泰瑞達 (TER) 2003 Q2 法說會逐字稿

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 second quarter 2003 earnings release conference call.

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

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

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

If you would like to withdraw your question, press star and then the number two.

Mr. Newman, you may begin your conference.

Thank you, Judy.

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

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

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

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

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

If anyone needs a copy, please call Teradyne's Corporate Relations Office at 617-422-2221 and we will provide you with one.

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

A replay of this call will be provided on our site starting at noon today, EDT.

If it's more convenient, you can access a replay of the call by dialing 1-800-642-1687 in the U.S. and Canada.

Or 706-645-9291 outside of the U.S. and Canada and providing the conference ID number 1543350.

Replays from both sources will be available through the 30th of July.

It's our objective to use this call to comply with requirements of SEC Regulation FD.

Therefore investors should accept the contents of this call as the official guidance from the company for the third 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, Mike Bradley and myself are authorized to supply company guidance.

The matters that we discuss today other than historical information include forward-looking statements related 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 exchange act of 1934.

Investors are cautioned that forward-looking statements are neither promises or guarantees but involve risks and uncertainty that may cause actual results to differ materially from expectations.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission including and not limited to our Form 10-Q filed on May 14th, 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 obligation to publicly update or revise any such statements to reflect any change in expectations or events, conditions or circumstances on which any such statements may be based.

Or that may effect the likelihood that actual results may 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 presented by us during the call will be provided in both GAAP and non-GAAP pro forma operating terms.

By disclosing this pro forma information, management attempts to provide investors with additional information to further analyse the company's performance or results and underlying trends.

Management utilizes non-GAAP measures such as operating results and earnings per share on a pro forma basis that excludes certain charges to better assess operating performance.

Pro forma information is not determined using 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 to GAAP.

Investors will find a reconciliation of our GAAP net loss to pro forma net loss within our press release of last night reporting our second 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 with the rest of the agenda.

First our CEO and Chairman George Chamillard will give the state of the industry and the company.

We will review our performance in the second quarter 2003 and we will provide guidance for the third quarter of 2003.

Then our Vice-President and CFO, Greg Beecher, will review the details of our performance in the second quarter and will provide some additional details in our guidance for the third quarter of 2003.

We will then answer your questions.

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

George?

Thank you, Tom and good morning to everyone on the call.

We had sales in the second quarter of $332 million.

Essentially flat from the previous three quarters and we had a loss on a GAAP basis of 28 cents per share.

Our gap loss includes a lose of 9 cents of special items mainly related to accident payments and work force reductions.

Orders and semi-tests strengthened significantly while in our other businesses they declined.

In total net bookings grew about 5%.

Net bookings for our semiconductor test business grew 23% sequentially, to $186 million.

The highest level in 10 quarters.

Within that $186 million, our product bookings, that is bookings without service, increased 50%.

And our SOC product bookings essentially doubled.

Net bookings for the rest of our businesses decreased $19 million sequentially resulting in Teradyne's total net orders growing 5% to $305 million.

We had gross orders of $313 million, an increase of 3%.

And we had cancellations of $8 million in the quarter.

The lowest level since the third quarter of 2000.

We continue to make good progress in improving our operating results in the second quarter and we're improving at a rate that we will hit or beat our target of a pro forma operating break even sizing of $350 million in sales in Q4.

Those cost reduction trends coupled with a little growth in the second half will allow us to achieve a pro forma operating break even in Q4.

While there are many things that could derail us from making money in the fourth quarter, we think we are in striking distance.

Given that environment, how do things look for the third quarter?

Basically we expect a continuation of what we saw in the second quarter.

In other words, an improving picture in semi-test, a pretty flat picture in our other business and continued progress toward making money.

We expect sales in the third quarter to remain between $310 and $340 million.

But that our net loss per share will be reduced to between 11 and 19 cents on a pro forma basis.

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

Let's review each of our businesses and look at the trends we have seen.

In semi-tests, orders were particularly strong in the subcard market segment.

At more than 50% of the total, sub con bookings were at their highest proportion in history.

Some of those customers made buys of 10 to 20 systems as opposed to the normal subcon patterns of spot market or incremental buying.

We believe this happens when the sub cons feel comfortable that they have business coming in from a multiple customers across a wide range of applications and therefore they need to buy capacity.

The orders from sub cons in Asia were primarily for tiger and catalyst systems.

With the sub cons are positioning themselves to be able to absorb a significant amount of outsource test capacity from their IDM's and [INAUDIBLE] customers starting in Q3.

The biggest success in the quarter was our tiger product, which had record new orders by a wide margin.

The applications behind the tiger buys were PC chip sets, graphic chips, networking applications and [INAUDIBLE] devices.

The other product which received volume capacity expansion was our catalyst test systems.

The primary applications behind these purchases were set top boxes, wireless, networking and optical disk drive devices.

Our new flex system which is still in the design-end phase for most customers had a record booking quarter which included design-ends at three major IDM's.

The applications behind the second quarter flex orders were wide ranging but they included power audio, automotive, FPGA, cellular based band, PDA and display driver devices.

Finally in our very successful image sensor test business, we capped off a long run of successful quarters by shipping our 200th system to a customer in Japan while broadening our customer list inside and outside of Japan.

The connection systems business got a bit better in the quarter.

A number of our customers in the server and networking markets are seeing some increase in demand.

However, excess capacity exists in the industry resulting in continued strong pressure on prices.

In spite of that, profit performance continued to improve.

The division lost less than $2 million on an operating basis and continued to generate positive cash flow.

These improvements came about by continuing our cost reductions.

Such as manufacturing in lower cost regions of the world.

For example, in the first quarter of this year, 24% of our back lane shipments came from Mexico, Padang and China.

In Q2, over 50% of the back lane shipments came from those lower cost regions.

Note that going forward, we have eliminated some unfavorable margin EMS business from our connection systems backlog.

We expect the impact of this to be that the division should run at about $10 million per quarter less than revenue with no deterioration on the bottom line.

In our assembly test and inspection business, the commercial segment continues to be plagued by excess capacity.

The second quarter bookings were at the lowest level in seven quarters and the availability of used test equipment is still serving to depress pricing for new systems.

On the positive side, our new test station product with it's safe test protection technology solutions seems to be a striking a responsive cord with customers.

We have received several key design-ends and we have other evaluations underway at major customers. [INAUDIBLE] technology is expanding to encompass larger and larger portion of the total electronic market and with safe test we are able to provide the safest powered up testing of low voltage devices thereby insuring the maximum quality and functionality for that technology.

That differential could prove to be a major advantage to us.

In the mil-aero business we continue to win new contracts for our analogue buss and digital test instrumentation in a wide variety of programs which includes the Navy's cast program, the army's integrated family of test equipment, IFT, and at the F 4 and F 22 program.

Although there are some delays appearing in the European mil-aero programs, the U.S. based programs appear to be on track with some major awards anticipated in the second half of this year.

This sector is clearly a bright spot in a generally weak assembly test business.

Our broadband test division, we remain optimistic that our products solarity and net flare meet real needs in the marketplace and believe that they will eventually be deployed on a much wider scale.

The telecommunications and cable companies are continuing to guard their spending judicially.

And while trials continue with a number of premier companies in both sectors, the orders continue to be delayed.

In Teradyne's diagnostic solutions business, we continue to be profitable.

The majority of the business continues to be on the manufacturing lines and in the dealer service area at Jaguar and Ford.

Our platforms in these areas have wide appeal and they have allowed us to expand into relationships with Peugeot, Honda and most recently with Volvo.

Given all of this, what's our outlook?

We've obviously focused on what's controllable by us over the last year or two.

That's our cost structure, our product mix, our design-end focus and our balance sheet.

And on those fronts, we are in better shape by far than we have charted a course to profitability.

On the product side, many of our best are hitting stride -- tiger, flex, GBX connector, test stations and the mil-aero business are all moving up.

And our orders have increased over the last 7 quarters.

So I'm optimistic.

Now I will turn it over to Greg to provide you with more details on the business.

Thanks, George and good morning everyone.

Our sales of $332 million were essentially flat with the levels of the previous three quarters and 7% above the level of a year ago.

We had a GAAP net loss of $52.5 million or 28 cents per share on 185 million shares.

This net loss included a loss of 9 cents for special items related primarily to [INAUDIBLE] impairments and work force reductions.

Our gross margin on a GAAP basis was $89 million or 26.7% of sales.

On a pro forma basis gross margin was $91 million or 27.5% of sales.

Earnings expenses were $64 million on a GAAP basis and $63 million or 19.1% of sales on a pro forma basis.

SG&A expenses were $62 million on a GAAP basis and $61 million or 18.3% of sales on a pro forma basis.

We provided $1.7 million principally for foreign taxes in the quarter.

Our quarter ending head count was 7,181 employees including 6,670 regular employees.

This total reflects reduction of about 190 people during the quarter.

From a product point of view, second quarter semi-test sales were 53% of the total.

Connection systems 28%, assembly test and inspection 11% and broadband test plus diagnostic solutions 8%.

On a geographic basis, sales broke down as follows.

U.S. was 36.5%, Europe 19.2, Japan 9.5, Korea 1.0, South Asia 23.9 , Taiwan 8.0, and the rest of the world was 2%.

We had gross bookings of $3-13 million and net bookings of $305 million.

On a sequential basis, our total net bookings were up 5.4%.

Semi-test was up 23%, aTd was down 19%, connection systems were down 9% and our other test businesses were down 19%.

Looking on a year to year basis, total net bookings were up 33%.

Semi-test was up 34%, assembly test down 33% and connection systems was up 169% and other test were up 19%.

Product distribution of net bookings was 61% for semi-test. 21% connection systems. 10% assembly test and inspection. and 8% for our other test businesses.

Our book to bill ratios based on net bookings was therefore .92 for the overall company. 1.07 for semi-test, 0.71 for connection systems, 0.83 for assembly test and inspection and 0.81 for other test.

At the end of the quarter, our back log stood at $368 million of which 83% is scheduled to ship within 6 months.

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

U.S. was 31%.

Europe 13.3.

Japan 8.5.

Korea 0.5.

South Asia 32.6.

Taiwan 11.2 and the rest of the world was 2.9.

Moving to the balance sheet, we ended the second quarter with cash and marketable securities os $532 million up $24 million over the first quarter.

From an operational point of view, we were cash neutral in the quarter.

And $24 million was generated from stock option exercises during the quarter.

Account's receivables stood at $221 million or 61 days sales outstanding, flat with the prior quarter.

We entered the quarter with inventory of $234 million or 18% of sales which is down $18 million from Q1.

We spent $19 million on capital on the quarter while depreciation and amortization was about $40 million.

Into third quarter as George mentioned, we expect sales to be between $310 and $340 million with a pro forma loss of between 11 and 19 cents per share.

Assuming, of course, no tax benefit.

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

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

We expect gross margins to run between 29 and 32%.

R&D and SG&A should each run between 18 and 21%.

We plan to reduce inventory by at least $10 million and spend $20 million or less on capital.

Depreciation and amortization should be around $40 million and we expect to end the third quarter with cash and marketable securities of $550 million or more.

Now I will turn it back to Tom.

Thanks, Greg.

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

At this time, I would like to remind everyone if you would like to ask a question please press star then the number one on your telephone keypad.

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

Your first question comes from Raj Seth from Cowen.

Tom, could you talk a little bit about the rest of our -- the mainstream semi-test business you talked about strength at the high end.

What's happening in the more mainstream J-750 business?

What do you think the outlook is there?

Is most of your expected momentum into next quarter still coming from the high end?

Or do you start seeing a pick up in the mainstream.

I will turn that over to Mike Bradley and let him answer it.

Thanks.

Our expectations for the next quarter are -- we will still see the strength in the mid-to high end of SOC testing.

So I would expect tiger and catalyst to lead the way.

The low end of the product line, the J-750, and the IP-750 for image censor have really been the high runners in the latter part of '02 and the first part -- first quarter of '03.

So we think they will take the second position as we go forward.

But the end applications that are driving this tend to be the high end SOC applications.

Has pricing remained as tough as it has been?

Or have you seen pricing get a bit better in the mainstream and perhaps you could comment at the high end do you still feel like you are getting design wins and gaining share especially against Agilent.

Obviously you are starting to see some volume buys coming off of some design-ends that some design wins that you had a couple quarters ago I assume at ATI and some others.

Do you have any design wins this quarter you can talk about?

That's a few questions in one.

Let me try to capture them quickly and say what I can on the subject.

Pricing I think is about where it's been over the last six months.

No big changes in pricing profile.

I would say that the subject of pricing is -- there is an oversimplification, is pricing getting more solid or less solid?

On large capacity buys that we are seeing now, obviously our customers want to get some share of any scale efficiencies that we have in a volume manufacturing schedule.

There is pricing even in the volume buys that we see.

The new design ends are obviously the place where you see the most volatility in pricing because the competition sets and we set very high bars in terms of terms and conditions.

So in the segment of the market where there is brand-new break in activity that's where you see the highest volatility in pricing.

The pressure overall remains reasonably high on pricing.

The market is 400 to maybe a little over $500 million per quarter and that's a depressed -- continues to be a significantly lower market level than we have had in the past.

In terms of share, I think you know that share numbers are a lagging indicator and they come out from the prime researches and so on an annual basis.

We track share -- we try to track share on a quarterly basis.

Our numbers and these are our numbers which say that we are slightly up in the first half of this year on share.

The design wins, we've announced some design wins this quarter.

I think we had in total in the 25 to 30 range of design wins.

You have to capture that in terms of both customers new products and sockets.

So it's a real mixture of the currency for design wins.

But it's about the same level we have had actually over the prior six months.

We think the momentum is strong and the momentum at the top end of the line with Tiger and with Catalyst has been good.

One last point is flex is starting to move.

We had a record quarter in Flex systems ordered and we are optimistic about the outlook for Flex as it starts to latches into production.

Double digit sequential growth, Tom, here?

In what?

In orders this next quarter.

Orders we couldn't guess at this point.

Momentum is good.

We will have to see what happens.

Thanks.

Your next question comes from John Pitzer of CSFB.

A couple of questions.

George, you stated in the your opening remarks that when you look into Q3, the semi-test business momentum continues the rest of the businesses are looking flat.

Against that I'm curious as to why your revenue guidance of 310 to 340, the mid-point of which would be a sequentially down revenue quarter.

Can you help me understand that?

Are you being overly conservative?

And when secondly, when you look at the subcon order trends going into Q3, can you give a little description about whether or not you think they'll growth sequentially, historically those order patterns have been extremely lumpy.

Q3 tends to be the real strong quarter for the test and packaging industry.

And I'm curious as to whether or not the Q2 momentum will carry through into Q3 and do you expect sequentially up from that customer base or do we need to see IDMs come back in.

Let me start with the question about increasing shipments and are we being conservative.

In the end, -- we aren't holding back shipments.

Whatever shipment level we have is a combination of releases from back log plus new orders we have coming in.

While the bookings in semi have come up dramatically and as we said the highest in ten quarters we are pleased with that.

The total sum of all the demand that customers are pulling us to ship could be flat or could be up a bit.

And we will have to see how that unfolds during the quarter.

I think that the rest of the business being flat as I see it is an issue of food chain.

And you would expect that the semi-conductor device business would start to pick up sooner than the rest of the business will as the end customers have used up inventories and as those inventories and the rest of the stream have to get filled up anticipating the end customer's demand increasing.

So it's playing out about the way you think it would.

On the downside it was felt first.

And on the upside you have to start filling the pipeline for the devices.

So I think that makes sense to us.

On the sub con side, it seems to me there's two things.

One that says what is it that makes sub con customers get so confident that they start placing orders in bulk as opposed to incremental?

It's getting themselves positioned so that they can respond to what their customers are telling them.

They would only do it if they had the confidence that it was coming from a broad range of customers and a broad range of devices.

Also there is an issue -- it isn't just placing the orders but taking delivery.

A significant portion of the bulk orders that we saw in Q2 shipped in Q2.

And this is very, very encouraging to see the pattern.

Will that continue into Q3?

I would expect we would see the IBMs would be back at the table doing some buying as well.

If you look at the utilization in the IDMs and the sub con, it's pretty high in the IDMs.

And they will either choose to further outsource that or they will buy it themselves.

We will have to see how the quarter unfolds.

George, a quick follow-up question, part of the assumption behind the $350 million break even is the idea that there has to be some pent up demand out there.

Given that Q3 revenue trends could be flat, plus or minus, can you help me understand why you are confident that 350 is still the right level and that 350 is an achievable goal in the calendar fourth quarter.

I think you have two different trends.

One that is tied to whether we can break even in the fourth quarter or not.

One trend is the cost reduction trends.

The operation improvement.

We have been focusing on improving our operating results for a long time now.

And the trend on that is encouraging.

We know what cost reductions we have made.

We know what plants we have closed.

We know what head count reduction and so on and so forth.

So that trend coming down we are very confident on that will be 350 or could be something slightly less.

The question, of course, is are we going to get the slight improvement in bookings that would give us the increased shipment for that to occur in Q4?

That's really -- I don't know, it's more of a tier of evidence issue.

What's are the tiers of evidence?

It's the highest bookings in semi we've had in ten quarters.

The lowest cancellations in the total business in three years.

At the margin customers are pulling in and not pushing out.

Sub cons are ordering in bulk and therefore have the confidence to do that and the confidence to take those orders.

Capacity utilization keeps tightening up.

Device units continue to grow.

Those tiers of evidence all build up to one that says to me this is one of those that if it looks like a duck, if it quacks and waddles it's probably a duck.

To say that the recovery is sharply under way would be strong, but to say that all the tiers of evidence point that direction.

I think it's a combination of our trends on cost cutting and those trends I described that make us feel pretty confident that Q4 we have a chance of breaking even.

Thanks, guys.

The next question comes from Jim Covello of Goldman Sachs.

Couple of quick questions.

Can you help us out with which specific line items are going to help you make the big leap from Q3 to Q4?

We are talking about at least a 10 cent, 11 cent improvement in EPS.

Obviously it has to come from a little bit of a bump in revenue, but is it more on the margin or the operating expense line that gives you the incremental EPS boost.

And secondly, George, you mentioned a little bit of a strategy shift with EMC in the connections business system, if you could expand on that a little bit?

Let me swap the order and I will comment on the EMS piece and ask Greg to comment on the improvement and operating results.

The EMS business has a series of jobs -- a series of specific orders that have high top line contribution and relatively low contribution to profitability.

And we have tightened up our policies on pricing and what pieces of businesses we are willing to take and the result of that is we are strengthening the mix of business we have in TCS such that even though we may have a small reduction in top line, we will have no deterioration in bottom line and that's tied to specific programs at specific accounts.

Greg, maybe you can comment on that.

In terms of how we get to the 350 break even by line item, the biggest area of improvement for us is in the gross margin.

We expect to be at about 34%.

This is on a pro forma basis in the fourth quarter gross margin from the 28% that we reported this quarter and the source of those savings is a long list but includes consolidating locations, it also includes material cost reductions and a lot of those material costs reductions we've described in the past tend to come toward the end of the year because you have to work through your current inventory, qualify the new suppliers.

That will start showing up in much larger amounts in the fourth quarter.

So gross margins is the biggest area for improvement.

The other areas where there will be smaller improvements would be R&D, we would expect would go from 19 to 17% at 350 million in revenue and SG&A 18 to 17.

The SG&A area was taken down quite a bit this quarter and what we're doing in areas like that is we are simply consolidating any transactional work and standardizing it and therefore we often find we need less computers or storage devices and we could lower our service cost as well as optimize the process.

That's what we have been doing for a long period of time and we see in the fourth quarter gross margin would be the biggest contributor.

Thanks very much.

The next question comes from Brett Hodess of Merrill Lynch.

Hi, this is Tom Diffely.

Can you talk a little bit about the lead times in semi-test maybe both today and where you think they might be a couple quarters from now.

This is Mike Bradley.

The lead times have shortened in the second quarter.

We have shipped roughly parody to what we have booked over the last nine months.

As we raise our shipment levels, the lead times for all the products have come down and we are operating anywhere from 8 to 14 week lead times depending upon the products.

And is that vary quite a bit between product lines?

Well, 8 to 14 is -- that's the range.

The thing we tried to do in the high demand product, the Tiger, for example, is to actually get position so that a spike in demands would not shoot the lead times out.

If you took the 8 to 14 week range, Tiger would be in the middle of that.

Thank you.

Your next question comes from Mehdi Hosseini of SoundView Technology.

Going back to your comments on gross margin for break even, if I remember correctly, a couple of quarters ago you said that you probably could do 36, 37% in gross margin with $350 million in revenues to hit your break even target.

I'm just curious to know what happened to the down take.

You talk about 34%.

That's my first question.

Number two question, as you move away from the EMS related businesses, to what extent are you able to improve margins.

I was expecting that less EMS business would actually help you maybe even lower break even point.

But it doesn't seem to be happening.

So could you add some more color on that.

On the first part, some of the EMS business we had in our original plan to price away our call certain businesses that did not fit our niche.

So that has been in our assumptions all along the way.

So that is part of our plan to get to a more attractive P/L and having our people focus on work that we can capture more value.

In terms of the gross margin, the 34% probably is a bit conservative.

The range could be 34, 37 it is a range and it depends upon when the material costs savings and how much we get in the fourth quarter and now into the product mix explanations as well depending upon what product mix we have, we could have a very different gross margin profile.

When we give you these numbers, 34, 36, they are the latest numbers and they can move a couple of points based upon are we shipping more of a particular division's products?

And within that division, what products within that division are shipping?

I would tell you that our material cost reduction program is on schedule.

There is no slippage there.

And we are going to have cost structure to intersect 350.

Whether it's 34 or 35 or 36, time will tell and that's dependent upon mix.

As a follow-up, going to your booking for semi-tests, to what extent are you accommodating customers by providing financing or actually leasing the equipment to the customer?

There is a very small amount of that activity on some number of customers who haven't completely decided whether they want to purchase or rent for a period of time.

Some of our products, this level of activity is probably less than $5 million a quarter.

It tends to be small.

And in fact that's why some of our depreciation expense went up this quarter because we've had some of that activity and I think the customer hasn't decided fully whether they will keep the existing product that they are leasing from us or whether they will want to at a future date swap it up for one of our other products and that's a decision they have not made and therefore this is their hedge.

I don't expect this is going to become terribly significant, but it wouldn't be uncommon for a couple million to $5 million a quarter periodically to have some type of this activity.

I think, Mehdi, that the overall thought is that our growth and our success here is definitely not predicated on that as a business practice.

That's the point.

This is pretty rare.

But, will we be accommodating to a customer who needs time, absolutely.

Thank you.

Next question comes from Edward White of Lehman Brothers.

Two part question.

The first is with semi-conductor test business reaching a new milestone, highest bookings in several quarters.

Can you talk about whether there are any signs that suggests sustainability?

In other words, as you look at the test capacity base out there, do you think that there is a need for some upgrading of the technology level generally that can go on for sometime?

And on the semiconductor test side also, a lot of the success is new product driven.

Can you talk about the new product outlook going forward given that new products are figuring pretty prominently in the success right now?

Ed, this is Mike Bradley again.

Let's see.

In terms of sustainability, I think it's -- as an earlier question alluded to, the sub con buying comes in a very lumpy way.

It's hard to say will that lumpiness be sustained?

I think it's unlikely that we get the same magnitude of buying from those same customers.

Our expectation is over the next quarter that that spreads out some and we get a broader base of demand from a wider range of customers versus the big slugs that we got in this quarter.

On the upgrading technology side, what we saw in the late 2002 period was most buys were augmentation to existing systems.

New instrumentation and so on added to Catalyst systems so that the existing install base could be driven.

We could get new tread on the tires.

The shift that's occurring now is that the design ends, for us the design ends at the upper end on Tiger and chip sets, graphics, step top box and applications and so on is the driver of the Tiger business and some of the catalyst business as well.

So we think those drivers will continue.

I think George's point about confidence in the sub cons comes from multiple customers giving them demand and that's why we get larger orders in this period versus the spot market buying.

One last thing and the other thing that is shifting here is that as larger buys take place, the market makes some move from a technology only buying pattern to a capacity buying where the emphasis is on productivity.

We are seeing a lot of parallel test increases to our existing installed base of equipment so that multiple channels added or the Tiger system installed so it can do quad versus duel site that you can do in some applications of Catalyst.

I think there is a shift here that's taking place in terms of an economic/cost to test angle that's occurring as the bookings have increased?

And then on the new product front?

New product beyond -- you'r talking about Tiger and Flex?

Or are you talking beyond?

Really beyond.

Because the pace of activity has been pretty active with new products in the last - looking back over the last couple of years and I think that's certainly helping or appears to be helping today.

As you look forward, what do you think about the pace of new product?

Do you think you are where you need to be?

Or do you think we will see the kind of activity we saw over the last couple of years.

I think the pace continues to be high.

There is no backing off in the overall market in terms of new market development, competitively and we have heavy amount of R&D that goes in to increased capability on the Tiger and to expand the Flex capability.

But, to put in perspective.

We are at the phase where we have well over 1,000 Catalyst installed and well over a 1000 J-750s installed and we sold about 100 Tigers and Flexes combined.

Our hope is that we have a long runway here with those couple of products.

And as we keep the road map, R&D road map on those products going, we have a lot to do on that front.

Thank you.

Your next question comes from Patrick Howe of Moors and Cabot.

Can you give a progress on the China facility that you mentioned in the last quarter how it's going there on the manufacturing front and on the cost and on the worker cost basis there?

We were pleased with the progress we are making on the China front.

One of the comments I made on the last call was while we were not seeing any significant customer ordering impact from SARS, since that was a quarter a period of time when we were transferring our manufacturing, it was slowing us a bit on getting our supply line built up in the low cost regions and getting our capacity built up.

The impact of all that was obviously minimal.

At this stage, we've certainly recovered from any impact we had there.

As I described on the TCS back claim side, we have significant portion of the backplane assembly being done in China and other low cost regions.

We are shifting 750s from China and we have transfers from other products in the assembly test business to the facility in China.

We have 20 plus applications engineers working in China.

And we are pleased with the progress that's being made there.

Great.

And finally again just a second question on more of a long-term strategic initiative type of question, as you've seen the semi-test business improve and even some improvement on the TCS side of things, would you consider any type of moves and when I talk about moves like divestitures of the assembly test and inspection business if it continues to weigh on the overall company once the semi recovery comes around?

First off, we are dealing with the weighing on profitability issue from all of our businesses.

We obviously are concerned about that as well.

You have to say what are the fundamental reasons you are in technology businesses.

And the reason is you think there is a discontinuity that's in front of you that is going to give you an opportunity for significant growth and significant earnings.

I'm still optimistic on the assembly side.

I see that the processes for assembly, the level of technologies being done in the assembly of electronics is getting smaller and smaller components.

You need different types of manufacturing equipment whether it's AOI or different kind of probing.

The British circuit boards themselves are becoming functional as opposed to just a interconnect system.

I see all these trends are going to be the discontinuity that will give us some opportunity in that business.

Now if it goes for a very long time and that technical discontinuity doesn't occur or if it occurs in and we are not able to succeed at it, then obviously we have to do something about it.

But I think at this part of the cycle what we are doing is to minimize the impact that it's having in terms of profitability on the company.

While at the same time we were finding ways where we can be positioned to exploit whatever technical change comes along that can give us some interesting business.

Thank you very much.

Your next question comes from Bill Lu of Morgan Stanley.

Thank you.

Question for Mike.

Mike, I've heard from several industry sources that if you look at these new high speed buses and PCs, [INAUDIBLE], that should drive test demand into the future.

I was wondering if you could talk about whether the increasing demand that you are seeing now is related to that or are we just back ordering for capacity now and that the stuff is coming up is still yet to come?

Bill, some of the demand is coming from this emergence of high speed bus technology.

But I would say there is no single standout application.

The [INAUDIBLE] would look reasonable flat which would include high speed buses, graphics, what we call disk SOC optical disk drive devices where the rate of technology change and turnover is very high.

Chip sets, graphics, I think there is a whole basket there that's driving this.

On the high speed bus side, that's clearly one area that's driving the performance on the speed access for systems.

There is a lot of visibility on that right now and we are demonstrating some of that capability at the show this week.

So when do you think the majority of the buying will happen for these new applications?

Pardon me?

When do you think the majority of the buying will happen.

What's the time frame for the buying to happen for these new applications?

I don't think there is going to be a moment in time.

I think that's beginning to roll out now and we are seeing the initial applications and design ends that are occurring on this now and that will grow as we go forward.

Secondly for Greg, you talked about 34% gross margin in the fourth quarter there to break even.

What's your assumption for pricing between now and then?

The assumption we generally have had is that there might be some continued price pressure up at TCS in the printed circuit board and the assembly part of the business.

While having said that, we also are being selective with what business we were going to take on the assembly side.

That's where we have some degree of -- I will call it a hedge in terms of the 350 as to what might occur.

Far from that, it's pretty much normal across the various businesses.

There are no significant assumptions in terms of deteriorating prices.

Thank you.

Your next question comes from Mark Fitzgerald of Bank of America.

Thank you.

I'm a little curious on the comments about the used equipment still being a competitive issue in the test side of the business and then the comments on utilization getting tight.

Those two seem to be divergent.s in that was on the test side of the business.

The used equipment comment was primarily on the vortest side of the business.

It was in the context of when we were talking about the assembly test side.

Used equipment on semi side, while there is some, the sales that are being driven are either because there is a functionality tooling or an economic value by going to the newer platforms we have that isn't being satisfied by used equipment.

Primarily the used equipment is on the assembly side of the business.

Okay.

The high utilization comments were specifically oriented toward semiconductor test.

So there was comment on two different businesses.

I was confused.

And just a follow on in the semiconductor test side of the business, when you talk about break even for the company in the fourth quarter, will semiconductors be at a break even or better level?

Is that your plan?

Yes.

Thank you.

Your next question comes from Shekhar Pramanick of Prudential Equity Group.

Good morning.

Two questions.

If we look a little bit beyond where we are today, where do you see the semi test quarterly revenues level to be a year out, particularly structurely and maybe today a different company than what you are in 2000 when you were still in the memory test and supplying functional testers in high end logic versus today.

Basically an SOC test company.

Secondly, maybe if you could give me two reasons why Tiger versus 92,000 Agilent, what's really different?

Okay.

On the first subject, could be a long one and I will try to give you a shorthand version about the long term view of semiconductor test.

We have experienced a CapEx rate in semiconductor test.

This is the non-memory side of the business which is 2/3 of the overall semi-conductor test market that has been in the 1 to 2% range for the last two years.

And prior to that, it was in excess of 2%.

The level of the market which is, as I said earlier, let's say $500 million per quarter, is considerably lower than when the semiconductor market was growing and expected to be a total of $200 plus billion market.

And have a buy rate of greater than 2 1/2%.

We had a double witching hour for two years in terms of the dollar value of semi-conductors and a depressed buy rate as the industry has driven to utilize the equipment that was put into place through the bubble of 2000.

As the utilization rates go up and that's being driven by unit volume, because the unit volumes are growing, that's driving the utilization up, I think that will push the buy rates back up some, but none of us are modeling 2 1/2 to 3% buy rates out into the future.

But I do think that the market can move back into the 600 to $900 million quarter range as you look out over the horizon slightly.

And that gives a market size that allows the level of R&D for the industry to develop the capability needs for the technology changes.

The pressure right now is that with the market of 500 to $600 million per quarter, that is putting tremendous R&D pressure on the industry and will likely play out with less total technology offered to the market over the next couple of years.

On the issue of what Tiger brings to the market, I think there is one major thing that Tiger has tried to do and that is it is built off the same architecture of the Catalyst.

That means it's a synchronization and high throughput DSD base back bone in the system.

So that for applications that are in shorthand big "D" big "A", meaning big digital content but analogue content SOC, the Tiger has the balance performance between analogue and digital that I think differentiated it from all of the competition at the high end.

Thanks.

Your next question comes from Dennis Wasing of Adams Harkness.

A couple of quick questions.

I think Shekhar just touched on this briefly, any changes in the competitive environment that you have seen whether the Agilent or LTX or others out there.

I don't think there is a big change.

I think the major trends that you see is that the total CapEx is squeezing out the niche bottoms.

Meaning that there is in the 2000, 1999-2000 period, if you put the spectrum of devices, SOC devices in terms of complexity and cost sensitivity, you would find room to develop niche products against narrow applications.

Automotive, RF and so on.

As the overall CapEx has gone down companies have had to shift to engineering leverage and that's has pushed toward platforms to try to stretch over a wider range of device technology.

I think that's the major trend that you are seeing.

The difficulty in doing that, obviously, is to get good price performance as the different device technology and economic ASP levels.

Judy, we will take one last question.

Your final question comes from Glen Young of Smith Barney.

This is Karen Wang.

In the past few years you have given us a sense of how the Tiger is doing out there in terms of number of systems and number of customers.

I was wondering if you could give us an update on that.

And the second question is given the level of DUM spending expected to take place, I was wondering if you could give us an update on Probe 1?

On Tigers, we booked between 70 and 80 systems.

We have 60 plus of those installed.

Number of customers, I don't have right in front of me but I think it's in the 15ish range.

And the second question, Karen?

Status of Probe 1?

In our memory business, we have announced the customers that we were going to be offering a last time buy of memory test equipment earlier this year and will be shipping our memory products through the end of this year.

Okay?

Thank you.

Thanks, Karen.

Let's see, I think we would like to thank everybody for their attention and participation.

For those of you that are in the area of the semi-con show and don't know this yet, we will be running an analyst breakfast tomorrow morning at the San Jose Hilton starting at 7:00 A.M.

If you would like to have more information on that, call our Corporate Relations Office in Boston, 617-422-2221.

And they will provide you with details.

Other than that, I will look forward to talking to you in about 13 weeks.

Thank you very much.

Thank you very much.

This concludes today's conference call.

You may disconnect at this time.