泰瑞達 (TER) 2004 Q2 法說會逐字稿

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

At this time, I would like to welcome everyone to the Teradyne second quarter earnings release conference call. [Operator instructions.] Mr. Newman, you may begin your conference.

Thank you, Miles, and good morning everyone and welcome to our discussion of Teradyne's most recent financial results.

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

Following our opening remarks, we'll provide you with details of our performance for the second quarter of 2004 as well as our outlook for the third quarter.

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

Teradyne's press release containing our financial results for the second quarter of 2004 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 webcast over our web site at www.teradyne.com.

A replay of this 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 8405020.

Replays from both sources will be available through the 4th of August.

It is our objective to use this call to comply with the requirements of SEC Regulation FD, therefore, investors should accept the contents of this call as the official guidance from the company for the first -- for the third quarter 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 Mike Bradley, Greg Beecher, 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 ends, and demand for our products, capital spending and other opinions of management.

These forward-looking statements are made under the federal security 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 10-Q filed on May 14, 2004.

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 in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

In addition, 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.

Finally, please note that our next earnings release will be on Tuesday, October 19th at approximately 6:30 P.M.

Eastern time, followed by a conference call at 10:00 a.m. on Wednesday, October 20th.

Between now and then, we'll be participating in the following investor events: the [inaudible] conference in Boston August 3rd through 5th; the [inaudible] semiconductor conference in San Francisco August 11th and 12th; the Wall Street Transcript Conference in New York on August 23rd; the WSTS Semi and Semi Equipment Conference in New York on August 24th; and the SC Cowen Conference in Boston September 8th through 10th.

Now, let's get on with the rest of the agenda.

First, our CEO, Mike Bradley, will review the state of the company in the industry, will review our performance for the second quarter 2004 and will provide guidance for the third quarter.

Then our Vice President and CFO, Greg Beecher, will review the details of our financial performance in the second quarter and will provide some additional details in our guidance for the third quarter 2004.

We will then answer your questions.

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

Mike?

Thank you, Tom, and good morning everyone.

Our second quarter results were very strong.

Sales were up 22% over the previous quarter to $526 million.

Net income doubled to $80 million and we achieved earnings of 39 cents per share.

Overall, orders were up 1% sequentially to $558 million, with increases in semi tests and connection systems and a strong increase in our assembly test division.

Orders in our smaller, broadband tests and diagnostic solutions groups were down after very strong orders in our first quarter.

2004 is shaping up to be a very good year.

We're particularly pleased with two aspects of the first half.

The first is our financial performance during this upturn.

We said at the beginning of the year that we would drop a higher percentage of our incremental revenue for the operating profit line than we have in past cycles.

In the first two quarters, we did just that, achieving our forecasted drop through targets.

We believe that this improved financial performance will continue as we maintain tight expense controls, continue our cycle time reduction programs, increase our engineering leverage, and expand our Asian outsourcing programs.

The second positive for the year has been the momentum of our new products across all of our major businesses.

I'd like to share with you some of the details of our successes to give you a feel for that momentum.

In our semi conductor test division, the second quarter orders showed continuing strength for Catalyst, somewhat lower bookings for Tiger and a record unit order level for the J750.

The Flex system, however, continues to be the biggest story.

We outlined in the January conference call and at our February analyst day that we believed that the Flex system on a chip system would break out in 2004.

The basis of that belief stemmed from the fact that the Flex combines the versatility and instrument breadth of the Catalyst with the parallelism and economics of the J750.

After a very strong unit order level in Q1, second quarter unit orders grew by about 50%, driven by competitive wins in Europe, the U.S. and Asia.

And we're well on our way to orders of 200 systems across a wide range of applications and customers.

The Flex has fanned out to a broad range of IDM and subcontract test customers, and is installed in production in every region of the world.

In spite of strong demands for our other SOC products, the Flex has grown from about 5% of our business six months ago to nearly 20% of our business today.

This growth is contributing to expected gains in market share for us in 2004 as four of the competitive wins in the second quarter were multisystem production orders.

Our connection systems business saw continued growth in Q2 with sequential increases in bookings, sales, and profitability.

Similar to our semi conductor test business, our investments in product development are paying off with increased bookings and design wins in connectors, backplanes, and high performance printed circuits, or HPC.

Our newest products, GbX, NeXLev, and HPC are latching in the market with Q2 bookings doubling over Q1 in each of these product families.

In the quarter, we won a very large order for connectors, back planes and HPC at a computer company for their next generation super computer.

Also, several of our new products won platform orders at a number of OEM customers.

In addition to the fact that the current 4 business is growing, we believe the future also looks bright given the continuing strength we're seeing in the communications markets.

An example from Q2 is that we won backplane business from a major, 3G wireless rollout in Europe.

In addition to growth in our end markets, we've added 18 new customers during the first half of this year.

For example, in the backplane area, we took business from a competitor at a major telecom customer, which will lead to shipments to 10,000 backplanes per year in China.

In connectors, we unseated a competitor at one of the world's premiere computer systems companies, and also in Q2, TCS received its first orders for VHDM connectors from a large Taiwanese original design manufacturer for ODM.

Our assembly test division, which includes Mil/Aero and commercial business, had a strong bookings quarter with about a 30% growth.

Mil/Aero test orders were up over 40% sequentially from a seasonally weak first quarter and are back to the normal run-rate for business.

Commercial orders grew 18% sequentially.

Orders for the primary product in our commercial business, our in-circuit testers, rose to their highest level in three years, and with a 35% sequential increase in the quarter.

Also in the quarter, we had 24 design wins for our in-circuit test station product, including six major competitive wins.

We're winning new in-circuit business due to our safe test capability that includes higher pin counts and improved pin electronics performance.

And we're also capturing new automotive and communications applications and penetrating several, large Taiwanese ODMs.

So the overall assembly test momentum is promising.

Our company-wide portfolio has performed well so far in 2004 in response to strong customer demand will continue to increase shipments in the third quarter.

You should, therefore, expect our Q3 sales to be between 530 million and $560 million with earnings per share between 39 and 46 cents.

Now, I'd like to comment on the demand environment as there's much speculation on that front in the investor community and in the market in general.

First, I want to reiterate that we don't provide order guidance for the simple reason that our customer's short-term capital spending plans are highly volatile.

This is not a gripe or a mid-2004 phenomena that will clear up when issues around Iraq or interest rates or the election are resolved; it's a condition that's prevailed for the past two or three years.

We're in a market of consumer-driven, unpredictable demand of short lead-time expectations and of relentless capital productivity pressure.

This means that order forecasts can't be the centerpiece of how we run our business.

Rather, we have to be capable of scaling up and down if the business swings, and delivering good financial results along the way.

And that's what we're set up to do.

I do want to add that I believe that overall volatility in the back end will be moderated going forward.

Although we have an unpredictable consumer at the end of the demand chain, the links in the chain are much stronger this time around.

IDMs are careful in their capital additions and are making strategic calls on increments of capacity and in outsourcing.

Our subcontract test customers are of significantly larger scale; our exercising efficiencies of that scale and our focusing on capital productivity.

Working with our own suppliers, we've significantly reduced the cycle time to gather material, assemble, and test our equipment.

The end result is a market where the granularity of purchases is smaller, where double ordering is reduced, and where the booms and buffs are dampened.

So short-term visibility on orders is a victim of this healthier market, a consequence that I'm happy to accept.

I hope this explains -- I hope this helps explain in advance why it's less meaningful to try and answer those questions that focus on short-term bookings forecasts.

Finally, I do want to comment on the longer term outlook.

Those of you who attended the Semicon West show last week know that technology change is thriving in both the semiconductor and semiconductor equipment industries.

Despite a lot of discussion over the last several years about a slowdown in [Moore's Law,] electronic content and end products has continued to grow, device complexity has continued to escalate, and semiconductor equipment has continued to evolve to meet the needs of our customers.

In the test arena, the thought that there were alternatives to traditional tests that would sweep the market and obviate the need for customers to spend 2 to 3% of their revenue on device testing has proven to be unfounded.

Granted, the use of design-for-test techniques, the broader use of parallel tests, and the scaling of test system architectures from silicon-based enabling technology have all helped to offset the bi-rate inflation that would have otherwise occurred due to SOC complexity.

And although there have, admittedly, been excursions of this bi-rate above and below the trend line, customer spending on non-memory semiconductor tests this year should be right at the historical average of about 2.5%, not excessive by any means.

So I'm upbeat on the outlook for the future.

I'm pleased with our product momentum and financial performance, and I'm optimistic about the improved health on the industry.

Now, let me turn it over to Greg for more details in the second quarter and our guidance for Q3.

Thanks, Mike, and good morning everyone.

Our sales in the second quarter of 526.5 million were up 22% from the previous quarter and 59% above the level a year ago.

We had net income of 80.5 million, which is a doubling from the previous quarter.

Our net income as a percentage of sales was 15.3%.

We achieved 39 cents per diluted share on 213.5 million shares.

Note that included in our calculation of diluted earnings per share are 15.4 million shares of common stock for our convertible notes, following the "if converted GAAP method" of calculating EPS.

In prior periods, these shares were excluded from the earnings per share calculations as the effect of removing the interest expense and including the related shares onto the converted method was anti-dilutive.

I recognize that this is a mouthful as well as a more common issue now in the semi-equipment space, but I wanted to include it for clarity.

Our gross margin was 226.6 million, or 43% of sales, up from 41% of sales in Q1.

The principal driver of this improvement continues to be additional manufacturing leverage from spreading our fixed costs over a larger shipment volume.

R&D expenses were 67 million, or 13(PH)% of sales, as compared to 15(PH)% of sales in Q1.

SG&A expenses were 70 million, or 13(PH)% of sales, as compared to 15(PH)% of sales in Q1.

Our operating expense increases in dollars are primarily related to employee variable compensation arrangements that increase or decrease with our profit levels.

We continue to meet our incremental profit drop through targets on our sales growth.

In the quarter, we drop an incremental 45.5 million of profits to the PBIT line at a 47.5% drop-through rates.

As a reminder, going up from 500 million to 600 million in sales, we will drop incremental profits through at a rate of about 45% to the PBIT line.

We provided 8.9 in state and foreign taxes in the quarter at a 10% tax rate.

Our quarter-ending head count was 7,536, which includes 1,242 temporary employees.

This head count is about 1200 people less in terms of regular employees than we had at a comparable sales cycle in the last upcycle.

Second quarter semi test sales were 69% of the total; connection systems were 19%; assembly tests 7%; and other tests 5%.

On a geographic basis, our second quarter sales broke down as follows: U.S., 25.2%;

Europe, 15.8;

Singapore 15.1;

Taiwan 16.9;

Southeast Asia, 20.5;

Japan, 3.9;

Korea, 2.2; and rest of the world, .4.

Net bookings were up 1% to 557.9 million in the quarter.

On a quarter-to-quarter basis, semi tests was up 4%, connections systems was up 6%, assembly tests was up 29%, and other tests was down 54%.

On a year-over-year basis, that is, Q2 to Q2, total net bookings were up 83% with semi tests up 107%, connection systems up 67%, assembly tests up 37%, and other tests was down 11%.

Our book-to-bill ratios were 1.06 for the overall company, 1.07 for semi tests, 1.09 for connection systems, 1.11 for assembly tests, and .73 for other tests.

At the end of the quarter, our backlog stood at 660 million, of which 92% is scheduled to ship within six months.

On a geographic basis, our net bookings for the quarter were distributed as follows: U.S., 25.8%;

Taiwan 17.8;

Europe, 11.7;

Singapore, 17.7;

Southeast Asia, 18.1;

Japan, 4.2;

Korea, 3.9; and the rest of the world, .8.

Now, moving to the balance sheet, we ended the second quarter with cash and marketable securities of 649.4 million, up 32.7 million over the end of the first quarter.

Accounts receivables stood at 295.5 million, or 51 days sales outstanding, an improvement from 54 days in the previous quarter.

We ended the quarter with inventory of 283.9 million, or at turns of 4.2 turns, up 36.1 million from the end of the first quarter.

We spent 25 million on capital, net of sales of related capital equipment, while depreciation and amortization was around 31 million.

In the third quarter ,as Mike mentioned, we expect sales to be between 530 and 560 million with EPS of between 39 and 46 cents per share, assuming a 10% tax rate.

We expect gross margins to run between 43 and 44%, R&D should run between 12 and 13%, and SG&A should run between 13 and 14%.

We expect to increase inventory by about 20 million and to also increase A/R by as much as 25 million due to the increase in forecasted shipments.

We expect net capital additions to be about equal to depreciation and amortization.

The majority of this, like the additions in the second quarter, is primarily in semi tests and related to our new products.

We expect to end the third quarter with cash and marketable securities of about 675 million.

In summary, we are delivering on our plan to scale up with more profit drop-through than the past cycle.

This increased rate of profit growth is being accomplished while holding fixed costs in check, and our break-even is holding steady at 350 million a quarter.

The improved profitability rate on sales growth is enabled by a wide range of actions we have taken that include optimized outsourcing and manufacturing, which gives us the ability to grow without expanding our real estate footprint; exploiting advantages in low-cost regions, whether that's been by moving 90% of board repair overseas or establishing material sourcing capability in Shanghai; also, consulting semi test engineering to get greater engineering leverage.

In addition, we've reduced cycle times at our suppliers and our factory and there's a long list of other actions.

These actions not only improve our ability to scale up with higher leverage, they also enable us to scale back down without giving back our profits through, for example, large, fixed-asset writedowns.

Lastly, as you would expect, our cash flow picture is also boosted by these actions.

And now, I'll turn it back to Tom.

Thanks, Greg.

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

Thank you, sir. [Operator instructions.] Your first question, sir, comes from the line of [Nurali Abouri] with JP Morgan.

Hi, Tom.

Question on your Tiger product.

Mike gave a fair amount of detail on your Flex product.

Maybe you can give us some sense of how the Tiger is doing here in terms of number of systems or customers out there?

This is Mike.

Nurali, the Tiger continues to address the very high end of SOC applications and it continues to sell well against that market on a unit volume basis; obviously, it's significantly lower than the Catalyst 750 and the Flex, which is really moving at this point.

Can you tell us maybe how many number of systems you have out there are customer based or something of that sort?

It's a broad customer base, over 100 systems installed worldwide.

Wide range of customers in the SOC market, both at IDMs and at our sub con customers.

All right.

Thanks.

Quick follow-up question.

You guys talk about utilization rates for your tester base out in the field, right?

How did that look in the June quarter and looking into September, do you see any trends worth noticing?

Yeah.

The utilization rates are -- continue to be high.

We tracked utilization on a couple of thousand of units of systems, both in our IDM customers and in our sub cons.

Actually, we compile that every month right at about the midpoint in the month, so we have a pretty fresh look at utilization.

And it is almost identical to where it was three months ago on this call.

So it's stayed -- has stayed very high.

Thanks a lot.

Your next question, sir, comes from the line of Shekhar Pramanick of Schwab Soundview.

Mr. Pramanick, your line is open.

Okay, sir, we'll go to the next line, Mark Fitzgerald of Banc of America.

Thanks.

On these utilization rates, have you ever tied this to the wafers starts that are happening in the foundry companies at this point, and can we assume that we're going to see some utilization rates come, given wafer starts are slowing at the foundries right now?

We don't tie it to the wafer starts.

We're, you know this is accounting know this thing that we do, where we're looking at, as I said, a couple of thousand systems.

And as capacity shifts from one platform to another platform, we're watching that to see if there's any signal as to spikes in demand side or reduction in utilization.

So we're not forecasting utilization based on the wafer starts.

Okay.

Well, let me ask another way.

Have you seen any slowing interest or reluctance or hesitation in placing orders by [inaudible] at this point?

The sub cons are still through the second quarter.

First of all, I should say the sub con business represents about 50% of our overall business.

So and that's consistent with where it's been with over the last six to nine months and we have not seen any changes in subcon demand.

You know, we look, as I said, we put tremendous focus on availability in our manufacturing.

So we are still seeing strong demand in the short term for both our IDMs and subcon customers with regard to making sure they have availability of product over the next couple of months.

Mark, it's Tom.

A little bit of amplification may be helpful on one of the points here.

I think this is obviously only one piece of data and it's not a perfect piece of data, but I think it's more robust than what I've seen in general and in the area of utilization.

But in some sense it's only a snapshot that's only as good as the day you take it, and it needs to be combined with other forecast information.

And I think one of the big unknowns here is what the end of the year is going to represent in terms of Christmas build, among a number of other things.

And if you thought ahead, you'd say, well, maybe utilization will go up if these systems weren't heavily utilized against shipments and devices against Christmas, but, you know ,there's a bunch of different views on what the forecast might be.

But this is not -- we don't use this as a forecasting tool; we really use it for other purposes, and as I said, it's a great piece of data as a snapshot, but it's only as good as the day that it was taken.

I guess the issue we're all focused on is the inventory build that's going on in the chip industry, and usually you see that as a problem at the sub cons first, because they basically stop shipping wafers to be assembled and tested.

I was curious if you've seen any pull back because of that trend?

We haven't seen anything yet on that front.

Thank you.

We will now try the line again of Shekhar Pramanick of Schwab Soundview.

Sir, your line is open.

Mr. Pramanick, your line is open, sir.

His line has disconnected.

We'll now go to the line of [Ali Arani] of CIBC World Markets.

Yes, good morning, gentlemen.

Congratulations on really nice numbers.

I'm hoping you could give us an update on the seasonal outlook for your connectors business.

It seems that there is a lot of leverage there within a back drop for your hardware customers that's also picking up.

Could you give us some updates, both looking ahead, whether this will be lumpy or more of a linear recovery and in particular, some of the mix effects to your margins as we go through the balance of the year.

Thank you.

I'll talk, Ali, a little about about bit about the trending.

As you know, the connector business is higher up in the food chain, so it does not have the swings that you see on the equipment side of our other businesses.

And so we're seeing steady growth across a wide range of backplane connection system applications.

That's been driven by commune -- heavily by communications, networking applications.

So our expectation is that the growth there will be more of a steady trend versus the spikeyness that we see in our other businesses.

You have some technical advantages in some of your product lines in that group.

It seems from some of the announcements that you've disclosed on the call that your winning design wins in competitive head-to-heads.

Could you give us some better sense of where you see the market share going and what part of your business, in particular, you see the fastest market share grow?

This is in the connection systems [inaudible]?

Yes, exactly.

Yeah.

The growth we're seeing is driven by what we're providing in system -- signal delivery solutions, or backplane -- integrated backplane connection systems.

The product family is really the foundation of that business, and we're seeing growth across a wide range of applications.

Now, we're seeing some emerging business now with our new products, our GbX and NeXLev connector businesses, even though they are a small percentage of our overall business.

Those products are starting to emerge and represent a larger piece of our business going forward.

I think the basic differentiation we're offering here is system solutions for very high speed and high density applications.

Ali, if I could expand a little bit on a couple thoughts there.

Mike said that it's the kind of integrated solution, the backplanes, the connectors, and the signal fidelity the and total integrity of the high-speed signal across -- or through all of those interconnects.

One of the signs or trends there is something that we mentioned in the prepared remarks, which is that a major super computer manufacturer, we won business in connectors plus backplanes plus daughter cards, or high-performance circuits.

And it was the integrated solution that made his high-speed product a better product with our offerings.

I think that was important and I think that might be a trend of things to come.

The other thing that was significant, I think, was the -- we're customizing some of our products around particular customer applications and that has a lot of captured some business from OEMs that we would not have gotten if we hadn't done the customization.

That may be also another trend in the future.

Great.

And just one quick follow-up on the Tiger platform.

You mentioned the bookings there were down sequentially.

Is that more a function of the lumpiness of that particular segment and the customers that you have, rather than competition from some of your other platforms?

It's more a function of lumpiness.

You know, the emerging PCI Express market, for example, is one that the Tiger is well positioned for.

And that's been slower to latch, so this upside, we believe strong upside, in the future for Tiger in those applications as we have a very good solution that's been adopted by a number of customers in that space.

Great.

So really a timing issue?

Right.

Thank you.

Again, we will try the line of Shekhar Pramanick of Schwab Soundview.

Hi, good morning.

Can you hear me?

Yeah.

Perfect.

Third time is the charm.

Sorry about that.

You know, you are delivering, clearly, on the gross margins; you know, 43% operating margin, 17%.

Could you maybe talk about next level where the model could go in terms of gross margin and operating margin?

And lastly, any kind of change in the subcon order behavior, somewhat of a cautiousness or you are seeing at this point, or do you think Q4 seasonality will work in your favor?

Greg, why don't you talk about --

Sure.

This is Greg.

In terms of the model, if you -- if the shipments went up to about 600 million, we would expect gross margin to improve a bit, probably be closer to 45%.

We think engineering and SG&A would probably be 11 and 12 as an estimate, so it would be a little bit better from what we told you in the last call.

I think the last call we had 44, 11, and 12 gross margin engineering and SG&A.

Now it looks like we've gotten more out of some of our products.

That's 45, 11, and12, so we're doing a bit better going up to 600 million.

Shekhar, let me comment on if there are any changes in the trending or behavior in the subcon part of the market.

First thing I'd say is that the sub cons are driven, obviously, by fabulous companies, and they're driven by the IDM content of their business, which is substantial.

So in fact, they represent both segments.

Now, they've always been on a shorter leash in terms of their lead-time expectations and the test equipment market has adjusted to that.

All of the test equipment companies, including Teradyne, have shortened our lead times overall.

So in fact, with no other change, you'd see more volatility in the market because it's a more responsive supply line into the sub cons.

But I would not characterize anything so far as different.

We've had lots of movement in our slot plan in the last quarter, we're constantly adjusting configurations and trying to pull in availability for short-term spikes in demand.

And while there's, you though, lots of press and lots of discussion, obviously, in the reports that you folks are writing, we haven't seen anything yet in the short term demand for the subcon.

And obviously, on the long term, sub cons are, you know, they are not giving us a long-term forecast.

They are saying we have to respond to the shifts in the market as they occur.

And how does the end market seasonality of the second half, if you have a seasonally good second half, how do you think that impacts your business?

At least in the past?

Well, five plus five to ten years ago, we used to think of it as a seasonal business.

We would see a softer Q3, a stronger Q4, with year-end money.

That hasn't been as consistent over the last four or five years.

So we're not -- we don't inject a seasonal element into it.

Obviously, the build for the Christmas season still has some impact; that we see as occurring later in terms of its affect on us over the last couple of years because of our ability to lie in a shorter cycle time.

And last question, when will be adding microwave and [inaudible] to the Flex?

We have some customers already who are adopting a Flex for RF applications, so that is under way at this point.

Early installations are occurring now in this past quarter.

Thank you.

Your next question comes from the line of [Colin Borne] with [Partech.] Mr. Colin Borne, your line is open.

No response from Mr. Borne.

We will now go to the line of Timothy Arcuri with Smith Barney.

Hi, guys.

Nice quarter.

Several things.

I guess first of all, can you talk a little bit, Mike, about what the backlog targets might be in terms of months of backlog going forward?

Sure, Tim.

First of all, maybe I should talk about lead times because that's part of the backlog equation.

Our lead times are very similar to what we outlined last quarter anywhere by product -- I'm talking semi tests now -- by product, anywhere between 8 weeks and 12 or 14 weeks, depending upon product.

We have biased the shorter lead times and positioned more inventory on the Flex product as we're trying to be sure we can respond to the short-term demands of that new product.

So you'd look at a scale from Flex on to Tiger anywhere between 8 and, let's say, 12 to 14 weeks.

The backlog, as you know, we only take orders that are shippable in the next six months, so our backlog reflects that.

As Greg said, I think over 90% of our backlog -- I'm sorry, it's all within a year -- but 90% of our backlog is for shipments within the next six months.

We will adjust our shipment rate based upon our book rate and really try to manage the lead time side of the equation, and the backlog will be a result of that.

So I guess on that front, you've really never had below say, 3.3 months, roughly, of backlog.

Is that kind of the floor that you'd see backlog going to?

I think backlog could be lower than that.

Sure.

Because the era we're in is an era of much shorter swings in demand, much shorter lead times.

So you could see, for example, in our assembly test division, we operate on a much shorter backlog.

That market is built around very, very short cycle of time, opportunistic spot market opportunities, and semi test is moving in that direction.

So I wouldn't say that the models of the past on backlog would be the ones that would exist going forward.

Okay.

And then maybe if I could ask just one more quick follow up.

You had a particularly strong bookings quarter out of Singapore.

Can you talk maybe, you know, there was some chatter about maybe some backlog shuffling from a customer in Singapore, particularly on the semi test side.

Do you anticipate potentially some digestion for semi test bookings out of Singapore over the next several quarters given the strong bookings here in June?

Yeah.

I would not focus in and say that Singapore has a different characteristic with regard to lead times or backlog impact.

We've had from many customers, and certainly the sub cons tend to be more in this arena, where the movement open the backlog has been very short-term movements in and out switching of capacity for different platforms.

So I wouldn't identify that as a Singapore phenomena .

Next question?

Your next question comes from the line of John Pitzer with CSFB.

Yeah.

Good morning, guys.

A couple of questions here.

I wanted to get your opinion of when you think PCI Express will be a meaningful driver of your business?

Secondly, just to kind of put the sub con question to rest, when you look at the September quarter, do you still expect them to be about 50% of the mix?

And then last question, given the strength you saw on the Flex platform, if my memory serves me correct, part of the strategy behind the Flex was to position yourself in markets where you really weren't well positioned before.

Do you feel the success of Flex is just,sort of new virgin territory and market share gain, or is there a risk here that the Flex platform is cannibalizing some other platforms?

And if that's the case, just remind us about the economics of the Flex platform for you, relative to the Catalyst or the J750.

Thanks.

Okay.

That's a lot.

Let me try to touch each one.

The timing of PCI Express has been slower than the market has expected, and you know, I think we'll be a gradual impact over the next year in growth of test shipments into that space.

I think, as you know, the chip set and graphics segment of the market was not one that we played in prior to the advent of the Tiger, so we think we're positioned for upside in that space whenever it occurs.

I can't actually predict what the slope of that curve will be.

I know we'll have available capacity to respond to it.

We're in production now, as Tom mentioned, on PCI Express, so it's not a ringing out of the engineering cycle for us.

We're ready to go.

The forecast around sub cons, as I said, we're not, you know, we're looking more at our response to lead times and making sure that our availability of product is there for all the IDMs and for the sub cons.

There's no indication I have today that would say the sub con IDM mix is different.

As you know, sub con's buy for both [fabless] and IDMs, so they really are a mix here and will have some reflection of their IDM demand as well as the fabless demand.

But at this point, we've gone nine months here with the mix of very close to 50/50 each quarter, plus or minus 5% over the last three quarters.

Now, your last question was around, if I heard it correctly, is the Flex strategy targeting new markets and what are the -- what's the result so far.

Has the flex been successful in its targeted new markets, and then I think the other part of that question is, is it cannibalizing existing products?

Just a quick refresher.

The value proposition for the Flex has been to try to do two things that we believe have been hard to do in a single product; that is to cover a wide space of applications and SOC, meaning a wide instrumentation portfolio.

And secondly, be able to implement very low cost, the kind of costs and economics that you could get out of a more dedicated system.

And we believe we can do that through very good parallelism on the Flex.

So that's what we've been trying to do with the system, and obviously, therefore, targets the most cost sensitive parts of the market as well as customers who want to leverage their capital across a wide range of parts.

So if you looked at the characteristics of those customers, you'd say do they look like that mug shot?

And so far, that's where it's been successful.

It's made its mark on some specific socket design ends that have been very high, price performance equations, meaning that the parallelism has been a big differentiator in the market.

Now, does it cover all the space that the existing products have?

Well, it does not, and I think that's evidenced by the continued strength of the Catalyst, the Tiger and the record level of J750 bookings we've had.

This Flex product is really positioned in consumer SOC and you would think of that as new applications where the Catalyst has really not had a large market share in automotive and power applications.

It also covers some of the consumer space that the Catalyst has addressed.

So there is some overlap, but the overlap in the cannibalization, if you will, the transitioning to the Flex from Catalyst ,has been a gradual process.

I'd say about half the business has been in new applications, new opportunities for us.

So we think it's having a contribution on the ultimate market share picture that we'll see by the end of this year.

Great.

Thanks, guys.

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

Good morning.

Thanks so much for taking the question.

A couple ones;

I hate to revisit the utilization rate issue, but maybe one other way to think about it, recognizing that it's only a snapshot in time and it's something you don't use to plan your business and recognizing Mike's comments that it's about where today it's about the same rate as it was at this time last quarter.

How about on a monthly trend?

Is it increasing, decreasing on kind of, a monthly basis?

Jim, I think I'd reinforce -- I think you got it correctly.

We really look at it to see how sensitive our capacity plan is.

In other words, if we see a change in the utilization rates for the J750, for example, then we would know slightly in advance that we might see more J750 demand and so we're anticipating that in the supply chain.

But your question was, what's the trend line, and the trend lines have actually been, aside from small blips that would be in duration of one month, we've seen a very consistent level for the last six months of capacity utilization.

Now, if you said spread it out and let's look at where the capacity utilization is the highest, we're seeing very high utilization on the J750 now, and that correlates to the high demand that we're getting.

Slightly higher now, I'm not talking about double-digit utilization differential, we've seen slight increase in that area.

And the Flex is -- because of the base is still a relatively smaller install base than it is in Catalyst or 750, utilization is on a growing trend on the Flex side, but it doesn't match the utilization rates we've got on the others.

But on overall terrain, you'd see a high utilization rate, really, five or six months ago and that has stayed and been moving in increments of single digits and percentage up and down over that six-month period.

No demarcation points, no outside the trend line moves.

That's helpful, thanks.

If I can ask another question on modeling purposes.

For tax rate, should we still be using the 10% tax rate going forward?

Is there any -- you know, what's the time frame for having to put the deferred tax assets back onto the balance sheet?

And then share counts, should we expect any big changes in share count over the next few quarters?

Thanks.

The 10% rate will be good for this year, and highly likely it will be the same rate next year.

I'll let you know if that changes but currently, that's the best view we have.

In terms of the share count, there should be no other changes in share count that are of any significance other than what just occurred, the convertible debt.

And just to comment a bit further, some of you folks tried to do the calculation from the press release.

You may have been frustrated.

To do the calculation, you need to take out interest expense, which is in the P&L a nd make a few other adjustments so you can get back to this sort of pro-forma, as if diluted, EPS.

But to answer your question, no other significant share changes.

Great.

If I could sneak in one final question, it's around the open architecture semiconductor test consortium.

If I could maybe characterize Teradyne's view of it, I would say maybe it's been kind of respectfully dismissive.

A) I guess tell me if that is the right way to characterize it, and b), has your view on the STC changed at all?

Thanks a lot.

Well, "respectful" is a yes, and "dismissive" is a no.

And what I mean by that is we actually have endorsed the concept of open architecture.

And what I mean by that is the basic customer benefit underneath the concept of an open architecture has been to widen the potential supply of instrumentation that could go into a tester.

And we actually have been very supportive of that concept because we think that's the fundamental benefit of the open architecture concept.

Now, on the front of should there be one architecture that's open or should multiple architectures be open, I think that's where we would diverge from the SPC approach, which says this should be one architecture.

So our approach has been to open the flex up, we call it open flex.

We have a number of third party instrument developers working with us and working with our customers to develop instrumentation into the open flex.

That is under way, that is growing.

The third thing I would say is that the third party developers look at the open architectures where they can develop product to insert into those testers.

And we're encouraged, because the broadening of the flex customer base gives them a larger terrain, a larger market opportunity for them to amortize their R&D investments.

So we think the open flex has got great potential.

We absolutely support the concept of opening the architecture, we've done that, and we're very optimistic about the potential for the third party development over the future.

Thank you.

Yep.

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

Given the success you're seeing in Flex now, I'm wondering if you are going to start to make a foray back towards the memory side?

And if you could give us an update on what plans, if any, you have to try to go after that avenue of growth.

Brett this is Mike again.

We're currently, as you know, we're not playing in the D-RAM or the flash memory space; we don't have current products in that market.

Our perspective on this is if we can find some technical or economic discontinuities, we would see that as an opportunity.

I don't have product announcements to make at this point, but it's a market we obviously pay attention to, because it has, from a technology and systems development standpoint, certainly some heavy overlap with the things that we know how to do.

But at this point, we're not a player in the memory market.

We always -- we keep the door open on that as a possibility, though, going forward.

Is there any risk to your SOC. testers if you are not on the leading edge in the memory side, for losing any functionality that might come out of the memory side?

I don't think so.

We have a substantial amount of know-how, intellectual property in this area, because we were in the past a very strong player in memory tests, both on the D-RAM side with our acquisition of Megatests, we acquired know-how on the flash memory side.

The SOC market, microcontroller market embedded memory testing, all of those require that know-how, and so it's a current technology for us; it's not one that's on the shelf and waiting, it's a current technology that we continue to develop.

So we think we've got the capability in that market space so it remains an alternative for us going forward.

Thank you.

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

Thanks a lot.

Congratulations, guys.

Just following up on the flex.

Obviously, you are seeing strong growth right now.

Can you, I guess, characterize or give color where you think you are gaining the flex?

Are you gaining it from market share gains or are you just getting it from an industry uptick?

Well, it's a mix.

Obviously, the industry growth has given us some gains and momentum on the flex.

I would say that when you have a market share tide rising, especially one that is moving up quickly, customers can't make a transition from an existing platform to a new platform very easily.

So in fact, there's a built-in deflater on what you might get and product momentum in an up market.

So really, the greater drives here are if the product has a real equation changer -- right, if you can really change the economics, customers are pulling very hard on it -- and in that respect, it is more of a market share product than it is growing just on the tide of the overall market increasing.

Now, if you looked at some individual situations in the second quarter, we've had flex applications in optical disk drive applications, in automotive and power applications, and in the wireless area.

So those opportunities are new silicon and while they're not all market-share ships, as some of them have been transitions from our existing platforms, in general, we think that the Flex has a higher component of new business, new market share potential than the other products do.

Patrick, one data point on the market share issue for Flex is that the majority of the orders in the second quarter were all market share wins and all from multiple systems in production.

So there is evidence that it's gaining market share in addition to just taking existing replacement business.

Great.

Miles, we'll take one more question.

Very well, sir.

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

Hi, thanks.

I was wondering if you could talk a little bit about the sustainability of the strength in assembly test.

I know the military/aerospace can sometimes bounce around a lot -- bounce around a little bit -- but can you talk about how you see that going forward and the role that safe test is likely to play in that?

Ed, you're right to characterize; the military business is a bit like our broadband test business in that the contract orders tend to be very, very lumpy in that arena.

But on the in-circuit test side of the equation, as we said in the prepared comments, we're seeing some strong momentum on the in-circuit side of the business with the test station.

We're optimistic on that front because we're seeing that the capability of test station -- you know, we've called it Safe Test with regard to low voltage protection -- the more, the broader value proposition is with some very unique digital capability, wide range of flexibility on the test station digital capability, and we're seeing that as a main driver in the test station momentum.

Secondly, it's penetrating some segments that we've not played in before.

The very large ODM companies, many of those in Taiwan are now adopting the test station, and we think that's a new market and emerging segment.

Many of you, I'm sure, saw the Business Week article that was talking about the information technology 100 and the biggest and fastest growing company.

And some of the companies on that fastest growing list are the ones that the test station has been able to penetrate over the last three months.

Great.

Thank you.

Yep.

All right.

We would like to thank everybody for participating in the call and for your interest in the company, and we'll see you all next quarter.

Thank you, guys.

Thank you.

Ladies and gentlemen, thank you for your participation.

At this time, this does conclude today's Teradyne second quarter earnings conference call.

You may now disconnect.