泰瑞達 (TER) 2003 Q4 法說會逐字稿

Good morning.

My name is Christie and I will be your conference facilitator today.

At this time I would like to welcome everyone to Teradine's fourth quarter and fiscal year 2003 earnings release conference call.

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

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

If you would like to ask a question during that time, simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press the the pound key.

Thank you.

Mr. Newman, you may begin your conference.

Thanks, Christie.

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

I am 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'll provide you with details of our performance for the fourth quarter 2003 and the fiscal year, as well as our outlook for the first quarter of 2004.

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

Teradine's press release containing our financial results for the fourth quarter and for the fiscal year of 2003 was sent out by a business wire and was posted on our website yesterday evening.

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

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

A replay of the call will be provided on our site starting at noon today eastern 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. and Canada, or 706-645-9291 outside of the U.S. and Canada, and providing the pass code 4792956.

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

It's our objective to use this call to comply with the requirements of S.E.C. regulation FD.

Therefore, investors should accept the contents of this call as the official guidance from the company for the first quarter of 2004 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 I are authorized to supply company guidance.

The matters that 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, orders, shipments, pricing design-ins and demand for products, capital spending and other opinions of management.

These forward-looking statements are made under the federal securities laws.

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 those projected in the forward-looking statements.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including but not limited to our form 10Q filed on November 12, 2003.

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

Teradine disclaims any obligation to publicly update or revise any such statements to reflect any change in expectations, or in events, conditions or circumstances on which any such statements may be based, or that may affect 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 S.E.C. regulation G, regarding Generally Accepted Accounting Principals, or GAAP.

Therefore, some financial metrics presented by us during the call will be provided in both GAAP or non-GAAP, or pro forma operating terms.

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

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

Pro forma information is not determined using GAAP.

Therefore, the information is not necessarily comproble 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 find a reconciliation of our GAAP net loss to pro forma net profit within our press release of last night, reporting our fourth quarter 2003 and fiscal year results.

A reconciliation of all GAAP versus non-GAAP metrics which are presented by Teradine during this call are available on the company's website at Teradine.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 review of the state of the company and the industry, we'll review our performance for the fourth quarter 2003 and for the year, and will provide guidance for the first quarter of 2004.

Then our Vice President and CFO, Greg Beecher, will review the details of our performance in the fourth quarter and the year, and will provide some additional details on our guidance for the first quarter of 2004.

We will then answer your questions.

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

George?

Thanks, Tom.

Good morning and happy new year to all of you.

And by the way, based on our fourth quarter results, there is a good chance 2004 will be a happier new year for Teradine.

Sales in the fourth quarter were $358 million, with a GAAP loss of 6 cents per share.

This loss includes a loss of 10 cents per share for special items, so consequently, on a pro forma basis, we had profits of 4 cents per share in the fourth quarter.

Teradine's net orders were $488 million, up 45% from the third quarter.

It more than doubled the level of a year ago.

This was driven by bookings in our semiconductor test business where orders were 312 million, up about 75 -- about 70% from the previous quarter.

That is 70.

In semiconductor tests, this quarter we are increasing shipments between 25 and 35%, with system unit shipments increasing by 50% in order to keep up with customer demand.

Consequently, we expect to have sales in the first quarter of 400 million to 430 million, with earnings on a GAAP basis of between 10 and 18 cents per share.

By any measure, 2003 represented a turn-around year for Teradine.

Sales grew 11% from 2002 to $1.35 billion.

Orders grew steadily throughout the year, ending with a surge that carried us to a year-over-year order growth of 57%.

Our cost structures have been adjusted to deliver profitability at under $340 million in quarterly sales, and this allowed us to end the year in the black for Q4 on a pro forma operating basis.

Our restructuring programs of the last five or six quarters have concentrated on changing the ways we do business in a more strategic sense.

That is, getting a balanced outsourcing of manufacturing and engineering, aggressively sourcing material in low cost regions, building and testing our products in low cost regions that, by the way, are in close proximity to the emerging markets, and so on.

So a newer streamlined Teradine has crossed the starting line of 2004 accelerating into the upturn.

Besides just yearly, a leaner, meaner company, 2003 also demonstrated the accelerating impact of Asia on Teradine.

The region is our fastest growing one and currently represents about half of our sales.

For the past several years, we have been increasing our capabilities within the region, including opening a factory in Shanghai, establishing a materials outsourcing operation locally, consolidating a major service center in the Philippines, and increasing our overall head count ending 2003 with close to 700 people in the region.

And with almost 60% of our Q4 semiconductor bookings coming from Asia, we are very pleased with what our people have been able to accomplish.

Obviously there's a lot less to do in Asia, and it continues to be part of our focus as we enter the new year.

Looking ahead to 2004, there is good news all around.

The growth in orders would seem to indicate that a recovery is under way in the worldwide electronics industry, and we are enthusiastically ramping our shipments to meet that demand.

Before turning the meeting over to Greg for a detailed financial review, let me give some short highlights for each of the divisions.

Semiconductor test orders showed a particularly strong demand for Catalyst and J750 systems.

Plus, we had a new record order level for Flex.

Both RF and baseband applications such as cell phones, wireless LANs, really drove the Catalyst orders.

The wireless business has been particularly strong with orders higher than any time since the first quarter of 2000.

We have seen growing strength in video applications such as DVD and digital TV, and subcontract customers continue to represent a major market for Catalyst.

The J750 order strength came mainly from our integrated device manufacturer customers, or IDMs.

The dominant application were micro controllers, automotive sensors, image sensors, and testing embedded flash memory in many other devices.

In total, we booked more J750 machines than we have since mid-2000.

Target orders remain steady for communication, mass storage, graphics and chip set device systems.

Flex unit bookings increased 40%.

Flex's fanning out now in subcontract test houses, with three new subcon customers added in Q4.

Flex offers unique benefits to subcons where a higher mix is a major problem.

Flex design is up, primarily for optical disk drives, baseband and DSL Applications, and they should drive more orders for the first half of 2004.

At connection systems, in previous calls we described that we had exited the electro mechanical EMS businesses.

Consequently, in total our orders were down 8% sequentially, about in line with our expectations, while conductor and backplane orders grew about 4%.

Our four connector products were particularly strong, however, with growth of 17% quarter to quarter and 75% growth from Q4 of '02.

Total shipments are up 5% sequentially, driven mainly by our traditional wireless customers.

Assembly test orders were up 28% sequentially, with bill arrow bookings up almost 40%.

During the quarter, Teradine announced the $67 million order from the U.S.

Air Force to test -- for test equipment to support maintenance of the B 1 B bomber.

Teradine is the prime contractor, and we will be supplying Spectrum 9000 series functional test systems, as well as bus and digital test instruments over the next five years in connection with this program.

About $8 million of the order was booked in Q4.

Bookings in our commercial and circuit test business business grew 12%.

Our safe test capability, which provides protection during test for a new family of devices that have lower volt and switching levels, is rapidly gaining strength with the tier one EMS providers, three of which bought our test station products and safe tests in Q4.

These orders are up for capacity expansion in PC and server markets.

In broadband tests, the orders included a long-awaited first office application order from a major [inaudible] for our Solarity product, who bought it in response to customer demand for digital subscriber line, or DSL, high speed internet access over the phone lines.

It will be used on several million phone lines in major metropolitan areas to qualify lines for DSL Service.

This is our first penetration of an [inaudible] with Solarity.

There is also a growing business for Teradine in supplying our new DSP-based loop diagnostic unit, or LDU, to our installed base which is over 120 million voice lines.

This upgrade allows our customers to more accurately dispatch field technicians, and, therefore, reduce their cost to maintain service level.

An interesting byproduct of that upgrade is that they are they are then positioned to have significantly lowered the cost for those customers to eventually move to our Solarity product for DSL.

Teradine's automotive diagnostic solutions business also had a good booking quarter.

We are two different businesses in DS.

Serving the automotive service bay needs, and serving the automotive manufacturers needs.

The service bay segment is our traditional market, so let me start there.

Teradine's orders in Q4 included a major break in order for our grade X diagnostic software product from Daimler Chrysler for service bay deployment.

This is a first order for grade X on a major OEM, and it's our first significant business with Daimler Chrysler.

Also, first shipments were made by our manufacturing and distribution partner, Snap-on Tools, of a vehicle communication gateway to one of our largest service bay customers, marking the first step of a transition from our older product line to a new generation of service bay tool.

On the automotive manufacturing side, our vehicle configuration and test solutions or V CAP product used by both the OEMs and their tier one suppliers also had a good quarter.

The growth in electronic content and complexity in automobiles represents an exciting opportunity for the division, with both manufacturing and service bay customers.

So, in summary, where are we?

We had a great bookings finish to 2003, and we plan to significantly increase shipments in the first quarter.

We are profitable on a pro forma basis in the fourth quarter, and we expect our Q1 expansion to translate into a solidly profitable start to 2004.

A great way to enter the new year.

Now, let me turn it over to Greg for some of the details.

Thanks, George, and good morning everyone.

Our sales of 358 million were up 9% from the previous quarter, and [inaudible]% above the level a year ago.

We had a GAAP net loss of 11.5 million, or 6 cents per share of 192 million shares.

This net loss included a loss of 10 cents per special items, related primarily to changes in estimates on prior facility closures, asset impairments and workforce reductions.

Last quarter, we provided guidance during our call that we expect the revenues for Q4 to be between 335 and 340 million.

With break in the results on a pro forma operating basis.

Since our revenue exceeded plans, we achieved a pro forma operating profit of 10.2 million, resulting in pro forma net income of 6.9 million, or 4 cents per share.

Our gross margin was 36% of sales on both a GAAP and a pro forma basis in the fourth quarter.

As compared with a gross margin of 30% of sales on both a GAAP and pro forma basis in Q3.

R&D expenses were flat in the last quarter at 61 million, or 17% of sales in Q4, and 19% of sales in Q3 on both a pro forma and GAAP basis.

SG&A expenses were 61 million, or 17% of sales on a GAAP basis, and 58 million, or 16% of sales on a pro forma basis, as compared to 18% sales on both a GAAP and pro forma basis in Q3.

We provided 2.7 million in state and foreign taxes in the quarter, our quarter ending head count was 6,710 including 6,108 regular employees.

This total reflects a reduction of about 70 people during the quarter.

Fourth quarter semi-test sales were 57% of the total, connection systems 25%, circuit board test and inspection 10% and other test was 8%.

On a geographic basis, our fourth quarter sales broke down as follows.

U.S, 36.8%, Europe, 14.3.

Japan, 5.6.

Korea, 3.8.

South Asia, 29.8.

Taiwan, 9.1.

And the rest of the world, .6.

I will pause to take a quick drink of water.

Excuse me.

You might have detected that many of us at the Boston end of the call have colds, and so we apologize.

Sorry about that.

I am back.

We had net bookings of $488 million in the quarter.

On a quarter to quarter basis, our total net bookings were up 45%.

Semi test was up 67%.

Circuit board test and inspection was up 28%, connection systems was down 8% and other tests was up 153%.

On a year-to-year basis, total net bookings were up 57%, semi test up 74%, circuit board test down 7%, connection systems up 112% and other tests was flat.

Book-to-bill ratios were 1.37 for the overall company, 1.52 for semi test, .98 for connection systems, 1.35 for circuit board test and inspection, and 1.45 for other test.

At the end of the quarter, our backlog stood at 506 million, of which 86% is scheduled to ship within 6 months.

On a geographic basis, our net bookings for the quarter were distributed as as follows: U.S, 33.9%, Europe, 17.6.

Japan, 3.8.

Korea, 1.4.

South Asia, 27.3.

Taiwan, 15.5, and rest of the world, .5%.

Moving to the balance sheet, we ended the fourth quarter with cash and marketable securities of 586 million, up 44 billion from the end of the third quarter. 19 million was generated from the sale of real estate, and 12 million was generated the from the sale of stock option exercises during the quarter.

Accounts receivable stood at 229.5 million, or 59 day sales outstanding, down from 62 days in the previous quarter.

We ended the quarter with inventory of 215 million, or 15% of annualized sales, down 6 million from the end of Q3.

We spent 22 million on capital in the quarter, while depreciation and amortization was 37 million.

In the first quarter, as George mentioned, we expect sales to be between 400 and 430 million with EPS of between 10 and 18 cents per share.

This is assuming a 10% effective tax rate.

We expect gross margins to run between 38 and 39%.

R&D should run between 15 and 16%, and SG&A should run between 15 and 16%.

We expect to increase inventory by at least 15 million to increase receivables by about 50 million, both of these due to the increase and the forecasted shipments.

We also expect to spend about $30 million on capital.

Depreciation and [inaudible] should be about 37 million and we expect to end the first quarter with cash and marketable securities of around 540 million, about the level of Q3 2003.

And now I'll turn it back to Tom.

Thanks, Greg.

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

At this time, I would like to remind every one, in order to ask a question, please press star, then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2.

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

Your first question comes from the line of Shekhar Pramanic with Prudential Equity Group.

Hi, good morning, congratulations on a great quarter.

Two sets of questions.

What do you see -- I know you don't make comments on orders, but what do you see order outlook for Q1.

Also, maybe give us some color on TCS, given that so-called corporate IT spending is coming back you have good exposure both on fiscal and telecome side.

What are you seeing there?

And lastly if you can give us the tax rate, what you think for the year.

I will start with the tax rate for the year.

We would expect the rate of 10% to hold for the entire year of 2004, and we have significant net operating losses in the U.S, and that means that our income in the U.S. is taxed for Federal purposes at about 2%.

And then when you add in foreign, which is taxed higher, you get to a blended rate of 10%.

So I think it's a number that is good forecast for the year.

I would be surprised if it changed much and if it chang it would be late in the year.

I wouldn't expect it to change more than a point or so.

If you look out to '05 will the tax rate go to like 20 or 30.

I think in '05 we have probably still have a 10% rate, and then at sometime in '05, I would expect, if, you know, the business stayed strong, we would end up bringing back on the balance sheet that large deferred tax asset that we reserved.

But we still have this asset to shelter future income from taking cash from the company.

It's just not on our balance sheet.

My best estimate would be 10%.

It's probably a good rate for two-years, and then the year thereafter, I would expect it to be back more toward a normal rate.

This is Mike Bradley, on your first question of order outlook, you're right we don't forecast orders going forward for the next quarter.

I would say the characteristics of the fourth quarter order profile were that they were very broad-based, wide range of applications, semi test, RF, consumer applications, DVD, optical disk drive, so on, so it was a very broad-based demand and in that respect it bodes well for the future, as it was not driven by a narrow segment.

I think the other thing to say about the order profile is that it was, you remember last quarter, we were about 50/50 split on a six-month basis of bookings from IBM and [inaudible] companies.

We said at the time if that strengthened on the IBM side, we would take that as a good sign, since it would reflect a broader based Cap Ex move and not just an outsourcing of a spike in demand.

So overall, we think that the prospects, based on the profile of Q4, are positive.

On the TCS side, I think the -- I think you are right.

We are in a good position with many of the leading customers that are in the business that will be increasing IT investments as they start to unfold.

On the other hand, we haven't seen the strong pop there, if you will, that we have seen in semiconductor tests.

It's been more of a gradual buildup, somewhat a little better each and every quarter but not an explosion yet.

Thank you.

Your next question comes from the line of John Pitzer of Credit Suisse First Boston.

Good morning, guys.

Congratulations on a good quarter.

Couple of questions, first on the range of guidance for Q1, can you help me understand what drives it to the low end and what drives it to the high end.

Is it your ability to produce what your customers need, or are you just giving us a cushion here?

Well, I think it is some of all of the above.

The key part of the expansion, of course, we are expanding in semiconductor tests, and the upper end is closer to a 35% expansion, or 50% expansion of shipment, in individual unit system shipments, and that's about as healthy as an increase and about as big a step as we have historically have made and other times we have ramped.

On one side the upper end says you are able to get out all that stuff and it goes well.

The down side is you just got to bend it a bit in case of some some mixture, or you have some difficulties.

But the orders are there, at this point.

And then, George, when you look at the order rate that came in for semi testing in Q4, were there any 10% customers in the order rate and can you help quantify if there were any really big large customers in that number?

Yes, there were.

Greg is turning the page.

Just give him one second to find the-.

Well, maybe I can talk in general terms about the concentration of orders.

Last quarter, if you remember the question, last quarter we had between Q2 and Q3, we had a very heavy concentration in semi test in Q2.

Over 70% of the orders were from from top 10.

In Q3, that was down to 55%.

Q4, that has been concentrated a little bit more, just over 60% for the top ten companies, and that is almost dead on to what the top 10 mix is for the whole year, so a little above 60%, slightly more concentrated in the fourth quarter.

I think it would be fair to say, we have one customer that was over 10%, and he was only slightly over 10%.

And that is -- that's of semi's business.

This is on the semi test side.

Thank you.

George, if I heard your comments correctly on your prepared statements, it sounds like semi test revenues aren't growing quite as fast as semi test units in Q1.

Can you help me understand what is going on in the mix in Q1, is that just the Flex beginning to become a bigger portion of the mix?

I'm sorry.

I thought it -- I said in the script we were growing revenue in semi about 35%.

Okay, yes, I'm sorry.

Now I understand your question.

Yes.

It is totally a mix issue?

I guess as a follow-on, can you talk a little bit about the pricing environment in the semi test business?

Well, the pricing environment is-- if you say, what is it that customers negotiated, we negotiate with customers.

If you say that two of them are delivery price, delivery is the major -- the major[inaudible] these days.

Pricing is not part of the discussion.

Is there an opportunity, George, to raise pricing?

Well, suppliers are raising prices to me, so my costs are going up as we try to ramp.

We have to keep that in check.

So, you know, historically, the industry hasn't made major pricing moves.

On the other hand, I think it's a critical time for all of us.

And I think, I think pricing certainly is firming.

Great.

Thanks, guys.

Your next question comes from the line of Dennis Wassung of Adams, Harkness & Hill.

Thank you, a couple of quick questions.

Looking back to Q2 and Q3.

I think back in Q2 a lot of the semi test strength came from the high end, new test capabilities, good strong tire quarter.

And then we saw sort of a broadening in Q3.

Just, you talked a little a little bit about this in your prepared remarks, but can you talk a little bit more about how that's progressed in Q4 and how your visibility looks into Q1 and Q2 at this point.

Are you seeing a continued broad strength here?

Or is it still -- are you seeing any weighting toward new test capability, visa the -- vis-a-vis the flex or or tiger or I guess any comentary you have there will be helpful?

Yes, this is Mike.

There's clearly a broadening in the applications, complete picture of demand in terms of end applications and semi test, our applications on up to high end, micro controllers, -- embedded memory, a whole series of applications.

On the product side, the unit strength was in Catalyst and J750 or 750 products, both image sensor and J750 products.

The flex is continuing to grow sequential records all through the four quarters of this year, so the flex is starting to fan out.

And about steady business, at the top end with the Tiger.

So I think the interesting thing that is happening is a revalidation, the Catalyst and 750 are the real work horse products in the install base, over 1,000 of each of those products and the flex is starting to move as a mid to low end SOC platform.

The other piece on the Flex is it's starting to move into subcons, which is, you know, the future opportunity for the Flex as George said for very high mix applications.

Okay.

So, looking at, I guess, sort of another follow-on here, with the Catalyst and J750 products, really taking on a big piece here, are you seeing more of a just a raw edition of capacity, or, is it still a driving force in the new business?

The addition of new test capabilities that customers didn't really have in place before?

Well, the Catalyst orders are driven not by capacity of 2001-2002 devices, these are all new socket design ends.

Many of them are driven by new instrumentation, many of the Catalyst orders are driven by new instrumentation on the Catalyst.

We had a record level of RF Catalyst applications and sales this quarter, highest level since the middle of 2000.

Okay.

It's all new technology, and the Catalyst happens to be able to still handle a wide, wide range of that new technology.

Okay.

And I think a little earlier you mentioned a 50/50 split back in Q3 between IDMs and the sub CONs.

What was the number in Q4?

I don't know if I missed that.

Yes.

Let me answer that again.

The thing I had said last quarter was that we had we had had a 50/50 split in business on the six-months, Q2 and Q3 and if you take then the most recent six-months, that has moved up to 60% IDMs and 40% sub CONs, so a slight shifting as the IDMs have grown slightly faster than the sub CON growth in the -- that six-month period.

Great, and a last quick numbers question.

In the Q1 guidance, Greg, you talked about -- what was the R&D percentage?

I had 15 to 16% written down.

Was that correct?

The Q1 spending is going up a bit.

It's going to 66.1.

I don't have the percent here.

It is 15 to 16%, yes.

15 to 16%, yes.

Okay, great.

Thank you very much.

You know, Dennis, this issue on the technology, and our Catalyst being bought for 2001[inaudible], obviousy, we think about sustainability, the whole industry does.

One of the interesting things is, there was no technology recession.

There was an economic recession.

You know, a lot was alive and we well.

And all during this time when customers were underbuying, there was new technology and new devices being developed and those devices are now moving into volume and these capasities, and I think that's a good bit of what's driving us.

Very good.

Thank you for the help.

Your next question comes from the line of David Durley of Wells Fargo Securities.

Yes, good morning, congratulations on a great quarter.

Just a couple of clarification issues.

You gave us some statistics earlier in the conference call, I think you mentioned that flex was up 40% sequentially.

Was that on revenue or units?

Units.

Units.

Could you, either on units or revenue on a consistent basis, kind of let us know Catalyst, Flex, Tiger.

Sounds like Tiger was flat on units, Flex was up 40% on units.

What did Catalyst do?

You gave a stat there and I didn't hear it.

It was about -- we have been roughly saying it is a little bit less than doubled in the quarter.

So on on unit basis that almost doubled?

Right.

Great.

Thank you.

Kind of a house keeping question.

When you put -- you reserved your deferred tax asset off the balance sheet, when, now that you are going to, I guess, in this upcoming quarter you will be profitable on a GAAP basis, do you unwind that and bring it back on the balance sheet.

How does that work and what impact on book value would that have?

That asset would come back on the balance sheet after we have a string of consecutive profitable quarters, and whether that four quarters, six quarters, seven quarters it all depends upon the degree of profits, what does the outlook look like then.

It is less likely it would come back on this year.

It is more likely it would come back on next year, and that would be a very large addition to book value.

You are looking at probably something close to $400 million coming back on the books.

Okay.

And do you have any commentary on the chip set space this quarter?

I know you have encroached upon Agilent's position at a couple of accounts or bang on them pretty hard, and Agilent has an architecture issue at this point, so I'm wondering what you are seeing from the three key graphics and chip set providers, I imagine that would have to do with Tiger?

Yes, that's been steady.

That has not reflected the level of growth that we had in the other segments.

That's been steady on the Tiger.

And would your guess be that everybody is kind of waiting for those PCI express parts to hit the marketplace to decide what platform to choose and so the purchasing at the high end of the graphic and chip set area is somewhat stalled right now?

I think that would be a fair statement.

One final question from me.

As far as Catalyst pricing goes, what is the increment to pricing when you get an RF option on that tester at this point?

I don't think anybody at the table has a good feeling for that, frankly.

100 plus K?

Yes, but the range could be pretty broad is the problem.

Okay.

Thank you and, again, congratulations.

Yes.

Our next question comes from the line of Timothy Arcuri, with Deutsche Banc.

Hi, guys, great quarter.

Actually had three questions and I guess I will ask two of them and follow up with a third.

Number 1, given that Catalyst now is up 50% sequentially, and, there's kind of been a lot of pricing pressure out there in the marketplace.

What are your thoughts about potentially raising price on Catalyst and/or J750 going forward?

George commented on it.

We certainly had more volumes so we get some efficiency on the volume side.

But our supply line is expediting at this point, and, therefore, it raises the cost structure for the products even though they are moving into higher volume.

And, obviously, the stability.

There's more stability in pricing.

But there is no price increase in effect at this point on the Catalyst we have not done anything on pricing on the Catalyst.

So do you think, when you kind of look into your crystal ball do you think that that is something that the market could undertake?

I think it is an option.

Okay.

Second Second question, I guess, this is more to kind of the lifeline of the older products.

You know, we have kind of heard a lot lot of upgrades out there but still most of your orders are coming from Catalyst and J750.

Can you give us some idea of the percentage of your total semi test orders that are from those Catalyst and J750 products ?

We can make a quick calculation, but it is more than 2/3 of the revenue is coming from the Catalyst and the 750.

Okay.

Is there some application out there, PCI express, what is the application that is going to break the Catalyst and it's going to force people to, you know upgrade on the high end either to Tiger or on the low end to Flex?

Well, a couple of things drive the Tiger.

That is higher speeds, higher digital speeds pushed Tiger sales.

But the other thing is, we have made a number of sales on Tiger for applications that can be tested on the Catalyst, but actually has higher parallelism on the tiger.

So customers who are either driven for productivity for Catalyst ready parts or have a mix of high speed and parallelism, that is what is driven Tiger.

At the mid to low end, SOC applications, it is very much a parallelism drive to move from the Catalyst to the Flex, because the Flex with the universal slot architecture and a higher parallel test architecture gives a very good economic solution.

So devices move both directions from the Catalyst. .

But many, as we said, right now are staying on the Catalyst.

Okay, great, and if I could sneak in one more follow up on TCS, according to the numbers you gave now, maybe I'm wrong, but it sounds like TCS orders were roughly flat maybe down slightly sequentially, is that right?

Well, if you say you take out for the fact this Q4 didn't have any of the electro mechanical EMS business that we had in Q3, as we exited that business.

If you take that out, that was slightly up.

If you leave that in, and doing an actual comparison, they were down sequentially.

Okay, George.

So that was my question.

So, if you look at it on an apples to apples basis, how much was TCS up?

I think we described that TCS was moving their portfolio to a richer mix of business, and there would be some businesses coming out but it would be replaced with a richer mix of business, and that is occurring.

So can you give us an idea of how much on an apples to apples basis orders were up in TCS.

What we said over all in the prepared remarks, Tim, was that they were down 8%, and the issue was how you treat the 20 plus million that we announced in the second quarter call in July that we were going to be taking out.

But the absolute numbers were down 8%.

If you looked at the connector product which is the most differentiated product TCS has, that was up 17% from the prior quarter, that was healthy growth and much more margin in that product.

Is there one particular customer there that is driving that?

No.

The segments that are driving it are clearly the wireless communications side.

Okay, guys, thanks a lot.

Your next question comes from the line of Ben Payne of J.P. Morgan.

Hi, congratulations on a great quarter.

Couple of questions, what is your outlook for the full year growth and the test business for capital spending, and in terms of the TCS business, how do we look at it going forward, in terms of the effect of the EMS.

Is there now no more exiting that business and everything going forward will be an apples to apples comparison off of 4Q, and last question is, could you give the gross margin guidance one more time?

Thanks a lot.

I will answer the latter question.

The TCS, EMS business, there was $4 million in the fourth quarter, that will be gone next quarter.

So starting Q1 there will be none of that business that has basically about the same revenue and costs in a very slim margin.

So that will be out of the numbers in in Q1.

The gross margin guidance is for it to be between 38 and 39%.

Okay.

And what are you guys looking at for the overall tax market in terms of the outlook for capital spending in '04?

Well, let me start off and then, Mike, why don't you jump in?

It seems to me different level of abstraction you need to think about on that.

At a very high level of abstraction, what are the factors that would impact Cap Ex, then one factor would be, there's been considerable underbuying or certainly constrained buying of capital equipment over the last few years.

A second macro issue would been -- there hasn't been a technology recession.

Technology has marched along and all of this stuff is starting to come into volume and capital is needed to make it.

And the third factor is that there is a strong U.S. and worldwide economy and a strengthening worldwide and U.S. economy.

Now, you drop those down and you say, well, how are people translating all of those things?

There are people describing that Cap Ex would be for the semiconductor industry, Cap Ex would be 25 to 40% growth in '04, continuing into '05, I don't know if you interpreted the Intel announcement the same way I did, but their guidance of 3.5 to $4 billion of Cap Ex in '04 seems to be consistent with that.

You look at the device units.

Device units are up.

In fact device units are higher than they were at the peak counts.

Utilization, you know, factories are fully loaded now.

Then you take it one more level of abstraction, try to get it down to your own business, and you see orders are up, you had this 70% explosion, you see broad signs of lead time stretching in some segments and some component segments starting to have allocation issues and you see the up turn is broad- based.

And so, you know, you string that logic together and you say it's a pretty healthy time.

And you take actions based on how you internalize all of that, and of course the actions we are talking about is a significant increase in our shipments for Q1.

What type of growth do you look at on the high end when you do your projection?

Do you need to still see the higher volume of the PCI express growth or where does that fit into how you model your whole year for '04?

I think in a broad sense, the semi test ATE market, that is a little bit over 3 billion, we think, for the end of this year.

Okay.

Could go to 4 billion next year.

Those are are some of the estimates that are out in the marketplace at this point.

The Cap Ex rate then would be above 2% for the year.

But on a three or four-year basis, that Cap Ex rate or buy rate for test equipment would just have it made it back to 2%.

And if you took the four prior years, the four-years prior to that it was in the high 2.8, 2.9, 3% level.

So there is room for the market to grow without blowing the doors off of the historical Cap Ex rates.

Thank you very much.

Your next question comes from the line of Jim Covello of Goldman Sachs.

Good morning, and thank you, terrific job on the execution this quarter.

Couple of questions, going back to Shekhar's original question, obviously you don't guide to orders, can you give us some idea on a book-to-bill for March, maybe around one, comfortably above one, any chance it's below one?

Let's see, if that was book-to-bill was one, that would be, let's take a 420, say we ship 420 million, that would be a significant drop in bookings for this quarter.

Doesn't feel like -- I think that's probably a floor, as I would think of it.

Okay.

That's helpful.

Second question on lead time.

Are you starting to see lead time stretching out at all?

And if you are you worried of any phenomenal growth in semi test could be a little bit of double ordering or are you comfortable with that?

Well, the lead times are moving out, especially for the big jumps in Catalyst and the capacity expansion we are putting in for Catalyst and for 750.

We are booking into the second quarter, obviously, on both of those products at this point.

Okay.

The demand, though, in terms of double ordering.

There's a difference between the uptick in 9900 and what we have seen in one quarter as we end '03, and that is that in the feeding frenzy of '00, the bookings were a combination of short-end demand and what I will call slot holding that was further out.

We have not seen much far-out slot holding at all.

That's fair, that's very helpful.

Finally, at the ISS conference this week in Monterrey, Intel talked about the open stock platform, and how that's giving them a 4 X decrease in cost in 2 X decrease in space.

Now, I know that is not coming from you guys competitively, and I know that you guys have have a position that Intel is an early adopter and maybe the only adopter of the open stock platform.

Can you talk a little bit again about why you think that Intel may be one of the only folks that adopts that platform.

That's my last question and thanks very much.

Why don't I comment on the whole open architecture initiative and tell you where we are on it.

I think that rather than to comment about what Intel may be doing on it, I would characterize OAI as moving from a marketing era to engineering era.

What I mean by that is that at the front end, the description of OAI was Lego architecture mix and match modules from a variety of suppliers and provide an infinite set of solutions that would integrate seamlessly into an simle open architecture concept.

That is moving now into what I call an execution or engineering era And what is happening there is that the work is tight collaboration between third party instrument designers and the platform designers and we're using the Flex as our open architecture platform, and are working with third parties now.

And that is progressing.

And I think that is the era that we are moving into.

It is one that will be less of this will work everywhere immediately, into an era where hard work has to be done, third party by third party to get instrumentation in.

I would say that that I think Intel has a particular characteristic that may not be shared by many other companies, and that is very, very high volume of devices, common architecture versus high diversity of architecture, SOC building block architectures.

And I think that mixture, low volume, high complexity, is a characteristic that the rest of the market has, and Intel has the unique characteristics.

This is a very limited application set.

Right.

That's extremely helpful.

Thanks so much.

And, again, terrific execution.

Thank you.

Your next question comes from the line of Patrick Ho of Moors & Cabot.

Thanks.

I also want to reiterate a nice job by you guys.

Can you just give a little bit more color on the December quarter semi test order trend.

Did you see a lot of the orders come in at the end of the quarter like in the December time period, or was it kind of linear throughout?

It was back loaded for the quarter.

The conference call last quarter.

I might comment.

At the conference call last quarter, we said that there were no indications of a surge in demand.

And that was a fact.

I was in Asia two-weeks after the conference call.

I told George that I did not return.

He reminds me I did not return with any orders at the time.

So the demand had not converted into real orders, even a couple of weeks after the conference call.

Mid to late quarter is when the trajectory changed dramatically.

So the bookings were clearly back loaded to the quarter.

Okay, great, and just the follow up again, I know you don't give give guidance on orders, but do you see a period of digestion of these orders, given how back end loaded it was, which could cause, you know, a little bit of a sequential decline, you know, in bookings, in Q1?

I think that's a possibility.

The -- any time there's a big appetite, a slug of consumption, that changes the utilization rates and the install base.

We've looked at what has happened in the past after a sharp uptick in bookings, and it's mixed.

If you go back six or seven-years, and you take, I think, there were four quarters where we had sequential order growth above 40%.

Three of those four quarters were followed by slightly higher growth and one was actually a decline.

So it is mixed.

And that is what gives you both sides of the story in terms of what Q1 could be.

Okay, great.

A final question, more on the cost and expense.

It looks like you guys have done a great job the last two quarter quarters.

What kind of ramp up do you see as revenue starts kicking in?

Are you going to be able to maintain this 340 million dollar break-even level that you have talked about or is there going to be another ramp sometime in mid 2004 to meet this increasing demand?

The way we think about that type of question is, on the incremental sales growth, what is our drop through to operating profit.

And to give you some background, if you went back to the last cycle, and looked at how did we drop through incremental profit on incremental revenue, you'd see we've dropped that at about a 41% rate.

You can look at a couple of different points and come to the same conclusion.

Our expectations going up to $500 million.

We would be closer to 50% drop through than the low 40, 41% drop through.

That's the result of many actions we have taken the last year to get our operating expenses and infrastructure much more leverage.

Great, that's real helpful.

Thanks a lot.

Congrats again.

Your next question comes from the line of Brett Hodess of Merrill Lynch.

Good morning, just two questions, first, on the capacity expansion that you mentioned on the Catalyst /J750 and the $30 million in Cap Ex, can you update us a little more on how capacity is being added, given that if we look at semi test, for instance, the revenue run rate is still far below the 2000 level so, talk about that, and secondly, following up on the incremental operating margin flow through, if we go back and look at the $400 million run rate in the last cycle, the gross margins were 2 to 300 basis points higher than the guidance for the first quarter.

Can you just give us some color on what you see the major differences between then and now.

Is it price on the testers or some other businesses that impact the margin?

Yes.

On the first question, you are asking me how fast is capacity being added?

I am adding, I am asking, what you need to be doing to add capacity to meet the demand, given that the shipment rates are still well below where we were in 2000?

Okay, good.

There is little we need to do to add capacity, other than hire direct labor people, get them trained very quickly.

The fixed assets is in place.

There might be some small incremental cost to complete some additional test base, but by and large the fixed assets and equipment are in place and direct labor exercise of getting the people on board.

The $30 million Cap Ex for the coming quarter is mostly targeted at what then?

That would be targeted at some customers have elected to lease some equipment from us.

There are a number of lease transactions in that.

There is also implants of Flex, where we will take Flex out to some select targets, so they can try the system.

And it's also some capital related to TCS, which has new products, connector products, they need some tooling equipment so they can ramp their new products as well.

So, generally speaking, the capital is not for our infrastructure, it is tied towards customers, getting customers in plants.

The challenge, Brett, in the first quarter, is marshalling gathering material.

Lead times for our backplanes, power supplies, all of those are moving out, and we are scrambling to add, to gather that material, to be able to hit the ramps that we have got in the upticks, especially in the 750 and the catalyst area.

Right.

Then the second question was, you know, at the $400 million run rate, the the difference in margin this time around versus last cycle, if you could give us a little color on what you think that difference is, where that segment comes from?

What we are generally planning that our operating expenses will be much lower and leverage much better and that is going to buffer any any lessening of gross margins from the past cycle, and there is a host of risk with gross margin.

Some of it is product transition, moving to a new product how fast, you get new customers on the new product which will have higher margins, part of the business mix is a big factor.

So our plan is much more focused on what we can completely control the operating expenses and if we can get back to the prior margins, that's going to be a huge win for us, but right now that's dependent upon many factors, particularly getting new products introduced.

Thank you.

Christie, we will take one more question.

Your final question comes from the line of Edward White of Lehman Brothers.

Hi, I was wondering if you could talk a little bit about market share dynamics, given the strength that you have seen in the quarter, do you think that there are some market share dynamics working in your favor and can you give us a sense of what you think is happening on that front?

On market share, I think we're where we were last quarter, when the numbers are in for '03, and that won't happen for 3 plus months.

Three or four-months, right.

We think we are going to be at least steady, possibly slightly up in market share in semi test.

Okay.

If you look at the orders in the quarter, was there any change in terms of size and scale of orders?

In other words, compared to what you have seen in recent quarters, are you beginning to see any, you know, large lumpy orders in there, or is it pretty much breadth in terms of just more customers ordering?

The broadening was dramatic from Q2 to Q3.

And in the fourth quarter, the profile of orders was very similar, if you took all of '03, Q4 looked like all of '03, relatively broad-based.

Okay.

Okay.

And then, finally, this gets, I know it's a difficult question, but it gets to the issue of looking at sustainability.

As you look at your customers, and, you know, you look at what their their game plans are and what they are looking at doing, do you get the sense that the current environment is satisfying their needs or that those needs are going to be going on for a while?

The reason I asked at, you know, looking at 2000 where we got to a point where clearly there was a lot equipment being ordered and it wasn't clear that the equipment lined up well with, you know, what was going on in the end markets.

So as you look at things today, you know, does this look like a different climate?

Well, I think on one hand, you know, I just happen to notice the front page of the journal this morning.

Yahoo, Apple, Intel, Samsung, all end customers beyond the people we sell the capital equipment to, Samsung we sell capital equipment to, and Intel, but Yahoo and Apple, the end customers, they are all up.

They are just strengthening in the overall worldwide product economy.

But there is no greater visibility today.

We were meeting with one of our largest customers yesterday, and the visibility of this customer to his demand, to his customer base, was very short horizon.

Okay.

Okay.

Thank you.

Okay.

Let's see, we would like to thank everybody for participating and for your interest in the company.

A few points of information will be at some investor events between now and the next earnings call, February 23 to 25.

The Goldman Sachs technology investment symposium in Phoenix, March 1 through 3rd, the Morgan Stanley technology conference in Laguna Miguel and in March 9, the Prudential bus tour in Chicago.

Our current plans for our next earnings release are is Tuesday, April 20th at approximately 6:30 P.M.

East Coast call followed by a conference call at 10:00 am on Wednesday the 21st of April.

Also note we will have an Analyst Day in Boston on Tuesday, February 3rd.

If you would like more information on the event please call our investor relations office at 617-422-2221.

Thanks for your interest, again, and see you next quarter.

Thank you very much.

Thank you