泰瑞達 (TER) 2002 Q4 法說會逐字稿

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  • Operator

  • Good morning, my name is Judy and I will be your conference facilitator.

  • At this time, I would like to welcome everyone to the Teradyne fourth quarter 2002 and fiscal year 2002 earnings 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 and the number one on your telephone keypad.

  • If would you like to withdraw your question, press star and the number 2 on your telephone keypad.

  • Thank you.

  • Mr. Newman, you may begin your conference.

  • Tom Newman - VP of Investor Relations

  • Thank you, Judy.

  • Good morning, everyone and welcome to our discussion of Teradyne's most recent financial results.

  • I am joined this morning by our Chairman and Chief Executive Officer, George Chamillard, and our Chief Financial Officer, Greg Beecher.

  • Following our opening remarks, we will provide you with the details of our performance for the fourth quarter and the year 2002 and what our outlook for the first quarter of 2003 will be.

  • First however, I would like to address some administrative issues.

  • Teradyne's press release containing our financial results for the fourth quarter was sent out via a Business Wire and posted on our website yesterday evening.

  • If anyone needs a copy, please call Teradyne's corporate relations office at 617-422-2221 and we will provide you with one.

  • This is being simultaneously webcast over our website at www.teradyne.com.

  • A replay of this call will be provided on our site starting at 1:00 p.m. today eastern time.

  • If it is more convenient, you can also access a replay of the call by dialing 1-800-642-1687 in the U.S. or 706-645-9291 outside the U.S.

  • Finally, the conference I.D. number is 7391435.

  • Replays from both sources will be available through January 29th.

  • It is our objective to use this call to comply with the requirements of SEC Regulation FD.

  • Therefore, investors should accept the contents of this call as the official guidance of the company for the first quarter of 2003 and beyond.

  • If at any time, we communicate any material chances to this guidance it is our intent to do so simultaneously to all of our investors to the best of our ability.

  • Investors should not that only George Chamillard, Greg Beecher and myself are authorized to provide company guidance.

  • Items we discuss today under the historical information include forward-looking statements related to future financial performance and other performance expectations, changes in the company's business, statement as to bookings, back lock, pricing and demand for our products and other opinions of management.

  • These forward-looking statements are made under Section 21E of the Securities Exchange Act of 1934.

  • Investors are cautioned that forward-looking statements are neither promises nor guarantees but involve risks and uncertainties that may cause actual results to differ materially from expectations.

  • One of those risks and uncertain tryst detailed in the filings in the securities and exchange economic including but not limited to our 10Q filed November 13, 2002.

  • We caution listeners not to place undue reliance on any forward-looking statements which speak only as of the date they are made and we incorporate rate tiers of discussion of those factors.

  • Teradyne disclaims any obligation to publicly update or revise any such statements to reflect any change in expectations or events, conditions or circumstances on which it such statements may be based or that may affect the likelihood that actual results may differ those set forth in the forward-looking statements.

  • 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 first quarter of 2003.

  • Our Vice President, Chief Financial Officer Greg Beecher will review the details of our performance in the fourth quarter and 2002 and will provide additional details on our guidance of the first quarter 2003.

  • We will then answer your questions.

  • For scheduling purposes, you should note we intend to end this call after one hour.

  • George?

  • George Chamillard - Chairman and CEO

  • Thanks, Tom and good morning to all of you on this call.

  • In the fourth quarter, we had sales of $334 million with a loss of 20 cents per share before special charges.

  • Special items provided further losses of $2.11, resulting in a total loss of $2.31.

  • Special items were driven by the fact that we recorded a valuation allowance against our net deferred tax which increased our GAAP loss by $1 $1.1 or 80% of the special charges.

  • Reserving of our net deferred tax is a one-time noncash charge following applicable accounting rules.

  • The balance of the special charges or 30 cents per share were generally due to the fact that we are continuing to restructure and lower our costs as we discussed in our last call.

  • We will describe these in fewer detail in a few minutes.

  • Gross orders for the quarter were up 24% sequentially and net orders in the quarter were up 2%.

  • In 2002 overall, we had sales of 1.22 billion dollars with a loss of $1.15 per share before special items and a loss of $3.93 per share after special items.

  • Gross orders for the year were up 25 percent over 2001, net orders were up 84% over 2001.

  • We find encouraging growth of sales in the first quarter of 2002 of 13 percent from the ending of Q4 2001 were followed by a 25 percent growth in Q2.

  • But the rest of the year we only grew 7 percent in Q3 and remained flat sequentially in Q4 as the second half of the year growth solid.

  • Our sales therefore were down 16 percent over 2001.

  • Combination of weak economy, weak demand for technology products and the uncertain world situation overwhelmed the recovery that had started earlier in the year.

  • Unfortunately, none of those negative factors have changed significantly as we enter 2003.

  • Looking at the macro situation and at the orders we have had in our backlog, we expect our sales from the first quarter to be about flat with the last two quarters.

  • Our guidance, therefore, is the same as last quarter, sales between $310 and $340 billion dollars.

  • Considering that we will have -- that we will gain no tax benefit from losses going forward, we anticipate a loss between 25 cent and 33 cents before any special ( inaudible ).

  • As a point of reference, if we were to have used our previous tax rate of 36% in Q1 our range of projected lost would be 16 - 21 cents per sales per share showing continued sequential improvement.

  • All of this is disappointing news.

  • Our reporting record losses for 2002, the fact that the uncertainty and the global economic growth coupled with political instability continues.

  • The fact that our losses will continue into 2003, although at greatly reduced rates.

  • At the same time, I am optimistic based on improvements in three areas.

  • First is our progress in aligning our cost structure to provide acceptable earnings and business pickup.

  • Second, the continued growth in devices being shipped, coupled with a high utilization of our systems, suggest that continued growth should soon require some strengthening in orders.

  • And third is the progress we have made, particularly in the second half of 2002 in fueling products that are resulting in us winning critical shootouts, positioning us for growth in market share.

  • Let me talk about each of these separately.

  • During our last call, we said that we were going to cut our sales breakeven level from about $480 million per quarter at the end of Q3 in 2002 to about $350 million in the summer of 2003.

  • Our program is very broad in scale and involves both tactical and strategic action which obviously impact our people, our facilities, our products and our material costs.

  • In the fourth quarter, we made progress towards meeting that goal and ended the quarter with a sales breakeven level of about $440 million.

  • Going forward, our improvements are more dependent on the reductions that our shipment mix that includes that inventory.

  • We are on plan with these reductions and we are on plan to meet our breakeven targets for 2003.

  • The question whether sizing of 350 million is enough.

  • I hope so.

  • We are shipping at an annual rate of about $1.3 billion. $350 million breakeven point annualized is $1.4 billion.

  • Consequently, something less than 10% growth will be needed for us to breakeven when we meet our downsizing target.

  • Now it is hard to make a compelling argument right now that the economy has turned up and with certainty support $350 million in revenue, but at any case, we are committed to stop losing money.

  • If the market does not provide the moderate sales growth needed, we will take further action.

  • My second point was growth in unit volume.

  • The most recent WSTS, which is the World Semiconductor and Trade Statistics shows that non-memory semiconductor unit shipments have grown to 90% of their peak in 2000 and they are up 56% from the trough levels a year ago.

  • Now obviously customers are working hard to avoid capital investments, just as we are by the way.

  • This combined unit growth has resulted in machine utilization that suggest customers will need to add to their tester capacity in 2003.

  • Semiconductor testers, the installed base at year end in our prime systems, the Catalyst and the J750, an average utilization of between 85 and 95%.

  • And the Tiger experienced significant increase in utilizations.

  • The third reason I'm optimistic long-term is our progress in product positioning.

  • We continue to get confirmation of product strategy from our customers.

  • The demand has increased, as indicated by the improvement in our gross orders in this past quarter.

  • Our new products continue to allow us to penetrate new application and they have gained market share momentum for us as the year unfolded.

  • Some of those wins by the way were a direct shootout with the installed supplier.

  • Examples here include our Tiger and Catalyst SOC test systems and our IP 750 image sensor testing.

  • So in balance, our progress in positioning our cost structure, such that we have a good shot of making good money when the cycle picks up, continuing macro trends of device unit and utilizations increasing suggesting that new equipment will be required and our progress and momentum in product position are all very encouraging.

  • Let me now extend a bit on some of the specific progress in each of our businesses.

  • In the semiconductor test business, we have a lot of product momentum which strengthened over the course of the year, particularly in the subcontract test market in Asia.

  • Our design increased.

  • In Q4, we had a strong increase in gross orders.

  • At the high end of the market, our Tiger system -- our Tiger system had record bookings.

  • Tiger expanded its hold on the high end SOC microprocessor chip set markets and broke into the graphic chip test segment, which has the potential of strong incremental sales in 2003.

  • In the mainstream consumer chip test market, we had volume orders for our Catalyst and J750 products from the DVD, cell phone and automotive test market he is.

  • Our new flex product received orders from a U.S.

  • IDM for wireless device and from a U.S. automotive manufacturer.

  • We continue to do very well in the imaging sensor testing market with volume orders in the quarter from four Japanese IDM's and from two subcontract houses, driven by cell phones, camera, fax, scanner and security applications.

  • Our connection systems division had a weak 2002 and one of the largest historic segments, telecom is still pretty weak.

  • Throughout the year, we ran essentially in the around $100 million a quarter in sales with improving financial performance in the fourth quarter.

  • Inventory was reduced to its lowest level since 2000 and accounts receivable were in a record low-levels, helping to provide the company with positive cash flow throughout the year.

  • The connection systems group has done a lot to improve their future potential with their very strong performance in design wins.

  • They had 42 in the fourth quarter and 182 for the entire year.

  • The connection systems is really in two different businesses.

  • First is a component business, where we sell high speed and high density two piece connectors complex high density PC cards and backed by assembly.

  • This business has highly differentiated intellectual property and the appeal to our customers is based on the resulting functionality.

  • Our new connector products continue to capture shares at the high end of the market, where density and speed are essential.

  • Additionally, we have introduced a lower cost product as part of our industry standard VHDM product line.

  • The new product line expands the available product market for HDM, and allows customers to lower their cost while increasing their performance.

  • The second business that connection systems is in basically attaches card cages, power supplies, cables and enclosures to our back lane assemblies.

  • So, this business is based mainly on customer convenience and we believe by broadening our services to system integration and tests, particularly for high technology low volume products, we can build an attractive EMS business.

  • An example of the type of products our EMS business is targeting would be our J750 test systems.

  • We are moving the assembly and test of the J750 into our connection systems factory in Shanghai, to get both lower cost and accelerate our incapability in Asia.

  • In the assembly test division, which makes products for in circuit test and inspection for inner circuit boards and modules, we continue to improve our financial performance in a flat market.

  • We have -- we have completed the realignment of our marketing, engineering and field organizations.

  • We are in the midst of divesting ourselves of some non-core product lines and we are making progress in our manufacturing consolidation activities which should be completed by the end of Q2, all these steps result in the significant reduction of losses in this division in Q4.

  • In the circuit testing and inspection market, by the way, there is still excess capacity available and the used equipment market, depressed current sales of new systems.

  • We did however have sales of both test and inspection equipment in the automotive market worldwide.

  • The military aerospace business continues to be a bright spot.

  • Our future prospects appear good, mainly because we are tied into programs that are funding priorities such as the Joint Striker Fighter and the Navy's IT Cass (ph) program.

  • Additionally, we have sold a new product, the BTI or ( inaudible ) that is part of some S9100 test systems for Boeing and we expect several orders.

  • The activity we are seeing in the automotive market in circuit board testing and inspection is apparent in the automotive diagnostic solutions business that we have in England.

  • Here the approach is to help automotive manufacturers lower their cost, both during the vehicle manufacturing process and in the post-sale diagnosis of vehicles.

  • These benefits give our products and services strong appeals in the current environment.

  • The business is currently running at an annual sales rate of $55 and $75 and generates a pretax profit.

  • Our broadband test division where we make systems to test telephone and cable networks for broadband performance, the customers continue to conduct trials of our products to demonstrate proofs but they also continue to defer spending capital when the trials are completed, particularly for DSL applications.

  • The evidence continues to mount that our products can lower the costs for our customers to do mass deployment and to maintain high speed services and that our products can help them grow their revenues in the short term.

  • We are confident that those attributes will prove compelling to the customers over time.

  • Let me now move slightly away from Teradyne specific results and comment on a concern I have with the entire ecosystem or food chain of the electronics industry.

  • I'm including my suppliers and the suppliers of them and including capital equipment companies like Teradyne, our customer whose make semiconductors, those customers who assemble the devices, whether they are OEM or subcontractors, all the way to the end customer.

  • I expect this next period of expansion of the electronics industry in the food chain to be much more difficult than expansions in the past.

  • Now at first blush, you'd say that can't be, because people expect a much slower recovery.

  • They might be right.

  • I don't know.

  • But I do know there are many things that are very different, will be very different in this cycle than it was in the past.

  • My concern is institutional memory loss.

  • The concern is that the industry has those supply chains that are totally untested against the types of ramps we have seen in the past.

  • These supply chains may be better or worse but I know they are totally different and untested against the strong, severe upturns.

  • The supply line electronics is made up of millions of people and thousands of companies all over the world.

  • They all make in general, components and equipment that each in their own is right very complex.

  • At the same time, the industry has been down a lot longer than previous cycles.

  • Factories have been closed.

  • The lower cost different materials have been substituted, different suppliers are being used, new employees will have to be added and so on, an increased chance that something can go wrong.

  • Now, is this a problem?

  • Well it seems to me that the risk of ramping is higher in the past and that this issue is in general not recognized.

  • Whether you are the electronics OEM, contract manufacturer, semiconductor or component manufacturer or semiconductor equipment company, you can't have it both ways.

  • Can't be lean and mean with low cost structures and in some cases so low that they are resulting in popular (ph) prosperity for some critical component companies and you can't pass all your risk along further and further in the supply chain and at the same time have robust fully flexible suppliers, who can turn capacity on a dime and meet whatever demand that is required..

  • Now I'm not a strong quotesman, so I may have this a little wrong.

  • But centuries ago it was recognized that for the one of the nail the horse has lost, for the one of the horse the rider has lost and the one of the rider, the kingdom was lost.

  • Greg will now review the detail of some of our financial performance.

  • Greg Beecher - Chief Financial Officer

  • Thanks, George.

  • Good morning to everyone.

  • Our sales in the fourth quarter of 334 million were essentially flat with the third quarter and up 52% year-to-year.

  • We had a net loss of 36.5 million or 20 cents per share on 183 million shares before special items and evaluation allowance on our net deferred tax assets.

  • Our GAAP loss was 423.8 million or $2.31 per share.

  • Since the special items are fairly numerous, let me explain them.

  • First, is the valuation allowance on our net deferred tax assets.

  • Our deferred tax assets remain available for use on our tax returns well into the future in reducing future taxable income, we have simply fully reserved these assets under US GAAP.

  • We will also no longer be reducing our losses by a tax benefit.

  • Next we took some inventory writedowns against a phase out of one of our older product lines and against a change in our marketing plans on another product.

  • Lastly, we took a number of actions related to consolidating locations, divesting non-core product line and people reductions to lower our breakeven level.

  • We have made progress in lowering breakevens and committed to reaching our breakeven targets.

  • On an annual basis, we had sales in 2002 of 1.22 billion with a loss, excluding special items of $1.15 per share and a loss after special items, of $3.93 per share.

  • The share count for the year was 182.9 million shares.

  • Net orders for the year were 905 million.

  • From a product point of view in the fourth quarter, semi test sales were 47% of the total, connection systems 31%, assembly, test and inspection 14% and other test segment consisting of broadband test and diagnostic solutions was 8%.

  • On an annual basis, semi test sale he is represented 46% of the total, connection systems 32%, assembly test and inspection, 14% and other test segment consisted of 8%.

  • Our gross bookings is in the quarter 307 million, up 24% quarter to quarter.

  • On a quarter to quarter basis our gross borders changed as follows.

  • Semi test was up strongly by 43%.

  • Assembly test and inspection was up 9%.

  • Connection systems was down by 8% and our other test activities were up by 36%.

  • On an annual basis, the gross order changes were semi test was up 122%.

  • Assembly test and inspection down 5%.

  • Connection systems down 5% and other test was up 32%.

  • We had cancellations of about $72 million in the quarter.

  • Of those, $48 million were in semi test, $24 million were in connection systems.

  • The semi test cancellations were mainly due to delivery slippages from certain customers and negative change in the funding status of a few orders.

  • For your information, as in the past, we continue to experience backlog pull ins in semi test.

  • The total was 8 million and this is not reflected in any of our gross or net order numbers.

  • The cancellations in connection systems were mainly a continuation of product cancellations by our telecom customers in a difficult market.

  • Our net orders were therefore 235 million and were up 2% quarter-to-quarter and 85% year-to-year.

  • From a product point of view and on a quarter-to-quarter basis, the change in net orders were as follows: semi test up 4%, connection systems down 28%, assembly test and inspection up 11%.

  • And other tests up 36%.

  • On a year-to-year basis, changes in net orders were as follows: Semi test up 112%, connection systems, 380%, assembly test and inspection was down 6% and other tests was up by 136%.

  • The product distribution of our bookings was 55% in semi test, 19% in assembly test, 14% in connection systems and 12% in other test businesses.

  • On an annual basis in 2002, semiconductor test products represented 53% of our net bookings, test and inspection, 19%, connection systems was 16%, and our other test products 12%.

  • Based on our net booking notice fourth quarter, our approximate bill to book ratios was .81 in semi test, .95 in assembly test and 1.06 in our other test segment.

  • The book-to-bill for connection systems was .56 on a gross booking basis.

  • At the end of the quarter, our backlog stood at $441 million of which $357 million is shippable within six months.

  • Our ending headcount stood at 7,709, including 7,178 regular employees.

  • This total reflects a reduction of 655 people in the quarter.

  • On a pro-forma basis, excluding the special charges we have talked about before, the gross margins in the fourth quarter were 24.7%, R&D expenses were $73.5 million, down about $4.5 million to 22% of sales.

  • SG&A expenses were 64.5 million, down about 9.8 million, 19.3% of sales.

  • On a geographic basis, our net bookings for the year showed growth in Asia, relative to the U.S., break down for 2002 is as follows.

  • Starting with U.S.- 43.8%, Europe - 17.7%, Japan - 9%, Korea - 2.2%, South Asia - 18.5%, Taiwan - 6.5%, and the rest of the world - 2.4%.

  • Again, that was the 2002 year.

  • The geographic distribution of sales for 2002 was U.S. was 45.9%, Europe - 18%, Japan - 6%, Korea - 1.8%, South Asia - 17.4%, Taiwan ~ 9% and the rest of the world ~ 2%.

  • Moving to the balance sheet, we entered the fourth quarter we are cash and marketable securities of 541 million about flat with the level of Q 3, receivables were 175 million or 48-day sales outstanding down 14 days from the previous quarter.

  • Inventory ended the quarter at $280 million, down $47 million from the third quarter level to 20.9% of sales.

  • Capital spending in Q4 was $16.9 million while depreciation was $35 million.

  • In the first quarter, as George said, expect sales between $310 and $340 million with a loss of between 25 and 33 cents per share before any special items.

  • Note however once again that the EPS guidance does not include any tax benefit from the losses we project.

  • Gross margin should run between 26 and 28%.

  • R&D should be between 21 and 24%, with SGA& between 19 and 21%.

  • We plan to reduce inventory by 15 million or more and to spend less than $20 million on capital, depreciation around $35 million.

  • We expect to end the first quarter with a cash balance of around $510 million.

  • And now I will turn it back to Tom.

  • George Chamillard - Chairman and CEO

  • Thanks, Greg.

  • Judy, we now would like to open the discussion for questions.

  • Operator

  • At this time, I would like to remind everyone -- at this time, I would like to remind everyone, if would you like to ask a question, press star and 1 on your telephone keypad.

  • We will pause just a moment to compile the Q&A roster.

  • Your first question is from Tim Arcuri with Deutsche Bank.

  • Tim Arcuri - Analyst

  • Hi, guys can you go into the detail again, I think I missed the net bookings breakdown by product.

  • Can you give that again?

  • Greg Beecher - Chief Financial Officer

  • Okay.

  • The net bookings was 55% in semi test, 19% in assembly test, 14% in connection systems and 12% in other test business.

  • Tim Arcuri - Analyst

  • Okay, great.

  • And can you give a little more color, the cancellations in ATD I think were a little bit higher than people were expecting.

  • Can you give a little more color maybe in is that a sustainable trend or a one-quarter blip in terms of cancellations in semi test.

  • Greg Beecher - Chief Financial Officer

  • The cancellation in semi test, what essentially occurred, as you get into the end of the year and companies are looking at their capital budgets for the following year, we were close with our customers in terms of what their plans are and a couple of our customers who had orders in our backlog, their capital plans weren't looking promising for us, so we made a decision, a judgment to remove these orders from backlog.

  • There was another order that a customer canceled themselves.

  • I don't think this is a trend but it is very difficult to predict what is going to happen with items in backlog, whether your customer might lose share or, you know, what can happen at the other end of the sale.

  • I wouldn't expect this to be a trend that we are going to see recurring.

  • Tim Arcuri - Analyst

  • Okay.

  • Great.

  • If I could just sneak in one more.

  • Can you talk a little bit about breakeven?

  • You said that breakeven would be or was 440, I believe.

  • And that at the end of Q4, the target is still 350 by the end of Q2 '03, can you give an interim target, what breakeven might be at the end of the march quarter?

  • George Chamillard - Chairman and CEO

  • We would like to stay away from exactly the step down.

  • I would rather talk more about what are we doing to get there.

  • I can give you a description of the program.

  • The actions are broad, as you can imagine, they affect certainly people, so we are sensitive how we describe those actions.

  • There is material costs and facility consolidations and outsourcing.

  • When you get later three, you generally find that the savings from those actions take a little time to show up in your P&L.

  • So, while there is committed actions and detail and people working on it, you generally aren't going to see a straight step down because a number of the actions have a delay in term of how many it takes to make itself into your P&L.

  • So it's a long list of actions.

  • You know, we are a quarter into our publicly announced plan, we have been doing this some period of time and to date, we are very pleased where we are and confident that we are going to get there.

  • And there will be some items that come in a little bit later due to the nature of the item.

  • Tim Arcuri - Analyst

  • I guess if you were to describe the linearity of it over the next six months, most of it is going to happen in Q2 instead of Q1?

  • George Chamillard - Chairman and CEO

  • Yes, yes.

  • Even decisions that are made, actions in Q1, only partial impact is shown in Q1, the next quarter, the full quarter, so you are going to see it as you get further near mid-part of the year, you are going to see the results show up.

  • Tim Arcuri - Analyst

  • Thanks a lot.

  • Tom Newman - VP of Investor Relations

  • Tim, this is Tom.

  • I think the important issue is that the target that we announced last time is still the target.

  • The timeframe for the summer is still the timeframe.

  • And whether or not we get there linearly or not is not really the issue as much as that we are clearly going to get there, we are going to get there in the timeframe that we talked about and the level of the commitment hasn't changed.

  • Tim Arcuri - Analyst

  • Okay, Tom, thanks a lot.

  • Operator

  • Your next question comes from Shekhar Pramanick from Prudential securities.

  • Shekhar Pramanick - Analyst

  • Hi, good morning.

  • A couple of questions.

  • First, you know, one of the thing which is a little bit worry is that the revenue guidance range from 310 to 330 puts that revenue to the backlog ratio pretty high.

  • Is that a concern?

  • Also, understanding the cancellations, so my understanding, what I understood was at least two-third were initiated by you and it may be a more one-time event, so you really not expecting similar level of cancellations into Q1?

  • And also if you can give us a little flavor were you think the Q1order is going to look.

  • I know you don't give a guidance but more qualitatively, that would be great.

  • George Chamillard - Chairman and CEO

  • Well, this is George.

  • Let me -- you have got about three questions to.

  • This let me first add a little bit to the backlog cancellation issue, because obviously, the review process as we close the books, I'm into that pretty well.

  • I would describe the situation the same way Greg did but add one point to it.

  • We looked at the backlog and had some pieces of businesses there that were there for some time.

  • This is not the case with something booked six months ago and we took it off the books.

  • It was in backlog for a fairly long period of time.

  • We saw that the capital spending plans that customer described as he went into this year were down from the year before.

  • And we saw that some of the people that customer competes with were growing.

  • We looked at it, we said maybe he is losing share a little.

  • We didn't care.

  • We just said the risk profile is a little higher on that, so we took it out.

  • And those stories were, by far the lion's share of the cancellation and I would think of those as being one-time events.

  • Shekhar Pramanick - Analyst

  • Pretty focused.

  • George Chamillard - Chairman and CEO

  • Yeah, they were very focused.

  • Um, the second thing is backlog.

  • You're right.

  • If you look at, you know book-to-bill or backlog-to-ship or backlog-to-next quarter shipments and so forth, the trend is down and at some point that has to get back in line for the business to grow.

  • But my concern is less that right now, because I think right now, our customers are in -- when they place the orders, they want them quickly.

  • We had a significant number of Tiger systems booked this quarter that the customer wants very fast delivery on those.

  • So the world has gotten used to give me the order, get it out.

  • That, by the way, is ( inaudible ) one of my concerns as I was describing the ecosystem, that there is a higher risk profile.

  • But I'm not overly concerned with the level backlog is at.

  • Typically, what part of the cycle you are in, backlog is a quarter, plus or minus a week or two, at the very low end and then picks up from, I don't know, six to nine months -- six to nine months at the other end.

  • I don't think it is abnormally positioned from where we were.

  • What was your third question?

  • Shekhar Pramanick - Analyst

  • I think the third question was qualitative feel for orders and where your backlog is.

  • I think your order number for Q1 has to be very similar to your gross orders of Q4.

  • George Chamillard - Chairman and CEO

  • Yeah, I think - we could do the arithmetic it could be less than that but I think it needs to be about that level, I agree.

  • Greg Beecher - Chief Financial Officer

  • That is fair.

  • The orders that are shippable for the next months have come down only a little bit from the prior quarter and follow up on one of George's points, when it comes to Catalyst, J750 or Tiger, we do have some slots in our bill plans that we have available for various customers and what we are finding is that currently, the slots are sold through till march.

  • So while we do have capacity to take on additional orders if we get a larger order, presumably going to affect the lead-time but we do have these slots available to try to manage with our customers, their near-end requirements.

  • Shekhar Pramanick - Analyst

  • great, thank you.

  • Operator

  • Your next question from James Covello with Goldman Sachs.

  • Jim Covello - Analyst

  • Good morning.

  • Three quick questions.

  • If you could review the cash burn projection in Q1 in each segment.

  • Number two talk a little bit about pricing in each segment.

  • And then number three, are you comfortable with the current funding situation or cash situation for the next 12 months or do you perceive the need to add any additional cash to the balance sheet over the course of the next 12 months?

  • Thanks so much.

  • Greg Beecher - Chief Financial Officer

  • Okay.

  • Let me start in reverse order, in terms of cash, we are very comfortable where we are with cash.

  • Look at where we were last year versus this year, cash is down a little bit over 10 percent over our worst year in history.

  • If you look at this past quarter, we had remarkable performance on cash.

  • The fact that cash is only down 2 million.

  • Now, that performance is not sustainable, because we have record receivables of 48 day sales outstanding and part of that is we ship more earlier in the quarter, a host of other things went in our favor.

  • There is a bunch of other factors too, such as January, generally true up a bunch of accruals, more cash goes out, whether it is 401(k) match.

  • When it comes to cash breakeven, that's a very tricky topic because cash can fluctuate significantly in terms of your balance sheet based upon items that aren't linked into the P&L.

  • But for rough math, if you think about our breakeven numbers, could you take about $40 million from our breakeven revenue and think about that, if these guys are at that level of revenue, they will be cash breakeven.

  • I get the 40 because generally speaking, we sell about $20 million of our inventory so we don't need to buy more inventory.

  • We are working on inventory balances now and our capital additions are far, far less than our depreciation, so we save another 20 million there so that is the rough math.

  • In terms of the divisions, the divisions all made significant progress this past quarter in cash that is how we ended up with just less than $2 million.

  • The bright star in cash all year has been connection systems, they have thrown off $70 million of cash, despite when you look at their -- their P&L it doesn't look attractive, but they have done a great job managing the balance sheet and throwing off cash and this past quarter was a little over $10 million.

  • George Chamillard - Chairman and CEO

  • The other question was a pricing, maybe I can comment on pricing.

  • The fact is pricing is obviously a problem in this part of the cycle, but it is a problem every time.

  • Except for a couple of specific examples, I don't think it is much more severe than we have seen other times in this part of the cycle.

  • The two I think are tougher are -- there remains a lot of pressure on circuit boards which puts some pressure on Teradyne Connection Systems, but I think the other one is, if you have, you know, our guess is about a half the demand for in-circuit test equipment was satisfied by the resale of used equipment and until that is flushed through, I think there is sort of typical pressure on that segment, but I think that's -- washed out fairly soon.

  • Greg Beecher - Chief Financial Officer

  • Actually in connection systems, we have faced pricing pressure for many quarters to date and we talk a little bit about last quarter that -- in terms of pricing, some business, we might price it differently so that we keep the business that fits our niche better.

  • The other thing is as we worked our suppliers to lower their material costs, as our customers are doing lowering our costs, you could see there is a delay.

  • For example, generally speaking, we end up lowering our price fairly quickly, to a customer in certain situations, but for us to get the supplier to lower their cost and then use up the old material parts and then get to the lower cost material parts takes some time.

  • So some of the price erosion we do expect to get back through some material savings but the price erosion certainly could continue and we need to be careful how we manage that.

  • Jim Covello - Analyst

  • That is all very helpful.

  • Thanks so much.

  • If I could just circle back to my first question about the cash burning Q1, did I understand that cash burning Q1 would be 40 million or did I miss that?

  • Greg Beecher - Chief Financial Officer

  • About 40 million correct.

  • Jim Covello - Analyst

  • Okay.

  • Thanks.

  • Very helpful, thanks very much.

  • Operator

  • Your next question from John Pitzer with CSFB.

  • John Pitzer - Analyst

  • Guys, a couple of questions.

  • First of all, on the march towards breakeven, a little bit of clarification here, can we expect so see more one-time charges and writedowns or do you think the bulk of that is behind you and waiting for some of the actions to fall and flow through on the P&L?

  • Greg Beecher - Chief Financial Officer

  • I think there will be more special charges.

  • I think there is opportunities to still consolidate some locations, so a little bit of special charges.

  • You are not going to see, I don't expect charges anywhere near this magnitude.

  • Obviously, the noncash tax items are a one-time thing.

  • I look at the other charges, I think overtime, you are going to see the charges are smaller.

  • John Pitzer - Analyst

  • Secondly, just on backlog cancellations, since the bulk of the fourth quarter of cancellations were Teradyne initiated, is your sense that cancellations will drop significantly in the current quarter.

  • Greg Beecher - Chief Financial Officer

  • That would be a reasonable assumption.

  • John Pitzer - Analyst

  • You talked about short lead times.

  • Can you quantify what the lead times are on the semi test side of the business and the fact that your customers are getting used to the lead times do you feel that utilization fluctuations maybe around the Chinese New Year make visibility into bookings in this quarter a little bit less than it was in the fourth quarter and then I have on follow up question.

  • Greg Beecher - Chief Financial Officer

  • It really depends upon how many of the particular testers the customer wants and who else put in orders at the same time.

  • Right now, today, Catalyst and J750 its about 13-16 weeks, Tiger is about 16 to 18.

  • Now we do have a couple of customers that were reserving slots for them based on ongoing discussions.

  • It depends on where you are with the discussions with our sales folks and where you are in the queue.

  • We have to obviously balance, we can't have a large number of slots and take on those costs and take on those risks without having some commitments and that is the a tight rope we need to walk.

  • George Chamillard - Chairman and CEO

  • That is a tight rope of a couple of industries.

  • Greg Beecher - Chief Financial Officer

  • Right.

  • Absolutely.

  • Sure.

  • John Pitzer - Analyst

  • Guys relative to the bookings visibility in Q1, is it really a post-Chinese New Year event before you guys feel you have a handle of when bookings might be coming in on the semi test side?

  • George Chamillard - Chairman and CEO

  • I don't think we view that as a big issue frankly, John.

  • The customers know how to plan around that, just like Europeans plan around their vacation and the world plans around Christmas and New Year's.

  • Business still works and I don't think that customers who need capacity in Taiwan won't find a way to get orders placed and take shipments during Chinese New Year.

  • John Pitzer - Analyst

  • So no significant change in the booking patterns, Tom, going into the moment of January?

  • Tom Newman - VP of Investor Relations

  • Not that we would -- not material changes, No.

  • John Pitzer - Analyst

  • Last thing maybe for George, a longer term question, George, I wonder if you could talk a little bit about the way the business is developing in mainland China on the semi test side.

  • Are we going to see local new entrants into the market, selling to a lot of new named and when does China become a big enough geography you report revenue there is separately as opposed to overall?

  • George Chamillard - Chairman and CEO

  • Let me try to answer that on a couple of levels.

  • Certainly close in the sales bookings to China are not significant enough that you would separate them out.

  • They are 2 or three percent.

  • Then you say who are you going to sell to.

  • The way I'm thinking about it is I think about our strategy in Japan.

  • And we are trying to replicate that strategy on a much shorter period of time in China and some other places in the world.

  • Let me describe what I mean.

  • It took us a long time to get to the point that we had manufacturing and engineering capabilities in Japan and a factory there, where we had a top design team identify a local requirement in the local market, but they did find them and the whole image processing IP 750 which we booked over 130 or so systems came from a design team in Japan using technology that they developed but also technology from the rest of the company.

  • We need that in China.

  • The reason we need that in China is two-fold.

  • One, China is big enough that over time, they will have a strong competitive infrastructure and we need to get there and build up our organization so we can support the customer and two, the support of the customers who are the large customers that we all know, also will be a range of startup with other companies, both in terms of assembling equipment, building and OEM equipment and installing devices.

  • How soon that comes, I don't know.

  • But our objective is to get established with a manufacturing facility, people on site in Shanghai.

  • We will be shipping, I hope, our first J750 from Shanghai in the middle of March.

  • Second, what you have -- once you start having critical mass, you start recruiting and building up the engineering challenge to do heavy applications, because we found every customer we sell to needs a lot of application.

  • Finally, after you get that built up, you have a infrastructure to identify new markets and opportunities and the challenge that can fall off.

  • If I think of a success story for 2002, it is hard to find them in 2002, but if I think of one, it was the fact that this process in Japan, which took a long time to get finished, but let's say after the past 15 years, we started putting in factory in Japan to when we have a top-notch design team that introduced us, product looking like a home run, takes a long time.

  • I hope we can replicate that model in China in a shorter period of time.

  • In the next couple of years.

  • John Pitzer - Analyst

  • I apologize for tying up the lining, but one more question.

  • You look at your breakeven target, is that still valid now considering that you are booking a tax benefit that you hadn't been in the past several quarters?

  • Greg Beecher - Chief Financial Officer

  • Yes, it is, because breakeven, presumes you make no money so in theory there is no tax.

  • John Pitzer - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Your next question from Vernon Essi with Adams, Harkness & Hill, Inc.

  • Vernon Essi - Analyst

  • Thank you.

  • George, wondering if you could just go over the utilization benchmarks you discussed there.

  • I missed that also wondering particularly what technology nodes, internally what platforms operate what utilizations and of course where you saw that at the sub con level versus IDMs.

  • George Chamillard - Chairman and CEO

  • Tom probably has the data ( inaudible ).

  • Tom Newman - VP of Investor Relations

  • Yeah I'll do it.

  • Vernon, if you took all of the J 750s and install base that we monitor that is about 350 systems, they ran at the most recent data we have through mid January, at an 86% utilization and the catalyst, which is about 700 systems in the database ran at about 90% overall utilization and the interesting thing to us is that the Tiger utilizations are growing substantially.

  • The numbers are still reasonably small.

  • Tens of systems.

  • But Tiger has grown in the last several months to over 90% the IDM installed base and into the mid-70s from the low -- from the mid-40s several months ago, the subcontractors, there is a lot of increase in the use of the Tiger base.

  • To look at the IDMs versus sub cons in the 750s and the catalyst is not a great deal of difference.

  • They are both running at 85 to 90%, slightly lower at the subcontractors for the 750s than for the catalyst, but they are both in the 80% to 85% range and higher per catalyst and relatively lower for 750s.

  • Vernon Essi - Analyst

  • Okay.

  • Thanks.

  • And also just wondering, just continuing the Marlin and wrapping that up, can you comment on your strategy there and DRAM?

  • Seems obvious you are putting all the chips on Probe-One.

  • Just wanted to, you know, get a comment from you on that.

  • Tom Newman - VP of Investor Relations

  • Well, why don't I start with that and then we can see where that leads it, if you like more information.

  • I think the issue, if you read the footnotes, is really that what's behind all that is that DRAM orders are very hard to come by, at least for us at this point.

  • We think for the market and we have got inventory around a previous generation project, the J 996 family and effectively no customers for it.

  • So carrying the excess inventory in this kind of environment didn't seem to make a lot of sense.

  • So we are -- we have written that down and going to the customers for that previous generation system and offering them a last-time buy opportunity.

  • That is what is behind the 996 issue.

  • Vernon Essi - Analyst

  • And -- do you feel you are getting any traction?

  • I mean, DRAM spend has been fairly robust any traction at all with Probe-One of late?

  • Tom Newman - VP of Investor Relations

  • Not really.

  • The Probe-One issue and maybe George would comment on this also, is really -- the need for Probe-One is predicated on a technology change, as you know the shift over from the majority of DRAM test happen tests happening at probe.

  • That has been slow to arrive.

  • And therefore there has not been a lot of drive.

  • We have been supplying some number of systems in a marketing sense to have people try to mount it understand the advantages.

  • We are going to scale that program back at some level here until we understand where the market is going and what the rate of technology change and DRAM is really going to be on this package to probe test issue.

  • George Chamillard - Chairman and CEO

  • I think there were two things.

  • We think the underpinnings for our strategy was there was going to be a series of technical discontinuities.

  • One discontinuity would be the economics of test times of people went into the next density mode, went to 512, 256.

  • Second would be the discontinuity around ( inaudible ) and the requirements to do higher speed testing at Probe.

  • And there isn't overpowering evidence that those discontinuities aren't playing out just yet.

  • Those people who are shipping 512s are not shipping in off the chart volumes, they are starting to build capacity.

  • Therefore, they can do what everyone is doing, they can make do by moving some package test equipment to Probe and find ways to make due with what they have, even though it would be economically more attractive and will be economically more attractive ( inaudible ).

  • We haven't seen either the building in volume, nor have we seen the tremendous increase in demand of having a new higher speed testing ( inaudible )

  • Vernon Essi - Analyst

  • Thank you very much.

  • Operator

  • Your next question from Mehdi Agha Hosseini from Soundview Tech Group.

  • Mehdi Hosseini - Analyst

  • Yes, most of my questions have been answered, but I have some follow-up.

  • Going back to your comments regarding 350 breakeven, would you elaborate on the margin assumptions that you have in there and the next peak of the cycle, would it be fair to say 65% of revenues are expected to come from semi test?

  • Greg Beecher - Chief Financial Officer

  • In the -- what we are expecting at 350 breakeven which obviously is well on the way to getting to model is gross margins of about 38%.

  • We expect though when we get to -- closer to model revenues, that we think our more sustainable in terms of take the peaks and troughs out and look at it, what a more normal buying pattern is we think our gross margins would be anywhere from about 42 up to 48.

  • All depends upon how sharp the peak is.

  • How pronounced it is.

  • But if it is at model revenues it would be 42, 43, that neighborhood.

  • Mehdi Hosseini - Analyst

  • Okay.

  • Then there was some comment on booking expectation for the first quarter.

  • Can you just clarify what your expectations are for the first quarter?

  • Would you expect to grow or improve bookings at the same rate or kind of an ease up?

  • George Chamillard - Chairman and CEO

  • I think the conversation was if we didn't have net bookings at about the same rate we had in Q4, gross bookings, then we would be concerned about the backlog.

  • But we did not comment on --

  • Mehdi Hosseini - Analyst

  • Last quarter you said that 20 weeks backlog is something that -- if it drops below 20 weeks, you will be seriously concerned and based on my calculation, right now, you are around 20 weeks.

  • So, if there is any further erosion in backlog, what is it that you are going to do about it?

  • Tom Newman - VP of Investor Relations

  • I don't think we said -- at least I don't remember saying if it gets below 20 there is a problem.

  • I think the way the business works, the backlog that you can run at is a function of, in many cases, the configuration of the testers that you are building it is easier to run a shorter backlog in DRAM and logic than it is in SOC, because there is more configurability to SOC testers.

  • Where that breaks down, I think, it is hard to run a lot below a 12 or 13-week level for long periods of time in the SOC business.

  • But I don't think 20 weeks has any magic at all and confused where that came from.

  • Greg Beecher - Chief Financial Officer

  • And our swap plan sold out through March.

  • Right now, if you look at the semi test business, certainly not an issue this quarter.

  • The issue could go the other way pretty quickly.

  • If customers want some number of testers on a very quick basis, they would be encouraged to speak to the sales force as soon as possible.

  • Mehdi Hosseini - Analyst

  • Thank you.

  • Operator

  • Your next question from Steven Pelayo with Morgan Stanley.

  • Steven Pelayo - Analyst

  • Just a quick follow on there.

  • Sold out in the business do we have to assume in the upside in the March quarter would have to from non ATE ( unintelligible )

  • Tom Newman - VP of Investor Relations

  • I missed the first part of the question.

  • Steven Pelayo - Analyst

  • With the flop plan and AT (ph) sold out in the march quarter, upside for the march quarter would have to come from non AT, more term oriented business like PCS (ph)?

  • Tom Newman - VP of Investor Relations

  • That's one way you could think about it, depending were you get the order, you could always squeeze one more tester out likely.

  • But, generally speaking, I think semi test our plans are pretty firm, we could always ship another 10, 15 million, generally speaking in that division.

  • Could you ship another 40 million?

  • No.

  • But it could go up a bit.

  • Steven Pelayo - Analyst

  • So the plan going forward is to increase the lead time necessary or the number of slots or is this the set swaps (ph) for the first half of '03?

  • Tom Newman - VP of Investor Relations

  • It's very judgmental.

  • You have to take into account data, how much risk are you willing to take?

  • You have some number the inventory components already and are your customers giving you plans that -- confidence they are going to take the systems when they say they are going to take them.

  • So there is a whole bunch of judgment and process that goes into, how much we turn the knob, so to speak, to speculatively have some number of open slots.

  • It is done in close coordination with sales folks.

  • Steven Pelayo - Analyst

  • The last question is product perspective.

  • Tom you mentioned about Tiger having tens of systems installed.

  • Where does that stand on the number of customers or installed base and the same information on the flex 750 as well.

  • Tom Newman - VP of Investor Relations

  • Let's see, flex has about 7 or 8 customers and about 16 or 17, I think systems shipped at this point, none for revenue.

  • Tiger has 30 systems shipped and about 15 or 16 customers.

  • Steven Pelayo - Analyst

  • Okay, great, thanks guys.

  • Tom Newman - VP of Investor Relations

  • Judy, we are out of time.

  • We will take one more question.

  • Operator

  • Your final question comes from Brett Hodess with Merrill Lynch.

  • Brett Hodess - Analyst

  • Just taking up the tail here.

  • Two questions.

  • First, on the -- just a quickie on the balance sheet, the increase in the long-term liability, that is all just the pension liability accrual?

  • Greg Beecher - Chief Financial Officer

  • Absolutely correct.

  • Brett Hodess - Analyst

  • Okay.

  • And then just back on the sub cons versus IDMs, can you give us an idea the percentage of sub cons are for semi test now versus IDMs and maybe how that was contrasted over a year ago to see how that has been changing?

  • Tom Newman - VP of Investor Relations

  • Yeah, the -- for the year, in terms of bookings and shipments for semiconductor tests, sub cons were 25% of the total and the IDMs were 75% of the total and that was exactly the same split as in 2001.

  • Brett Hodess - Analyst

  • So, no real change in the buying pattern there?

  • Tom Newman - VP of Investor Relations

  • No, it changed -- changes quarter to quarter and it was somewhat higher in 2001 for the year and -- sorry in 2000 and it started the year 2001 in lower percentages and built up over the year, so, there is a lot of fluctuation quarter to quarter, but surprisingly little year to year.

  • Brett Hodess - Analyst

  • Final question on that as you look forward now, do you get a sense it will stay in those kind of ratios?

  • George Chamillard - Chairman and CEO

  • I think so.

  • I think the best view we have of the market is that if you add the foundry fab less and subcontract test houses together they represent today about a quarter of the market.

  • And they represent about a quarter of our business.

  • We think we are the leader in that space at this point.

  • So I wouldn't expect that to change a lot in the short-term.

  • I think over time, that number creeps up as a proportion of the total.

  • But I wouldn't expect it to go to 50% in the next year or two.

  • Brett Hodess - Analyst

  • Great, thank you.

  • Tom Newman - VP of Investor Relations

  • All right, I think in the way of closing, I think we would like to thank all of you for your attention and participation and look forward to talking to you on our next conference call on Wednesday, April 16th.

  • If would you like to learn more about Teradyne, you should be aware we will be participating in the following investor conferences between now and our next call.

  • The Thomas Weisel conference in San Francisco, February 3 through 5th.

  • The Bank of America conference in San Francisco, February 11th and 12th.

  • Goldman Sachs in Palm Springs, February 24th through 26th, Morgan Stanley in Dana Point, March 3 through 5th and there is a Prudential Bus Tour in Silicon Valley we will be at March 11th and 12th.

  • Thank you again and I hope to talk to all of you soon.

  • Operator

  • Thank you for your participation and in today's conference call.

  • You may disconnect at this time.