泰瑞達 (TER) 2003 Q1 法說會逐字稿

Good morning.

My name is Derrick and I will be your conference facilitator.

At this time I would like to welcome everyone to the Teradyne first quarter 2003 conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer period.

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

If you would like to withdraw your question, press star then the number two on your telephone key pad.

Thank you.

Mr. Newman, you may begin your conference.

Thank you Derrick.

Good morning, everyone, and welcome to our discussion of the most event financial results.

I'm joined this morning by our Chairman and Chief Executive Officer George Chamillard and By our Chief Financial Officer, Greg Beecher.

Following our opening remarks, we will provide you with the details of our performance of the first quarter of 2003 and with our outlook for the second quarter of the year.

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

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

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

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

A replay of this call will be provided on our site starting at noon today eastern daylight time.

If it's 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 of the U.S. and providing the conference ID number 9435656, Replays from both sources will be available through the 30th of April. [inaudible] It is our objective to use this call to comply with the requirements.

Therefore investors should accept the contents of this call as the official guidance of the company for the second quarter of 2003 and beyond.] If at any time we communicate any material changes to this guidance, it is our intent to do so simultaneously to all investors to the best of our ability.

Investors should note that only George Chamillard, , Greg Beecher and myself are authorized to provide company guidance.

The matters we discuss today, other than historical information, include forward looking statements relating to future financial performance and other performance expectations, changes in the company's business, statements as to bookings, backlog, pricing, design ends and demand for our products, and other opinions of management.

These forward looking statements are made under section 21 E of the securities and 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.

Hi, may I have your name please --

Hello?

Hello, sir.

Derrick.

There's a cross wire here somewhere.

This is the conference call.

Derrick, are you there?

Can you explain that?

Are we okay to proceed?

Yes, sir, you can proceed at this time.

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.

Some of those risks and uncertainties are detailed in our filings with the Security and Exchange Commission, including but not limited to our form 10-K filed on March 28, 2003.

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 here the discussion of those factors.

Teradyne disclaims any need to publicly update any changes on which] any such statements may be based and that may affect the likelihood that actual results will differ from those set forth in the forward looking statements.

As a final administrative issue, we want to make clear to investors that our prepared remarks will be presented within the requirements of SEC regulation G regarding generally accepted accounting principles or GAAP.

Therefore, some financial metrics provided by us during this call will be provided in both GAAP and non-GAAP of pro forma operating terms.

By disclosing this information, management intends to provide investors with additional information to further analyze the company's performance, core results and underlying trends.

Management uses non-GAAP measures such as operating results and earnings per share on a pro forma basis that exclude certain charges to better assess operating performance.] Pro forma information is not the term used in GAAP, therefore the information is not necessarily comparable to other companies.

Pro forma information should not be viewed as a substitute for, or superior to data prepared in accordance with GAAP.

Investors will provide -- will Find -- a reconciliation of our GAAP nonloss to - sorry, GAAP net loss to pro forma net loss within our press release of last night reporting our first quarter 2003 results.

Our reconciliation of all GAAP versus non-GAAP metrics which are presented by Teradyne during this call are available on the company's website at www.teradyne.com by clicking on "investors" and then selecting the GAAP to pro forma reconciliation link.

Now let's get on to the rest of the agenda.

First our CEO and chairman George Chamillard will review the state of the company in the industry, will review our performance in the first quarter of 2003, and will provide guidance for the second quarter of 2003.

Then our Vice President and Chief Financial Officer Greg Beecher will review the details of our performance in the first quarter and will provide additional details in our guidance of the second quarter of 2003.

We will then answer your questions.

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

George?

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

Last quarter we listed 10 or 12 financial metrics that we expected to hit in Q1.

And we were able to hit them all.

In addition, our net new orders were up from Q4 '02.

Given the times in which we have been operating, I think it's fair to say that we are making significant progress on improving the company in all respects.

To be specific for Q1, we had sales of $335 million, flat with the previous quarter, and a loss of 41 cents per share on a GAAP basis.

Our GAAP loss includes the loss of 15# cents for special items, mainly related to asset impairments, work force reductions and accelerated depreciation on some of our assets.

Gross orders were flat at 304 million and net orders jumped by 23% to 289 million, due primarily to significantly lower cancellations.

Looking forward, the high level of uncertainty impacting the global economies and consequently our business continues.

The future of the economy, the time frame for winding down of the war and the start of rebuilding process in Iraq, the future impact of the SARS epidemic are all unknown at this point.

We've seen delays in customer plans recently and more delays are certainly possible.

Consequently, we aretargeting shipments in Q2 to be in the same range as in recent quarters, 310 to $340 million.

We expect our losses to be reduced to between 16 and 24 cents per share on a pro forma operating basis.

The CPS range assumes that we will have no tax benefit in the quarter.

Back in 2001, we decided that our focus was on successfully implementing our product development programs and on supporting our customers.

Our success on these fronts is significantly improving our competitive position across our businesses.

But beyond investing in technology, and providing top notch support to customers, we must make money.

So in our October call last year we announced that we intended to reduce our cost structure to a break even of about $350 million on a pro forma basis, and that's still the target.

Two very different elements are critical to meeting that goal, and I want to discuss them separately.

First is a resizing of the company's structure to better align with the realities of the business.

As we described previously, that program encompasses the entire organization and involves reductions in people, plant and equipment, and noncore product lines.

We are well along in that area and essentially we are on plan.

The second element in our cost reduction comes from efforts in [inaudible] our material costs.

These reductions came from work with our suppliers to reduce costs, from getting materials from lower cost regions in the world, from outsourcing and from moving some assembly and test work to China.

These savings were projected to accelerate over time and consequently are back loaded.

We are somewhat behind our schedule primarily because of our inability to increase shipments.

By not using up inventory at a faster rate, the new costs are not being dragged into the pipeline and therefore not flowing into the P&L as fast as we hoped.

In addition, our expansion plans in China are being impacted by SARS, adding additional risk that we can meet $350 million during the summer.

Just to be sure I'm clear, $350 million in the goal -- is the goal -- and we're on plan and sizing the structure to meet the goal.

Material cost reductions necessary to support the goal are somewhat behind schedule with a risk that the goal of reaching $350 million break even by summer could push out.

We also said that if the business outlook did not start improving by summer, confirming that $350 million was the appropriate sizing, we would take the break even lower in order to stop our losses.

At this point, we are holding the $350 million target but recognize we may have to lower that later this year.

Before closing, let me offer a few highlights of our quarter's business.

We mentioned China in the context of cost reductions, but let me update you on our overall activities there.

We believe there are significant opportunities in China for our customers and for ourselves over the next few years.

Teradyne is not a newcomer to China.

We have been supporting customers there for 20 years and we now have over 800 test systems in the country.

In early March, several of us attend add celebration to mark the opening of our new facility in Shanghai.

It supports the activity of our semiconductor tests, assembly test and Connection Systems Division in China.

As part of the event we announced the shipment of our first J750 system made in China.

Over the course of this year we will move the system integration and test of all of our J 750s to China.

Driven by both our internal and external customers the 50 people working for Teradyne in Shanghai at the end of last year are projected to triple by the end of 2003.

But SARS must be identified as a major risk item in achieving our targets close in.

The semiconductor tests we saw a seasonally low level of activity in the consumer area and a slight falloff in the computing areas.

These were offset by significant strength in image sensor tests and by a resurgence of demand for power PC chip testers, by an expansion of our list of cell phone customers and by further penetration of Tiger in the computer and communications chip applications.

During the quarter, there were two major events.

First, we broke into the graphic chip and PC chip set markets at companies like ATI and Beer (ph) with the Tiger.

And, second, we had a number of wins in foundry and subcontractor customers in China in a variety of consumer markets, several of which were with new customers.

We also continued to introduce new instrumentation on the FLEX system.

In this case, to allow us to address the test needs of our automotive customers.

At Connection Systems we had an improvement in both gross and net orders.

Shipments were driven main by new product introductions from our traditional customers and remain in the range of past several quarters.

We are continuing to make progress on improving profitability through plant consolidation, improve utilization and cost reduction activities.

Design ends remain at a very high level with more than 40 again this quarter.

BHDM and GBX Design wins more than doubled.

Connection Systems continues to introduce new products to exploit opportunities.

In January, the division announced VHDML series, a lower cost version of the industry standard VHDM, which is rapidly gaining customer acceptance.

They are also expanding into new business areas, such as providing their high technology PC board technology to both military and commercial customers, and expanding their range of system integration and test services.

In our assembly and test -- in our Assembly Test and inspection business, we continue to experience a very competitive environment.

There is plenty of used equipment available and there was little growth in demand.

Where we are getting business is where we have differentiated products such as our 7300 AOI system.

We introduced two new products in the quarter, a new in circuit test system, test system LH and a new optical test product.

Test station LH has a unique capability that ensures safe testing of the increased number of low voltage technologies.

The 7210 is aimed at post placement applications and surface production lines and able to perform process [inaudible].

Also during the quarter, we sold off three commercial product lines that we deemed to be noncore to our future.

Our supply line execution software products, our manual x-ray rework test station products and our manual x-ray products.

In the military aerospace segment of Assembly Test we saw seasonally lower sales on the quarter but we had significant design wins in the C 17 and joint strike fighter programs.

We also have signed a licensing agreement with a Boeing company to manufacture and market a new Boeing designed automated test system for airplane components.

Boeing designed this next generation test system using Teradyne's 9,000 series as its core.

It will replace current Boeing design systems for testing avionic packages.

These wins will add to our revenue over the course of 2003 and beyond.

Our Diagnostic Solutions business continues the success they had in 2002.

In the first quarter, the business remained profitable as it was throughout 2002 and it ran at an annual sales of about 100 million.

We started volume shipments of portable diagnostic systems to the worldwide deal airships of a major Japanese automotive manufacturer and we expanded our scope with that customer with orders for our PDA based testers for their might cycle and marine business.

Also in the quarter we beat out the incumbent competitor at a European automotive manufacturer who [inaudible] the new testing applications and we provide our first test application to four different international customers at their facilities in China.

In broadband test, our customers continue to hold off placing orders despite favorable trial results with our products.

While the deployment of high speed networks as described in the press will require capital spending, as yet these orders aren't being released.

Our strategy is to continue to broaden our product line, to include assurance tools, for both cable and DSL networks.

With our present sales, the business remains at about break even.

In summary then, where do we stand?

We have understandable concerns about the state of the world which we cannot control.

But we have increasing confidence about those things we can control.

Our cost reduction program and our improving competitive positions across all our business should allow us to do better than our competitors no matter what this year brings.

And now I'd like to turn it over to Greg to review our financial performance in more detail.

Thanks, George, good morning, everyone.

Our sales in the first quarter of 335 million were flat with the fourth quarter and up 35% year over year.

We had a net loss of 76.5 million or 41 cents per share on 185 million shares.

This net loss included a loss of 15 cents for special items related to asset impairments, work force reductions, and accelerated depreciation on some much our assets.

Our gross margin the first quarter was 84 million or 25% of sales.

That was due to inventory provisions for memory products in the previous quarter.

R&D expenses were 69 million or 20% of sales down 5.7 million sequentially.

Our SG&A expenses were 67 Million, up 2 million from Q4.

We had net interest in other expense of 3.9 million in the quarter and we provided 1.2 million in foreign taxes.

Our quarter ending head count stood at 7,376 people including about 6800 regular employees.

This total reflects a reduction of about 330 people during the quarter.

From a product point of view in the first quarter, semitest sales were 50% of the total, seconds systems 28%, Assembly Test and inspection 13%, and our other test business, consisting of broadband test and diagnosed sticks solutions 9%.

Note that the Connection Systems proportion given here and throughout this discussion is net of any intercompany transactions [inaudible].

On a geographic basis our sales showed a growing dollar proportion coming from Asia with Europe essentially flat and the U.S. down.

The percentage details are as follows.

U.S., 39%, Europe 20.

Japan 8, Korea, 2; south Asia 19;

Taiwan 10 and the rest of the world 2.

Our gross bookings in the quarter were 3004 million, flat with the previous quarter.

We had cancellations of 14.5 Million, of which 12.2 million came from Connection Systems and 2.3 million from semiconductor tests.

We believe that at this point further program cancellations and seconds systems are unlikely.

On a sequential basis, our total net bookings were up 23%.

Semitest was up 18% and Connection Systems was up 14%#, Assembly Test down 12%, and our other test businesses down 8%.

On a year-over-year-basis, total net bookings were up 37%, of which semitest was up 69%.

Connection Systems was up 53%, and Assembly Test and inspection was up 9%, and other tests were down 29%.

A product distribution of net bookings was 52% for semitest, 25% for Connection Systems, 13%# for Assembly Test and inspection and 9% for other test businesses.

Our book-to-bill ratios based on net bookings was, therefore, .86 for the overall company, .91 for semitest, .77 for Connection Systems, .89 for Assembly Test and inspection, and .87 for our other test businesses.

At the end of our quarter, our backlog stood at 394 million, of which 78% is scheduled to ship within six months.

On a geographic basis, our net bookings for the quarter were as follows.

U.S., 39%.

Europe, 23.

Japan, 13.

Korea negative 1.

South Asia 19.

Taiwan 4.

Rest of world 3.

Moving to the balance sheet, we ended the first quarter with cash and marketable securities of $508 million, down $33 million from the end of 2002.

Receivables stood at 222 million or 60 days sales outstanding an increase of 12 days over an abnormally low 48 days in the fourth quarter.

Inventory ended the quarter at 252 million or 19% of sales, down 28 million from the end of 2002.

We spend $18 million on capital in the quarter, while depreciation and amortization was 40 million.

In the second quarter, as George Mentioned, we expect sales to be between 310 and 340 million with a pro forma loss of between 16 and 24 cents, again assuming no tax benefit.

Although we expect that there will be special charges in the second quarter, we are not able to project them with any degree of certainty at this time.

Our guidance is therefore all being given on a pro forma basis.

We expect gross margins to run between 26 and 28%.

R&D and SG&A should each reach run between 19 and 20%.

We plan to reduce inventory by at least 15# million and spend 20 million or less on capital.

Depreciation and amortization is expected to be around 37# million.

We expect to end the second quarter at capital and market securities, at the worst case flat with the first quarter.

Derrick, we'd now like to open the discussion for questions.

At this time, I would now like to remind everyone if you would like to ask a question press star and then the number one on the telephone key pad.

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

Your first question comes from Robert Maire with Semiconductor Equipments.

Hi, Tom, a question related to the SARS issues.

We've heard from other companies that that is impacting their forecasted orders.

Can you give us some guidance on that?

How much of an issue do you believe it to be?

A second half to that question, we seem to be hearing a little bit more activity as utilization rates increase.

Could you give us some commentary on utilization rates that you're seeing in Asia?

Tom, why don't I do the SARS and you talk --

Okay.

think the -- I see it as to be two impacts on the industry, not just us, but on the industry from SARS.

One is a series of operational issues and the second is the impact it may have on expected business and expected new orders.

The expected business, new orders, is very difficult to size.

The -- I think the question there is if customers are able to keep their shipments -- if the demand is up and customers need the equipment, then the orders will stay.

But the operational side I think is where there's -- I can add some insight.

The operational side to us has two areas.

One area is the area of how it might impact our break even and drive to get costs down.

The second area it could impact us is potentially in how -- in some difficulty in supporting customers.

On the cross town side, clearly what we're trying to do as we move 750s and after that, some other products to China, and as we try to grow our organization in China from 50 people to 150, as it's adding people, developing a supplier base, mostly in Asia, and transferring technology, so we're asking people from North America and Europe and other parts of the world to go to China, help transfer the technology.

We're asking people from China to come to other parts of the world to learn the technology.

We're trying to get many -- build up our procurement sourcing organization and the confusion around SARS and some of the logistics issues around SARS will have an impact on that.

Have you seen any impact in the last two or three weeks?

Yes we've seen impact in the last couple of weeks.

We find it is increasingly difficult for us to ask people from North America to go over and stay a month and help someone learn how to test a very difficult option.

Or to help solve some particular problem.

We're also seeing difficulties in supporting the customer side.

Let me give an example.

We know when a large system is being installed in a customer's facility.

Often times we do that installation by asking people to go -- for example, from Singapore to China or Taiwan to do the installation.

The customer is asking us to have that person come to the country and be quarantined 10 days before they'd like to have -- not like to have -- before they will let them come into their factory.

And then when the person returns to his home office, he's asked to work ten days out of home in essentially a quarantine basis as well.

So a two or three or four day task all of a sudden becomes 20 days or 23 days.

And, I think if this grows and continues to become a big problem it will obviously have impact on customers and -- I think we have some real advantage there.

First, as a general statement, if I use the term embedded customer teams, it may help create the mental model.

We have a large customer team organization in Taiwan and we have a large customer team organization in Singapore and we have a large customer team in Japan and Korea and so on.

We have a relatively small customer team in China, and therefore the fact we have local teams in the local countries will take care of the ones where they have to support installations and problems in their own region.

But we'll have some complexity as they are asked to move around.

Do you think you've seen an impact on orders already?

I don't think we've seen an impact on orders.

I think also we have an advantage.

We're finding ways to do more and more diagnostic work through E-connect and being able to diagnose systems here in the U.S. because they are tied to the local machine.

We also have a 60 site Teradyne picture-tell (ph) meeting network so I think customers and the equipment providers will push these as much as they can, but to size what the impact may be at this stage is difficult.

On the utilization front.

I think the overview of what we saw was that we've had very high utilization of our primary systems meaning the Catalyst and the J 750 which have been the overwhelming majority of our semiconductor test sales in 2002, and also high utilization of the Tiger system, particularly at IDMs which is a key product for us in 2003.

We did see a falloff of utilization at the subcontractors as we move from Q4 into Q1.

The April data, however, indicates that there is a resurgence of several points worth of utilization at the subcontract locations for those system types, particularly with the Tiger and so the increase in activities that encouraging sign for us looking forward into Q2 and beyond.

Great, Thank you very much.

Your next question comes from Jim Covello with Goldman Sachs.

Good Morning, thanks so much.

Couple quick questions.

I was wondering if we could get a little more granularity on the path to profitability.

We talked about maybe the possibility of maybe being pushed out a little bit from the summertime, so are we talking about a profitable month in late Q2 or a profitable month in early Q 3?

If you could maybe just help us out there.

And, then, is the path to profitability linear so we should go from somewhere between 16 and 20 cent loss, linearly down to zero or is there going to be kind of a cliff break even kind of period in the Q3?

And, then, I guess the second question would be, how much can you really squeeze your suppliers?

We're hearing about this all throughout the chain.

Is there a point at which the suppliers are going to push back because they have their own liquidity concerns?

I'll take that one.

We've -- our plan has always contemplated that it would be back end loaded for many of the reasons George mentioned, a big part of the savings that we have yet to fully secure, but we have a line of site to it is in the material cost.

And to get those savings you need to -- in certain instances, you're changing vendors and you need to get parts requalified and that takes some period of time to do.

And when you couple that with you have existing inventory on your balance sheet, that you need to work your way through, first, it takes a while for that to show up just mechanically in terms of how many units you have to ship.

So the program is still proceeding.

There is some delay, though, in the material side of it.

But we're confident that we will get there.

When you talk about time frame, let me clarify what we said was if we had $350 million of revenue, we would expect to be break even at the operating level.

So to answer what we might look like further out, I'd like to just keep the conversation at 350 because the revenue could be higher or lower.

But at the 350 number, tag that we thought was an aggressive target way back when we set this in Q3, I think we're making fairly good progress.

And we also see that, you know, this is clearly a temporary issue for us to work through.

We're obviously focused on the earnings power and the various businesses and return on invested capital and Connection Systems but right now it's clear that the first milestone we need to show to the external world and our employees is that, yes, we are going to achieve the break even plan and we're committed to it.

So you think you can be break even on an operating level in Q3 or is it just going to be sometime during Q3?

I think it's more likely that if we had $350 million of revenue we would be break even in Q4.

Now could the end of Q3, you know the last week or something, that day forward?

I think if you look at the total Q3 results and put in $350 million of revenue and said how much incremental gross margin should provide or take away if we're more than 350.

Then I think you'd find that there's likely a gap in the third quarter currently.

Now if shipments picked up a lot that could help close the gap, but right now we're seeing that the material cost is the big bar on our [inaudible]-- and we've had a lot of programs to get those savings.

So I'd say it's much more likely Q4 and I'd say Q3 would be high risk but I want to completely discount that sometime toward the end of Q3 from that date forward you might have achieved that sizing.

Can I just comment on the squeezing supplier side?

At the beginning of cost out everybody lunges to just press harder on your suppliers and certainly we did as well as everyone else.

But this has gone on long enough where everyone has realized that the only way you're going to get the cost down that you need is to change your designs.

Find different processes.

Change the specks, change the performance.

And fortunately we put a lot of -- we put about as much focus on just squeezing the supplier, if you will, as we did on how do we change what we're buying from the supplier so that we can get costs down.

The second point I'd make is at the beginning, the supplier may see -- I was just squeezed, but as Teradyne has found they have to lower their fix costs and their structures and the end result is a lower cost structure.

So have many of the suppliers and the view that we're getting just from squeezing the supplier I think is -- certainly there's a big element of that but I don't think that's the major thrust we've had.

Terrific.

That's all very helpful.

Thanks so much.

Your next question comes from Edward White with Lehman Brothers.

Hi.

Thank you.

Two-part question.

First I was wondering if you could talk a little bit more about the dynamics of the accounts receivable change, the dynamics behind the low level in the fourth quarter and the jump up in the first quarter.

Secondly I was wondering if for semiconductor test you could talk qualitatively about the progress of some of the major product platforms in the quarter such as Tiger, Catalyst, J 750 Integra FLEX.

I'll take the first one on receivables.

The receivables in the fourth quarter at 49 days was a record low for us looking back as far as you can look back.

And what happened in the fourth quarter was essentially everything went our way from -- we had very few extended terms.

We had higher shipments earlier in the quarter.

And the type of performance that you get periodically but it's not something that's sustainable.

We have a what we call a model for receivables where we expect it to be over any period of time and the growth in receivables in Q1 is, you know, one day under that model so it's still slightly favorable, so where it is landed in Q1 is not a concern if you look at a series of control charts over a long period of time.

We're still within the range that we would say is our model.

And obviously we're going to do our best to keep it at this model.

Let me try to address the product story here.

I think we had a good quarter in the product side.

I think particularly Tiger, which you know is a key product for us, it has been winning at the high end through all of 2002 continued to penetrate some significant markets for us in the most recent quarter.

And it's I think noteworthy by the first penetration by us into the graphic chip market which has been a hot market and a heavy consumer of test equipment.

We had a press release on it -- when we had there at ATI, we also have had further penetration into the PC chip set market, where we had already had a presence but we had a press release in the quarter and we have another press release which is yet unannounced in that market place.

Again, here's a market that is historically a pretty good consumer of test capacity.

So it's a good place to be and Tiger has some pretty unique capability against both of those end markets which is proving to be a big benefit as technology moves forward.

We also had a major win in the quarter in disk SOC Devices, which are a new complex device for CD players and PCs.

And the FLEX had two important wins, one on the RF world and another in the cell phone market.

So we had -- we also had additional wins with the Catalyst and the J 750 that continue to roll along every quarter and get new wins in the technology markets in which they compete, which are primarily consumer oriented these days.

So I'd say we had a good quarter with some major Tiger wins and I think we're looking forward to having a continued success through the year.

Thank you.

Your next question comes from Bill Lu from Morgan Stanley.

Thank you.

A couple of questions.

I know you don't like to talk about bookings but given the fact -- [inaudible] is up in April...pretty healthy numbers in the second quarter-- can it be expected to be up sequentially?

We're not going to give guidance on orders any more than we have in the past, Bill, we're not able do that with any reliability at this point.

We draw comfort from the fact utilization is up.

But I think you and the other analysts have as much contact with the end customers as the three people sitting at this table, probably.

I think you can probably estimate what that means in terms of orders yourself.

We're encouraged but we're not going to quantify that at this point.

Okay, that's fair.

Just -- related to that, if I look at your backlog it's a little bit low in the quarter right now.

Is your level where you'll be uncomfortable operating under?

Or, you know, could it be under a quarter in backlog?

Well, let me try to answer that -- talk about backlog.

There's no question that, you know, we had book-to-bill this quarter of about 86 or 87%.

We shipped more -- shipped about 46 more than we booked and backlog has come down and backlog is now, like you say, 15 or so weeks.

Now, in a perfect world, what would we like?

In a perfect world I'd like more Backlog, particularly if it's not cancellable and particularly if the -- when there's a scheduled delivery date it can be shipped.

But in this part of the cycle nobody has that.

And the basic question is what's - really what's the customer demand.

Whether it comes from backlog or whether it comes from new orders probably doesn't make too much difference.

I'm not shipping anything the customer doesn't want.

And I'm shipping anything he wants I am shipping.

I need the revenue and he won't take it to extreme.

So the issue is risk.

Now, I want to describe two different models might be helpful.

Model A says I've got $650 million backlog.

In my previous quarter I had net bookings of let's say 200.

And I want to ship 300 million.

Let's say model B. Model B has $400 million backlog.

I booked last quarter net bookings of 250.

Say 250.

And I still want to ship 300 million.

Now, which of those two models would you be more comfortable with?

On one hand, if the $600 million backlog was solid as a rock, you'd probably say that one.

On the other hand, at this part of the cycle that may be the higher risk profile to Teradyne.

Why?

Well, at 600 million backlog that I thought was pretty solid, I would be putting in place a material pipeline to support that.

I would probably dilute myself that we ought to -- things are come b back great.

We can then do less cutting.

So forth and so on.

Therefore it would -- therefore I think that mold represent as higher risk for Teradyne.

On the other hand, model B is a higher risk for my customer.

And I think what this whole -- what's going on in the industry is to find the balance between what is the right risk for the customer and what is the right risk for the supplier.

And the real question is am I going to ship 300 million in either case?

If the demand is for 300 million and I have little backlog it will come in.

If the demand is not 300 million and I have 600 million in backlog, the customer will lower what I can ship.

While we would like a different World, I'm not particularly uncomfortable -- certainly I'm not uncomfortable relative to last quarter very much.

I don't know if any of that made sense.

No, that's very helpful.

Thank you.

Just one last question.

You talked about the J 750 being manufactured in China.

Is that just J 750 or does that include the FLEX as well?

As this stage it's just the J 750.

Okay.

Thank you.

Your next question comes from Tim Arcuri from Deutsche Bank.

Hi guys, actually I had three quick ones.

First is a follow up to that backlog question from Bill.

Can you tell us how much of the backlog is semitest?

Yes, just give us a minute.

Semitest is $224 million of that backlog.

Okay.

Great.

I guess kind of following up on that, you know, give than we're now down at such low backlog levels would it be correct to assume that we're going to have to rely a lot on some turns bookings business here over the next couple of quarters?

Yes.However, at this point it is not much higher turns to business -- it isn't much higher turns business than last quarter.

And I think the question is, is the business model that the industry is going to have, all of a sudden becoming quite different?

And we'll have to find ways to operate on smaller backlogs.

But I think you can't make that -- make the conclusion whether that's going to be the case until you really see what happens on the upside.

Tim, one other thing, if you look at the backlog for semitest, Q4 versus Q1, it was 19 weeks in Q4 and it's 18 plus in Q1.

Right.

There's been no material change in the semitest backlog and that's the bigger issue.

Most of the other businesses pretty much run on a turns basis with more book and ship in the same quarter than the semitest business historically.

So that helps.

It's a better situation than it could be in this environment.

Right, right, that's kind of what I'm getting at.

Basically asking the same question that Bill asked but kind of on the semitest side.

What is the minimum, you know, 16, 17 weeks, based on discussions I think that we've had in the past, that's probably the absolute rock bottom that you'd want to see semitest backlog get to, right?

Well, certainly the fact that a lot of the SOC testers have a lot of options and configureability -- not custom but unique to each customer.

The longer have you the better.

A big portion of the business we can live with lead times shorter than that.

I think the issue on lead times Is...one question is when's the next open slot.

The other question is, if you have a large volume, how much of it can you keep up with?

And I want to make sure and I keep telling our customers that the -- answering it by when the next slot is available may be one lens to look at.

The more important lens is when you want 20 machines, what's the lead time for 20, and that's quite long.

I think, Tim, the rule of thumb you're looking for is more like 12 or 13 weeks rather than 16 or 17, but I think George has the right point here, that it's really what you want to order, how much machines you want, when's the next open slot.

All of those things play into this when you get into the real world of a customer order and it ends up to be configuration dependent.

Which machine do you want.

Is it J 750?

Is it Catalyst, Tiger?

They all have different lead times.

It's do you want a thousand opinions or 300 pins?

Do you want this list of options versus another list of options?

All of those have different lead times and all of those have different -- we have a different ability to deliver one of those machines and an even different ability to deliver five or six of those machines, so it's a little more complicated than the easy rules of thumb.

Okay great, I guess if I can just follow-up quickly on one more thing.

If I can get a little more granular on break even.

With TCS GAAP break even this quarter, I know that we had talked about ATE and TCS being break even in Q2 and we had hoped that ATE would be break even in Q3.

So I'm trying to see kind of where that has shifted now that we've kind of shifted overall corporate break even out.

Maybe a quarter or a couple of months, at least.

Let me start with the TCS break even.

TCS going into -- ending the first quarter, they lost about $5 million on $96 million of revenue.

Looking forward to the quarter we think they'll be in much better shape.

I think TCS, the - nature of their business is they can get back to profit than some of the other businesses that have much heavier R&D investments continuing.

So we'd expect TCS to be back to profits on near term.

Was there another question in there?

Yeah, I was just trying to kind of ascertain whether we're still expecting ATE to break even in Q3?

Maybe if you can give us the same numbers for ATE in Q1, just so we can figure out kind of what the linearity might be to get there.

You mean semiconductor tests right?

Yes, yes, right, sorry.

Semiconductor tests I don't think we said it would break even in any particular order.

What we had been saying is if we had $350 million of revenue we would size the company such that we could break even on an operating basis.

And saying that, there's some businesses that will be making money and some that would still be losing money.

And the semitests at that point it all depends what the revenue is, too, of the various businesses.

So it's a very difficult question to answer, per se, with any precision because the mix of business can vary quite a bit and the profits you get on incremental sales in the business vary quite a bit as well.

Okay.

So I guess it sounds like even when the corporate break even hits, be it tend of Q3 and Q4 ATE probably still loses money at that point?

Well, how do we pick the 350?

Maybe that's the thing to go back to.

We said what do we think each of the businesses we need -- what do we need for results of each of the individual businesses for us to be at model profitable and model changes for each of the businesses?

And then we worked it down and said, how does that translate to what shipment level for each of the businesses to being break even and we said we will drive to get the company's size to that level as soon as we can.

Hopefully the summer, now it looks a little after the summer.

But we would size for that level.

Now, semis -- I think what Greg is saying semi's piece of that it isn't as clear they can get to the shipment level as soon as some of the other groups can.

Therefore, you may have us achieving the 350 break even by some groups being ahead and some groups being behind.

And this is very dependent on mix.

It's also, by the way, take the mixed complexity.

We have to first say what's the mix between semi and let's say board tests.

We then have to say within Semi what's the mix of products?

Catalyst, Tiger, 750s.

Then we have to say what's the mix within J 750s of ones that are able to manufacture in China versus the ones that are coming out of North America.

We have to say what's the mix in terms of options and so on.

So the sizing of this thing is pretty dynamic.

But we're trying to get all of our businesses to break even as soon as we can and we're trying to get all of them sized to the break even level with a mix of 350.

We will try do that by summer.

Now it looks like that will slide out a little.

Okay, guys thanks a lot.

Your next question comes from John Pitzer with CSFB.

Yeah guys, I hate to hammer on this point, but on the bookings front again, can you comment on whether or not you will see any divisions on the June quarter with a positive book-to-bill.

Specifically, can you talk a little bit about Taiwan.

A lot of the incremental growth I suspect will be coming out of Taiwan, especially if the founders are breaking up, yet that seems to be the region with the weakest book-to-bill and then I have some follow-up questions.

I think it's entirely possible that we'll have divisions with the book-to-bill greater than one in the quarter, but you know, there's risk on that obviously in this kind of environment, but is it possible?

Yes, it's certainly possible.

I think it's hard to talk about bookings in a high level sense, but we're going to do that as opposed to trying to put numbers on it.

I think if you look at Taiwan, I think, again, we're encouraged about Taiwan mainly because the utilization of the sub contract space took a jump up from March to April and the people with the feet on the street there are telling us that there's a very large amount of activity.

Now they are also telling us they have customers that are beginning to cancel meetings because of concerns about SARS and all that so this is a complex mix to look at.

The activity appears to be high t interest in our products appears to be high.

The utilization appears to be high so on balance we're encouraged about Taiwan, but it's early in the quarter yet and there's a lot of unknowns.

Then, Tom, I'm just trying to get a sense of some of the cost savings leaking back into the model.

I thought I heard you say that gross margins in the March quarter were impacted by inventory provisions. [inaudible] Could you talk about the pricing environment out there?

Then I have one last question.

I'll talk part of that.

The gross margins were $7 million better without the -- excluding the one-time memory write down in the fourth quarter.

If you look at our path to get the 350 model you will see that much of the improvement in our margins come from the gross margin line.

There's some improvement certainly in R&D and SG&A and much of the improvement is in gross margin going forward and that obviously includes everything from material costs down to discussions we've had as well as infrastructure, taking the infrastructure down further to ensure that we can intersect gross margin at about 37% at 350 model.

That's the biggest area that we're focused on now and over the next couple of months.

Then how does pricing influence the margin?

What's happened in many instances, you respond to prices in a competitive shoot-out based upon the facts and circumstances and your differentiation, and I think what's happened in some of our businesses, Connection Systems as an example, they've responded pricing very competitively, but now they need to catch up and get the lower cost advantages that are basically presumed in the ability to price business in that manner and I don't think it's uncommon for suppliers to have to lower their prices first if it's an important piece of business to win provided you can see a path to get your cost in line through getting lower cost materials or manufacturing costs.

Could I just go back to the bookings?

I want to try to put a -- maybe a slightly different lens on one way to think about bookings.

Gross bookings for the quarter have grown -- grew five quarters in a row.

And in Q4 last year, you know, jumped up about 20% to around the $306 million level and it stayed there.

Net bookings have been up 6 quarters in a row and jumped up 23% this quarter.

And are at a level where it's about .86 book-to-bill.

That trend continuing or that -- those results staying flat another quarter or two probably says that we can stay flat or about the level we're at.

George --

If that happens we should have improved losses.

And any upside is great.

The other question on the margin, I may not have answered directly, is that the costdowns we believe will enable us to get back to the margins that we've had in our businesses.

What we assumed, and I think some of the pricing to be competitive occurred in advance of working through the material cost so I think once we secure that I think our margins will be back where they historically have been.

Then, George, just finally as a last question.

I'm not necessarily worried about you guys getting to break even at 350.

What I'm more concerned about is whether or not that's the right level for what could be a somewhat muted growth path in this recovery.

I guess when you guys look at the $350 million level as the right break even level, is there an assumption there's pent up demand out there right now in the market place.

The reason why I ask, we have sort of already seen the best part of the unit recovery, or at least the easy part of the unit recovery.

It's sort of my assumption that the best we can expect going forward is a sort of 8 to 11% unit growth in semis, which has been the historical norm.

Do you think I'm underestimating that?

Is there an assumption of pent up demand, or is that 8 to 11% what you guys are modeling?

I think my assumption is there's pent up demand.

Obviously all of these metrics we have are high level metrics, what you would really like from metrics is seconds of test time.

We can go from dollars to units but all units don't take the same test time.

Now, the mix of units the industry has had for a long time have been heavily consumer, heavily micro controllers and because a portion they haven't been buying is the industrial consumer for, you know, routers and communication and telecom and so on.

And so the -- you may have a small growth in units but a fairly large growth in test time, depending on what the mix of parts are, and I think there is a built-up demand there.

Well George, if the more muted scenario plays out what then becomes the right level to size the business to?.

We don't know.

We'd have to bring it down, that's for sure.

Derrick we'll take one last question.

Your last question comes from Mark Fitzgerald with Bank of America Securities.

On this target revenue for break even here, what's the data point you're looking for in the summer to decide if you have to lower that?

Customer demand.

So I mean do you have to have bookings at a certain level?

What should we as analysts be targeting?

Well, it's a combination of factors.

It's ultimately what demand do we see from the customer and that's represented sometimes based upon [what's on the backlog schedule to ship.

It's represented by bookings you received and represented by forecasted business you expect to close.

So you try to base its on a bunch of information and you're continually making that assessment.

That question is 350 the right number, we ask that ongoing.] Task number one is get to 350 at the same time we're revisiting it, is that the right target.

We continued to revisit it as we described in the prepared remarks.

It's something that's an active exercise for us but the triangulation is the best way to think about it, Mark.

We do compare ourselves carefully to peer companies, and in those comparisons we take some comfort that we don't see ourselves generally doing better in terms of financial performance.

That's not comparing to all the choices investors have, for sure, at least it gives us some sense with the hand they have to play somewhere into our hand.

We are make some meaningful progress.

If you decide it has to come down, can you in fact respond quickly enough with additional cost cuts you can still hit a fourth quarter break even target?

Depends on how far we have to come down, but we think so.

Okay.

And are you running with the assumptions at this point of the second half of the year currently, given your 350 break even?

What we're really doing is we essentially assumed flat sales in terms of how we are setting the bill plan and taking on commitments.

And we have established for each business what we think a relatively conservative level of revenue is over a cycle, and we're pushing the businesses to staff at break even levels.

So that whatever you'd spend in a particular line item, let's see if we can spend that at a break even level.

So this constant scrutiny and push in terms of testing the assumptions, and then working that back into, you know, where would you make the tradeoffs in the business.

All right.

Then just one final question on the 16 to 20 cent guidance for the next quarter --

16 to 24 by the way.

Pardon.

16 to 24 but not to be picky, Mark.

What would that range be if you actually embedded the tax benefit into it?

It would improve it by about 36%.

So let me just take.

That's fair, I can do the calculation.

All right.

Thank you very much.

Thank you.

Derrick.

Yes, sir.

I think I'll make some concluding remarks, if we can.

Or is everybody hung up?

No sir, you can make the concluding remarks right now.

Okay.

I thank you everyone for your attention and participation and we look forward to talking to you again at our next conference call, which is currently scheduled for Wednesday, July 16 at 10 a.m.

Eastern time.

If you would like to learn more about Teradyne in the meantime, you should be aware we'll be participating in the following investor events between now and the next call.

A Deutsch Bank tech conference on May 13 and 14 in Las Vegas.

Our annual shareholders meeting on May 22 here in Boston, Salomon Smith Barney semiconductor on June 5 and 6 in Monterey.

Bear Stearns tech conference on June 10 and 11th in New York and a Mors and Cabot (ph) corporate forum on June 24th here in Boston.

And thank you all for your attention and interest and we'll talk to you soon.

This concludes today's Teradyne conference call.

You may now disconnect.