in the first half, there is potential up side here for the second half.

Teradyne's business includes testing of automotive electronics primarily for OEMs and dealer network.

In the second quarter the group expanded its new vehicle configuration testing system known as D cap further into one of its core customer a big 3 OEM account.

This new product line along with other new developments in remote vehicle diagnosis should allow the group to experience modest growth in the second half.

In the semi conductor test business our customers have been and continue to be cautious, primarily due to the uncertainty surrounding growth in end demand for technology products.

But in spite of this, demand has allowed us to grow shipments 74 percent from the trough in the fourth quarter, including the stronger sequential growth quarter in our history by a factor of 2.

This despite the fact that capacity was put in place in 1999 and 2000 that could support shipments of almost double what the industry is now seeing.

They have to ask why is this growth occurring?

Where is the business coming from?

In the end it's simple: Customers build on the test units, not dollars.

Whether it's DVD players, storage systems or semi conductors.

So if you look at the data from the semi conductor industry there's an interesting dichotomy developing.

Monthly sales of devices worldwide seem to have stalled at about an annual rate of around 130 billion dollars.

While the monthly unit shipments have been rising for the last five months.

Total unit shipments have gone up about 40 percent since December.

Since January, 1997, the world semi conductor trade statistics data have not risen more than three months in a row and has not gone up continuously by this percentage.

Also I would note that such memory units are relatively small portion of the total they've been fairly flat in monthly unit shipment during the period.

The nonmemory shipments have increased about 50 percent in that period.

But that's one reason for the growth in the ATD business is the increased growth in unit demand.

Now there's incurrable pricing structure in the semi conductor device market and Teradyne's focus is to offer solutions to their testing problems.

Our products range from tiger which is aimed at the very high performance high speed high accuracy devices, the catalyst system, which is positioned in the sweet spot of the SOC market to the Integra FLEX and system high volume medium performance devices.

It's clear that our customers price performance requirements are in fact widening even further in the past.

Given the sharp increase in our orders for test systems a cross this entire price spectrum it appears our strategy is the right one.

The high volume sales to Teradyne are the catalyst SOC system and the J 750 high volume logic test system.

Each of these has experienced orders for more units in the second quarter than they had in all of all of 2001.

The catalyst by the way this was also true in Q-1.

Our worldwide applications team programmed 450 new devices on the install basis systems in 2001.

While those devices are now being moved into production and they're creating a demand for systems which we knew they would eventually.

The other product that is increasing in demand is our catalyst tiger system.

The design insin we had last for are for tiger and SOC includes chip applications are also moving into production.

And beyond that there's demand for tiger systems in the microprocessor application which is a new focus for that system.

This will broaden the appeal of tiger in this up cycle.

So far in this cycle we're not seeing any volume shipments for our J 996 memory system or our J '93 (inaudible) system.

Two new products that we expect will expand our market share are the pro 1 D run system and the Integra FLEX.

The design ins we've had with these products should turn into volume shipments later in the cycle.

Now, if we stand back from the short-term details of the business, it's clear that our sales are increasing and it's clear that we are in a new cycle.

But we are entering a cycle that may be very different from the 1999 and 2000 cycle.

The depth and duration of the down cycle was unprecedented to our customers and to their customers.

And therefore, the shape of the recovery is very unclear.

But one thing that is clear is that cost is a predominant issue.

The issue before each of our business units is to improve their profitability in the cycle.

Obviously some of this improvement will come from growth.

The reality, however, is that technology companies like us need to increase the emphasis placed on cost reduction as opposed to just on new product development.

For example, in our case, we have made IT investments that allow greater cost reduction from improvement in supply line management.

Additionally, we have expanded our outsourcing programs, increased our engineering reuse.

Leveraged low cost areas such as Mexico and China and consolidated manufacturing in engineering locations.

All of which allow us to increase product deduct activity.

The impact of these programs will allow us to make more profit to dollar.

I'd like to turn it over to Greg to provide more information our business dollars.

Our sales of 300 million were up 25 percent from Q-1 levels but down 15 percent on a year to year basis.

We had an operating loss of 51 million or 28 cents per share on 182.9 million shares.

From a product point of view semi test sales were 47 percent of the total can connection systems 34 percent, assembly test, 13 percent.

And other tests businesses which consistent of broadband test and diagnostic solutions were six percent.

As George mentioned, our growth bookings were 273 million up 15 percent from the first quarter.

Net bookings were 228 million up nine percent from Q-1 and from a year ago also.

From a product point of view semi test net books were 61 percent of the total.

Connection systems 14.

Assembly test, 21.

And other tests, eight percent.

Also there were inter company eliminations of about three percent.

Cancellations in the quarter totaled 44 million.

With 42 million from connection systems.

In general, these were due to the cancellation of products and programs by some of our large telecom customers.

In semi test, in terms of the end market drivers, the primary applications are of wireless, consumer electronics, mass storage and broadband.

On a geographic basis our growth in south Asia and Taiwan has been the strongest with bookings representing about 45 percent of the total in Q-2, compared with about 18 percent of the total at the end of year.

From a customer point of view 25 percent of our orders from the last quarter were from the subcon sector versus 31 percent in Q-1 and a high of 42 percent in the second quarter of 2001.

Our approximate focus ratio by segment were one.Zero in semi test one.2 in assembly test.

Point 8 in other tests.

In connection systems, the book to bill was point 7 on a gross basis.

At the end of the quarter our backlog stood at 644 million of which two-thirds is shippable at six months.

At the end of the quarter our head count stood at 8,632 and an increase of 234.

Of this it was a net decrease of permanent employees and an increase in temporary subcontract employees to handle the increased shipment volume in the quarter.

Gross margin in the quarter were 23 percent.

Improvements from the first quarter was mainly due to increased shipment volume.

R and D expenses were 72 million or 23 percent of sales.

Up three million due to increase investment and semi test platforms.

SG and A expenses were 76 million.

Flat end dollars in the first quarter and 24 percent of sales.

Our tax rate was flat at 36 percent.

From a geographic point of view our net bookings in the quarter showed a continuing increase in orders from Asia the distribution is as follows: U.S., 35 percent.

Europe, 17.

Japan, 10.

Korea, two.

South Asia, 26.

Taiwan, eight.

And the rest of the world two percent.

The geographic distribution of sales in the quarter was as follows: U.S. 45 percent.

Europe 17.

Japan, five, Korea, one.

South Asia, 21.

Taiwan, nine and rest of world, two percent.

From point of view of the balance sheet we ended the quarter with cash or marketable securities of 581 million, down 36 million from Q-1.

Receivables were 17 percent of sales and an increase of 31 million over Q-1 mobiles.

This represents 61 days outstanding down four days from the first quarter.

Inventory was 343 million or 28 percent of sales, down 31 million sequentially.

We consumed important lien cash from the operations during the quarter.

Capital expenditures in the quarter were 18 million and depreciation was 37 million.

Going forward as George said we expect sales in the third quarter to be between 325 and 350 million.

The loss of 29 cents, plus or minus three cents per share before any special items.

Gross margins are expected to run between 20 and 24 percent.

R and D and SG and A will each increase due to the salary changes we discussed and should each run between 23 and 25 percent.

Our tax rate should remain at 36 percent.

We plan to reduce inventory during the quarter by 20 million or more.

We plan to spend 26 million in capital additions and depreciation should run about 37 million.

We expect our cash balance at the end of the quarter to be under 550 million.

We also plan on working our way to break even at levels of about 450 million by the end of the year our cash break even at that point in time will be about 450 million T now I'm turn it back over to Tom for questions.

Great.

We'd like to now open the discussion for questions

At this time I would like to remind everyone if you would like to ask a question, please press star and then the No. 1 on your telephone key pad.

Once again, if you are on a speaker phone, please pick up the hand set before asking your question.

We'll pause a moment to compile the Q and A roster.

Your first question comes from Timothy Arcuri with Deutsche Banc.

Hi.

Several questions.

I guess first of all relative to the comment just made, are you implying you're going to be break even by the end of the year or are you saying that break even will be 450 by the end of the year?

What I'm saying is we expect to be at about 450 million of revenue levels would get us to break even.

I'm not saying that we expect to be at break even in Q-4.

I'm confident that our cost structure will enable us to get there.

The risk is will we have the demand to grow orders that fast to get there as soon as the fourth quarter.

Okay.

Great.

I guess to follow on to that.

What needs to be done from where the contractors are right now gets to you a break-even of four 50?

Are the cuts primarily in terms of head counts?

In terms of manufacturing sites?

We have some items that you're probably aware of from past calls that we're completing, such as the Genrad integration.

There's been increased out sourcing.

There's a host of items like that that we've been executing for some period of time.

And by the fourth quarter there will be greater results from those initiatives.

Great.

And then I guess lastly on that point, can you talk a little about I know you have to give credibility by product too much, but can you at least talk whether the TCS business and the circuit board business was break even in the quarter or if it's close?

TCS in this quarter was slightly profitable but essentially close enough I'd say break even.

They have been cash flow positive.

And the circuit board business?

The circuit board business is not at break even, no, they're not cash flow positive.

So would it be fair to say that those are the losses, the vast majority of the losses are still coming in semi test, still?

The majority of the losses would be semi test and the assembly test division.

That's where the losses are.

It's the capital equipment that customers wait to the last moment to buy.

So those businesses are currently experience the largest losses.

Great.

Thanks a lot

Your next question comes from Mehdi Hosseini with Soundview.

If I heard you correctly, you actually added, what, 230 people to your total number of head count: is that correct?

Yes.

We actually reduced permanent head count and we hired some temporary employees to help us with the increased manufacturing requirements to meet the 25 percent increase in shipments from the prior quarter.

So that's essentially where those folks were hired for.

Right.

So just pricing pressure in semi test and system test that is keeping the margins down?

The pricing - in semi test, keeping the margins down is the volume.

That's 95 percent plus of the issue that the volume is so far off in semi test.

That's the anchor that's holding us back now.

There's a host of things that we're doing in supply line management to improve our margins, when more normal buying resumes.

And it's very difficult to see that right now because the buying is so low.

Of the 80 million you put out of backlog, was that mostly in semi test?

The reduction in backlog, yes, it was largely semi test, that's correct.

Thank you

Your next question comes from shack car prom Nick with Prudential Securities.

Just a couple of questions.

What was the break-even before the so-called 450 break even target which we could reach at the end of the year?

Also, if you could a little bit talk about on TCS as well as assembly test, assembly side of the business, what kind of forward growth expectations you're looking to for the next two quarters and lastly maybe give us a little since, so-called slow growth cycle, which test product you think will be the most, where you're going to get tremendous leverage?

We're probably going to divide that question up.

I'll take the first part on the break-even.

As you might imagine, the break-even changes over a period of time for many reasons, one, pricing pressure.

And some of our businesses particularly connections systems drives up your break even.

There's a host of other factors but our break even in various points in the last, if you go back to Q-1, our break even was about 460, 450.

So the salary increases we held off on over a year and the pay cuts do increase our break even but our plan is by the fourth quarter to work our way back to 450 by Q-4.

What's the downside to that, 20 million is the cost coming down?

The salary increases, yeah, about 20 million is close enough.

The salary increases are about 11 million and if you do the normal math that's about right.

Okay.

You asked what product we think is going to be the driver in the future.

I think the sweet spot of the SOC market which is where we have made tremendous gains.

I shouldn't say tremendous.

Certainly strong gains in terms of share in this quarter.

I think we'll continue to be the area that will drive the semi conductor business.

I think the 750 and catalyst for SOC testing out of the two products we think will continue driver recovery.

And the growth estimates for the TCS and assembly going forward?

TCS and assembly, I think in TCS, the issue in TCS is of course the major customers that have represented the historical side of the business have been the large people in service and in storage and in network switches.

And while (inaudible) customer businesses are still sustaining now in terms of revenue, for them the unit demand is increasing in all those businesses.

I think it is how quick the end demand, the enterprise products particularly, how quick that demand comes will term how quick we'll get a recovery.

We'll have a low double digit growth in both of those businesses in the second half of the year.

For it to be much greater than that would require a strong return of buying for enterprise customers.

So your expectations is still at double digit growth in both segments, at least for -

Low double digits for the next couple of quarters.

Thank you

Your next question comes from James Covello with Goldman Sachs.

A couple quick questions.

George on the last conference call you indicated it was going to be possible, you never said likely, but possible you could do 25 percent sequential revenue growth each quarter of 2002 and again potentially break even in Q-4 and it certainly seems there's been a change on the margin there.

Could you talk a little bit about what are the changes on the margin.

I think first let's see what the likelihood is that we could have a flat year.

If we ship 350 million which is the upper end of the guidance that we gave today, I would say we shipped 910 million after three-quarters.

But to have a flat year, if you even describe a flat year as 1.4 billion, would require a 35 or 40 percent sequential increase from Q-3 into Q-4.

Now, the key, of course, is are we going to get the orders, will orders increase shipments to those levels.

We have had growth like that in the past.

And but while it has happened in the past, it just doesn't feel like it's the most likely outcome from where we are right now.

Now, maybe the outlook we have right now is confused because we're in the summer and a whole bunch of other reasons.

But it just doesn't feel like that's the most likely outcome.

And so again what was the change on the margin that made it possible or maybe more likely on the last conference call and less likely today?

Let me take a crack at that.

Last quarter we were indicating we thought we could grow 25 percent the next quarter.

And in fact we did do that.

And as you get further out, with a lack of visibility, it's much more difficult to have any reasonable assurance as to what's going to happen two quarters out in this environment.

But with the 25 percent growth in the immediate quarter, there was some, in competence of that level there was some belief that deep manned possible could continue at that pace.

And there has been some indications that customers are slowing a bit in semi test and just being more cautious to ensure that they don't get one extra piece of equipment than absolutely necessary.

So there's been some slight signals from the customers that they're even more cautious.

Is that more on the IBM side or the packaging and test tell side?

I think if you said there's really three different questions that give you a sense for customer demand.

You might ask are customers delaying orders you would expect to take place?

You might ask are they cancelling backlog and you might ask are they delaying shipments you had planned to make that are already in backlog.

Let's look at those three questions separately.

Customers are not cancelling backlog.

There is one customer, a North American IDM that has asked us to push out some of the shipments we had planned in third and fourth quarter, push them out some period of time.

And there is some sign that customers are being more cautious in somewhat delaying putting the orders we expected to book.

I think that is different than it felt this time one quarter ago.

But no cancellations at all.

And there is no broad based sense or no broad based happening that people are pushing out current planned shipments that are in backlog, with the exception of one customer.

Great.

Thank you very much.

That's very helpful.

On the other hand, by the way, we've also had pull insfrom customers, too

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

Good morning.

I guess on that part of the follow-up could you talk about what your new books expectation is for the September quarter and then I have a follow-up quarter.

We don't talk about bookings forecast, the way to get at that would be to, if we expect - if we're giving guidance that would be able to (inaudible) shipments in Q-3 then between the cache nation of new orders coming in and backlog that are already accelerated or have scheduled deliveries obviously would be enough to support the guidance we've given.

Do you think you'll see sequential growth in your bookings?

I don't know.

We just don't comment on that.

What about on the semi test side I have to get some sense whether or not visibility is picking up.

You eventually had the second quarter to book to bill came down sequentially.

I'm curious as to what's giving you the confidence level.

What's tricky about the historical measures of book to bill, as George mentioned, previous comment, we had a number of pullins.

That's two quarters in a row.

So the historical measures book to bill aren't as great an indicator as they may have been in the past, because we have experienced two quarters of pullins from our backlog where customers are accelerating shipments.

There's other factors you need to put into the formula.

What we think makes more sense is to think about the revenue ranges we're providing, whether it comes from new bookings, from backlog, pull ins or schedules.

It's those three things that work in concert that give us the assurance to provide the range.

Secondly for clarification, what is break even today, the 470 level you hope to bring down to the 450 level I'm confused there.

It's 479, 480, rounded.

I guess the last question, can you help me understand why 450 is the magic number for break even?

What's your assumption as far as the size of the market?

Maybe if you could make it relative to what we saw in the 2000 peak.

Are you hitting a 450 break even target with the assumption that your end markets get to 80 percent of 2000 level or is it 130 percent of 2000 level.

I'm curious on that front?

The 450 is where we expect to be by Q-4.

There are a number of initiatives, particularly in supply line management, as one example, that we expect will improve beyond that over a period of time.

Now there's other things, obviously, that are anchors that may go the other way, whether there's greater pricing pressure in connection systems.

And why we say in Q-4 only because that's near end, and there's more meat around the execution and the time frame.

And we generally like to speak closer in than further out because there's many more things that can happen further out.

To answer your question it's not a natural number it's what we think is an aggressive target for a short period of time.

Do you believe that that 450 break even, as you move out throughout this cycle, will support the sort of margins you saw in the 2000 upturn or do we have to expect cycle to cycle you might not get as robust margins?

We expect to improve from the 450.

But a number of the plans we have, some are buy independent, some are time independent.

So we're not done at 450.

In terms of the next cycle, our expectation is the plans we have will get us to the margins we had in the last cycle.

Again there's many balloons and anchors that can affect the plans that we have.

Then just one last question on the Integra FLEX if we can get a detailed update how many systems do you have out in the field right now.

What do you expect to see the real volume ramp up on that platform.

Tom?

John, I was thinking about another point and let me just throw this in because I think it gets to the cycle issue that you were asking about.

I was a little distracted because of that.

I think one of the things in terms of recovery is that the magnitude of the market for equipment and particularly for test equipment in this cycle versus last, and one of the things that might be surprising is that if you look at the unit levels, unit shipments per month as of the last month in May where the data was collected, we're running at about 85 percent of the peak back in 2000.

So we're not that far away from the extreme levels in most people's definitions of what we saw as a market size at the peak in the last up cycle.

And that's part of the reason why we're having the shipment levels that we're having at this point, assuming that units continue to grow even if sales don't grow in semi conductors.

We could have a pretty strong recovery here and I think that's part of our assumption, particularly for catalyst and J 750s.

I don't know if that's helpful or not but I thought I would throw it in because I think it was related to the question you were asking.

For FLEX, we booked four.

We shipped two.

We had one new IBM customer book in the quarter.

And we are expecting volume shipments in the fourth quarter.

Have you seen the subcon dumped or at least bring platforms in house?

No it's all IBM so far.

When do you really begin to see your subcon or is that not the market you're targeting.

I think the subcon is a great market product for this market.

But they're going to follow IBM and wait for tooling to be done by the IBMs.

But I think that happens in the fourth quarter.

Maybe just one more follow on.

When you look at your semi test business, what end markets are you most leveraged to right now?

Is it consumer and wireless?

Is that a fair statement?

Yes it's consumer and wireless, correct.

Those are the biggest areas right now.

Great.

Thanks, guys

Your next question comes from Avinash Kant with SC Cowen.

Two questions.

You talked about new design ins in the TCS business.

How many design ins were there in this quarter in the ATD business and the second question what kind of utilization rate are you using in the IDMs in the subcontractors.

Maybe I can answer that.

We've only had - it's for lack of scripted attention, I think.

In we had 70 design ins in the quarter.

A dozen, 12 were in our RF wireless applications and seven were in consumer which backs up the question that John asked about kind of where the major focus is.

We also had three major tiger wins at IBMs in U.S. and Asia which solidified the penetration of that product into some significant markets going forward.

So we had a great quarter for design ins and semi tests and the omission was not because of any issues there.

Utilization continues to be strong.

If you looked at the IDMs, catalyst in June is running in the low 80s.

The 750 is running in the mid 90s, and the 973 is in the high 70s.

The catalyst in the 750, which backs up the bookings story we're seeing, have been at those fairly high levels for a couple of months now.

In the subcontractors, the catalyst is about 80 percent.

The 750 just under 90 and the 750 is lower is in the mid-'60s but that will fall off as we ship customers in micro processors of tying ter over time.

But again it's a story that backs up the bookings we're seeing for catalyst in and the J 750 both for IDMs and subcontractors.

Thanks

Your next question comes from Glen Yeung with Salomon Smith Barney.

Have you looked at the order activity and some of the push outs you see in the ATV business you compare it to the state of the world 15, 18 months ago, what's different here?

What's 15 or 18 months.

We were in the peak of the business coming down and clearly you were at the bottom looking up.

I'm wondering we've already seen this recovery of moderate or minimal proportions from the first half of the year.

I'm wondering if we're in a position where we're really going to go back to the troughs or is it just sort of a leveling out?

I think again it comes back to why do you think - why are people buying, starting to buy ATE again.

When in theory they had enough capacity in place to ship about twice the volume in dollars that they're shipping now, just to get the math right.

The industry - but the peak was shipping about, I don't know, 250 billion dollar in the quarter rate, annualized rate and today they're shipping about 130 billion dollar annualized rate.

So you say there's plenty of ATE.

Why are they buying?

Well, there's three reasons that I see.

One reason is they're certainly buying ATE for the new devices that the old products can't test.

And we have some examples where certain devices for example we won business in competitive shoot outs for those areas so that's the new technology.

There's some buying there.

The biggest one I think, though, is the fact that they're shipping at about 70 or 80 percent of the peak.

85, 84.

Let's say 80 percent, in terms of units.

Right now the industry is shipping about 80 percent of the number of units they were shipping at the peak.

So if when they're at the peak utilization was probably 110 percent.

They were skim pinning on maintenance, working shifts around the clock.

Using engineering systems to test devices and so forth.

So a rational semi conductor manufacturer running his (inaudible) start buying again.

The final one is the installed base of test equipment at the peak supported a mix of end markets.

And I would suggest that at the peak the mix of the end markets was tied around networking infrastructure, Internet bandwidth, high speed service, et cetera.

And therefore the (inaudible) was aimed to support that.

Today the demand is much more heavily industrial consumer.

So most likely there's some buying that's coming from that.

And I think if you said what's the difference 15, 18 months ago, I think those would be the issues.

We're getting back to the volumes that were being shipped.

There's certainly been a mix shift.

There's more SOC, for example.

There's more new devices.

And to me that's the change in the environment over the last 15 months.

If you were to - in talking to your customers, what's the sense you're getting from them about what their next six months outlook is?

I'm not asking any comment oh the state of their business, but just where their hedge are around recovery or lack thereof?

I think on one hand they say this can't go down as long as it's been down.

The enterprise customers have to start buying, if you look at the normal CAGR rate of buying for information technology, for example, it's at - maybe it's not all time lows but it's certainly way down.

That has to come back.

On the other hand, they say that the world is in chaos.

There's confusion around predictability and ethics in business, there's confusion about terror, confusion about the economy, on and on.

As they say we're going to be as cautious as can be and we're going to do just in time buying.

Glen it may not be helpful but as a data point here, in semi test of Q-1 to Q-2 we grew shipments at 65 percent and bookings about 55 percent, ignoring a substantial number of pull ins we had on top of that.

Those numbers aren't going to continue forever, obviously, at those rates.

We had a great quarter.

But I think if we even fell off to more modest numbers that are more representative of the rest of the industry we'd still have a pretty good second half and a pretty good third quarter in all likelihood.

That's with respect to orders?

That's business in general.

Orders and shipments.

Great.

That's good insight.

Thank you

Your next question comes from Robert Maire with Bear Sterns.

A couple questions.

First of all, I think I've heard different answers.

But just to clarify, in terms of push outs versus pull ins, did the number of push outs in semi equipment test exceed pull ins or did pull ins exceed push outs can you give us a balance to put that away for us.

Pull ins exceeded push outs.

And in terms of gross margin and lack thereof, what would you attribute that to, if you tried to attribute it to absorption price pressure what percentage of each do you see?

Or is it just kind of a bunch of everything?

It's overwhelmingly volume.

And our test equipment businesses, that's 90 plus percent of it.

In the connection systems business I would say the vast majority is volume as well.

But there are pricing pressures on the printed circuit board business.

It's hard to quantify that but those are not insignificant.

These are all primarily absorption issues?

Correct.

In terms of the references to the last minute nature of things, I would imagine that's making your quarter look more hockey stick like in making the predictability somewhat less.

Are there any other changes that you're seeing out of customers, are they ordering in smaller lots or ordering one see two sees when they would normally order 10 or 20 at a time, something like that?

We're seeing lots of 10s and 20s swells one and two.

It's both.

I think it's both but you have to think of it in a different way.

If you said the contract manufacturing business is a pull business, and you get a large order and you had a delivery date but in tend you're going to ship it when the customer says ship it, that's what the equipment industry has turned into.

Okay.

Couple other questions.

In terms of the share of your business that goes to IDMs versus contract subcons, how do you see that changing?

How do you think that has changed and where do you think we're going with that in the near term?

I think that if you go back to the peak, I think we saw in the billion dollar quarter that we had in the first quarter of 2000, I think that the semi test bookings peeked at about 35 percent subcontractors.

As a percentage of semi test they were 30 percent in the first quarter and they were 25 percent in the second quarter just finished.

And I think that there's data that would say that they represent about on an ongoing basis 25 percent of the market, plus or minus five.

And we are one of the major players in that market.

I would think that they would be 25 to 30 percent of our bookings on a steady state basis going forward.

Can I get back to one other thing quickly? .

On the confusion over pull ins versus push outsI don't want us to leave the wrong impression here.

The second quarter data says that the pull ins exceeded push outs by a factor of six or seven to 1, and the key thing about the push outs that we saw I think are that so far they've been limited to one IDM.

And it's not a broad phenomenon.

That was the point we were trying to make but the volume was overwhelming looking at the second quarter data alone that the pull ins sharply exceeded any push outs that we saw.

And I don't know what's going to happen in the third quarter.

But the data for the second quarter is pretty clear.

That's what I was trying to clarify, because there has been some confusion about that.

And one last question.

In terms of competitive positioning versus yourself,age lent, CMOS (inaudible) et cetera, any substantial changes or anythings you're seeing and also maybe if you could address that as well in the memory market.

Well, let's talk nonmemory first and then we'll get to memory.

If you say we've increased our shipment over 70 percent, since the first of the year, I think that would say that - those numbers would say at least for this period we're gaining share.

We won't know, of course, until one or two quarters is not a permanent change.

But we'll have to wait until the beginning of next year to know for sure.

But we feel good.

We feel like we're gaining market share.

We also feel good that if you look at our major competitors, we had head to head shoot outs in several cases that we won.

And we've had that against Agilent, against LDX, we've had that on the memory side essentially there's no buying going on in the memory side.

We think in terms of promises we won a shot out but no orders were placed that would validate it.

So we think we're doing pretty good again.

Very good.

Thank you

Your next question comes from Brett Hodess with Merrill Lynch.

Just a quick question.

When you were talking about the Integra FLEX before and the fact it's not exact to ramp product end.

That product has a different cost structure and manufacturing cycle time and whatnot than your previous testers.

Can that start to have some more meaningful impact if that starts to increase as a percentage of the semi test business over time?

That's certainly the plan, certainly.

I mean if you look at the cycle time issue for most systems in this business, two or three weeks is world class and four to six weeks is pretty common.

And the target for Integra FLEX is three days to build and test a system.

So I mean it's the products every generation are designed to be more efficient to manufacture tests and predecessors as well as improvements in other areas.

And we certainly have high expectations for FLEX in that area.

Thank you

Your next question comes from Steven Pelayo with Morgan Stanley.

Could we get back to break even for a moment what kind of assumptions are you making for gross margins and operating expenses to get to break even of 450 revenue levels?

In terms of gross margins, what I said was I wasn't saying that we have the level of revenues to get break even but our cost structure would be in place such that the demand did materialize at the level mentioned about 450 we should be at break even or will be at break even.

There's a bunch of detailed actions that were executing against to ensure that happens.

I don't have a schedule showing where each one hit the P and L.

When you just - what's your gut tell you about SG and A and R and D?

Should R and D just continue to increase or quarter over quarter are there some major programs that will finish up and maybe you can make some head way on your break even there?

Is there anything that we can just kind of go for a feel here qualitatively.

We wouldn't expect any material changes in R and D that might catch your eye.

We're making significant investments in semi test and will continue to do so.

You might see some smaller savings in some other areas as we finish up on the activities in process.

But I don't think you'll see much in R and D.

Okay.

And then your comment about pull ins being six or seven times to one versus push outs.

So I guess going into the quarter, since you've exceeded your guidance by about ten million or so going into the quarter you guys expected these pull ins to come in.

I'm nervous to not have these pull ins not come in maybe you missed this quarter.

I'm concerned about the access next quarter.

Are we relying on the same type of phenomenon.

First, I wouldn't be nervous even if the bookings, for example, last quarter were significantly higher than what we shipped.

I don't know what would be anymore or any less effective the customer is going to take new orders are we going to take backlog.

And I don't see any difference in the risk profile between the two.

Okay.

And were there any (inaudible) shipments at the end of the quarter that really didn't fall in terms of SBA 101 revenues that gives you a good deferred revenue going into the next quarter?

No, nothing that I know of any significance, no.

Lastly, I guess just kind of a big picture question here, when you look across your products in ATE, is there any lap there.

Does the 750 sometime get into the catalyst area.

Does the catalyst get into the tiger area.

If that happened I'm worried one might cannibalize the other are there clearly defined spec levels.

You want to look at the boundaries, because what a customer would like to do, he would like to, let's say he standardizes on catalyst versus primary test and he would like be able to give, if a small portion of his business would fit product that might be, a device that could be tested with 750, rather than buying a different tester he'd like to drag down the tester if you will so it could overlap into that area.

So yes you always have some overlap.

This overlap has never been the issue of cannibalization.

Last quick question here.

I guess this had been mentioned before but for the past year or two looks like you've been running one book to bill.

Do you have any thoughts when you might start building backlog again?

Is that something we should just think about next year?

I think it's probably fourth quarter or next year.

Okay.

Somewhere along the year end or beginning of next year.

Thanks a lot, George.

Your next question comes from Jerry Flemming with bond stock.

Actually it was answered.

Thank you, operator

Your next question comes from Mark Fitzgerald with Banc of America Securities.

Given your break even level and cost structure, is it fair to say you guys are betting on a snap back in business here as this unit starts approaching the 2000 level, 100 percent of the 2000 level?

No, I wouldn't say we're staking our plans on if that doesn't happen that we should have done something differently, no.

If you look at where our spending is, a lot of it is in R and D and we think there's enormous promise at some point in the cycle and we need to make sure that we have the right products at the right time.

So we don't have excess capacity sitting around waiting for orders as evidenced by when we did get some orders we had to hire temporary people.

Having said that, again we're going to continue to work the costs and get our break even from 479 to about 450 by the fourth quarter.

Earlier someone made a comment that the gross margins were really a function of volumes.

So I would assume that you had capacity, and as the volumes went up, you would see a nice snap back in profitability.

Certainly.

We have certain manufacturing locations that we depreciate the buildings and so forth and purchasing functions that are there.

You can't change the building depreciation.

So you're right at one level and the volume does come back.

It drops through very nicely.

I think this issue of margin and profit, you gotta say - if we're asking employees and investors and shareholders et cetera to accept large losses you're making two assertions.

The first assertion is you do all you can to minimize those losses, and aggressively pursue cutting back and so on T the second assertion you're making is you believe your products and the engineering investments you're making will pay off.

Let's look at the two of those separately.

We've reduced the company a third.

We went through a period of salary cots, so forth and so on.

And I think we are daily trying to tweak down our cost structure, trying to find a way where we can minimize those loss.

We're not doing a bad job at it.

Against the second assertion, I think we're demonstrating right now very good results.

It looks like we're gaining significant market share.

Looks like these products are latching and attack taking hold.

Given your cost structure you have to bet at some point that you're thinking of being profitable and 450 would suggest you're looking at a business that's going to be a two and a half, three billion dollar business sometime in the near future here.

And that's the problem I have in terms of where you are today with your revenues and my personal view of the growth rate for the business I think could be a while before we get there.

And it just seems the cost structure's out of whack with what that growth opportunity is over the next 18, 24 months.

Well, you might be right.

You might be wrong, as well.

Yeah.

That's what I'm trying to get a sense of.

How do you guys view because the real bet here is what's the growth rate of the business?

Can it come back and absorb the cost structure that you guys have laid in here.

And you guys seem to be betting on the aggressive side that we're going to see a pretty hard snap back.

Given that, we have tremendous stakes in electronics and semi conductor, believe that an industry that's been down couple of years has to snap back strong sometime and that we will be able to maintain or increase our dominant leadership position when it does, then, yeah, we are being aggressive.

Because we do believe that.

I think there's one other point I don't know if it's helpful against the thought process but let me throw it out anyway.

I think that within the company we're not making the assumption that three billion dollars is going to come back soon and save us all from the current problems that we're having.

And the product groups, the divisions are hard at work on finding a way to make a reasonable amount of money within the company we call model profitability over a cycle at more like a 2.2 or 2.5 billion dollar company.

And not assuming that the peak will return soon.

And if the peak returns sooner, that's even better.

But as Greg was mentioning, there's a lot of effort being put in place to improve profitability.

And a lot of these things won't happen until we get more volume and some time has gone by.

But that's what the plan is.

And it's not assuming three billion happens in 2003.

Okay.

Fair enough.

Just one additional question.

On the cancellation, I mean we're pretty well into this down turn.

What causes you guys to get surprised have you not scrubbed the backlog at this point or is this turns business in the connectors business where they come in place an order and turn around and cancel it on you in the same quarter?

That's never occurred.

The cancellation we had was in TCS.

What occurred in that case was a couple of large telecom companies had programs and products which ultimately they dropped.

The reason they dropped those products is unfortunately, if the recession or down turn goes two years, technology doesn't stop for those two years.

And they realized they have some products that were just not going to go address the needs of their customers when they finally came out with them.

And so they cancelled the backlog we had for those products.

At the same time, they designed us in on the new products.

But there's no need to place volume orders for those new products yet because they're not ready to start shipping them.

The result is that there was a program issue that was the cancellation in TCS's backlog.

So what you're saying it's hard for to you get visibility whether they're going to continue that program or not, that's where you got surprised?

Absolutely.

Fair enough.

Thank you.

Operator, we've extended beyond our hour.

I think we need to cut things off at this point.

Any closing remarks?

Thanks everybody for participating in the call.

We look forward to getting together again next quarter and reviewing our performance at that point.

That's a lot.

Thank you.

Thank you for participating in today's teleconference.

You may now disconnect.