泰瑞達 (TER) 2004 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to Teradyne's third quarter 2004 earnings conference call.

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

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

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

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

Thank you.

I would now like to turn the conference over to Tom Newman, Vice President of Corporate Relations.

Sir, you may begin.

Thank you, Kimberly.

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 Beacher.

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

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

Teradyne's press release containing our financial results for the third quarter of 2004 was sent out via 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'll provide one -- we'll provide you with one.

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

A replay of this call will be provided on our site starting at noon today eastern 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 1164207.

Replays from both sources will be available through the 3rd of November.

It's 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 fourth 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 Mike Bradley, Greg Beacher, and myself 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 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 10-Q filed on August 13th, 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 may differ from those set forth in the forward-looking statements.

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

Finally, you should know that between now and the end of the year we will be participating in the following investor events: a Wells Fargo bus tour to Teradyne's north-running Massachusetts facility on October 26th; a Bear Stearns bus tour to [north-running] on November 3rd; a Jany Montgomery Scott luncheon in Chicago on November 10th; the CS First Boston annual conference in Scottsdale, November 30th to December 3rd;

Jany Montgomery tech luncheon in Boston on December 6th, and one the following day in New York on December 7th; and the Lehman Brothers tech conference in San Francisco on December 8th to 10th.

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

First, our CEO Mike Bradley will review the state of the Company and the industry, we will review our performance for the third quarter of 2004, and we'll provide guidance for the fourth quarter.

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

As you know, we announced on September 20th that our previous expectations for slight growth in sales and earnings for the third quarter would not be met.

Instead, we said that we expected sales and earnings to fall from the levels of Q2.

As reflected in our press release yesterday, we closed our quarter with sales of 458 million and earnings per share of 21 cents.

The reduction in our shipments was driven mainly by a sharp drop in our SemiTest orders.

These orders declined 67% quarter to quarter, while our four other business units saw sequential declines of 9%.

Overall, Q3 orders fell 49% from Q2 levels.

This sharp curtailment of new SemiTest business was more pronounced in the subcontract test segment, which had grown over the last two years to about 50% of our SemiTest business.

Given the change in the environment, we now project shipments in the fourth quarter to be between 360 million and 380 million, with earnings per share between break-even and four cents.

With the fall off in business, I think that the primary question in investors' minds is how we are addressing our cost structure in both the short and the long term.

So, let me spend some time on that subject.

As our orders declined in Q3, we have taken and continue to take many of the actions you'd expect.

Cutting back sharply on our temporary employee staffing, reducing the build level at our contract manufacturers, and executing a series of other actions to vary our expenses in line with our revenue trajectory.

These are all consistent with the variable cost model we've been operating under for the last year or so.

In a larger context, you'll recall that we had moved the company to a quarterly operating break-even of $350 million in revenue at the beginning of this year.

As our quarterly shipments grew to over 500 million in Q2, we kept our break-even essentially at that $350 million level.

In 2005, we plan to further reduce our break-even to under 330 million per quarter.

This will be derived from the higher manufacturing productivity of the Flex platform, as well as from a continued focus across the company on yield improvements, engineering leverage, and low-cost region sourcing and manufacturing.

These actions will proceed independent of overall business conditions.

Now, let me give you my take on what's happening in our businesses and in the end markets they serve.

Our Connection Systems business is healthy and networking, storage, computer and service segments.

As is our Mil/Aero business and our assembly test division.

But these businesses do have some soft spots, such as the wireless infrastructure driven segment at Connection Systems.

In addition, commercial in-circuit test demand has backed off in the laptop and server markets at the large Asian ODMs.

In SemiTest s PC and graphics are showing some seasonal strength, but they're not driving large capacity increments.

Automotive is a bright spot, driving both Flex and J750 business. [Handset] IC production is stable for the tier one suppliers, but it's sharply off for the second-tier companies.

The major factor in the fall-off in semi SemiTest demand is industry-wide excess inventory.

As you know, there were almost two dozen announcements from our customers during the third quarter, lowering sales and earnings from earlier projections.

And the rate of announcements increased as the quarter progressed.

As a result, inventory levels have risen, and this has triggered a broad curtailment in test-capacity spending.

Despite the fact that the inventory surplus is much lower than in the last cycle, new test system orders have been cut back sharply to allow for this excess to be absorbed.

Now, another checkpoint in the demand equation is tester utilization.

On this front, there's been a drop off in utilization levels starting in the August data.

Our install base shows us to be more focused in the subcontract test companies than in IDMs.

And more in the catalyst line than in either the Flex, the Tiger, or the J750 products.

Nevertheless, the sub subcontract test companies have RAENed in their spending across all spending in the platforms in the short term, and are concentrating on loading any idle systems.

Finally, the CapEx, or buy rate, for nonmemory system on a chip applications grew in the first half of this year to about 2.5%, from the below 2% level of the last few years.

Current projections for the industry, however, put the buy rate at just over 2% for all of 2004.

Far below the 3.5% levels seen in the peak period in 2000.

The punchline here is that the sharp decline in order rates is not driven by any obvious overheating of CapEx rates in the back end.

On a related front, the back end order rate, as a percentage of total equipment bookings, is at its lowest level since the 2001 correction.

So, why the sharp decline in new orders?

Most people I talked to believe that the industry has now proven itself capable of providing shorter lead times to its customers.

In the first half of 2004, we had a record sequential growth in shipment rates for some products.

Our supply line responded and customers enjoyed shorter lead times than seen in the 1999 to 2000 period.

We've seen little, if any, of the double ordering which was rampant in 2000, as evidenced by the very low level of cancelations we've seen so far.

While some might use this to claim the certainty of a short downturn and a fast net back, I'd simply suggest that the elasticity in the industry and in our supply chain allows us to make faster turns.

In this context, the idea of a sharp fall-off followed by a quick recovery is appealing, and it's logical, but it's ultimately out of our control.

In the meantime, we'll continue to focus on the things we can control.

Driving on the success -- excuse me, driving on the success of our Flex platform, which had a number of new design wins this past quarter, is the single-most important thing we can do to continue to increase our market share and to lower our costs.

In addition, we'll continue to drive the programs we currently have in place to lower costs and improve productivity in all of our businesses.

I'll now turn it over to Greg for more details on the third quarter, as well as on our guidance for the fourth quarter.

Greg?

Thanks, Mike.

And good morning, everyone.

Our sales in the third quarter of 457.8 million were down 13% from the previous quarter and 39% above the level a year ago.

We had net income of 41.1 million, or 21 cents per share on 195.8 million diluted shares.

Note that our EPS for the third quarter excludes the assumed conversion of the convertible notes, as such assumed conversion would not be dilutive for our quarterly EPS.

Note, however, that our EPS for the nine-month period includes the assumed conversion of the convertible notes as such assumed conversion is dilutive to EPS in the nine-month period.

As a future reference point, the notes are soon to be converted following the GAAP it converted method at EPS levels per quarter of greater than 24 cents.

Our gross profit was 188.5 million, or 41.2% of sales, down from 43% of sales in Q2.

This decline was primarily related to reduce shipment volume in SemiTest.

R & D expenses were 67.2 million, or 14.7% of sales, as compared to 12.7% of sales in the second quarter.

SG&A expenses were 70.3 million, or 15.3% of sales, as compared to 13.3 of sales in the second quarter.

These percentage increases were due to the declines in revenue as operating expenses were essentially flat quarter to quarter.

We also provided an $8.9 million for our in income taxes in the quarter.

This provision included a one-time IRS settlement of $3 million, which was related to closing out the tax years of 1999 through 2001.

It also included in that amount is an additional $900,000 based upon our revision of our annual estimated tax rate from 10% to 10.5% for the year.

Our quarter ending headcount was 7,367 people, which included 6,335 regular employees, which represents a decrease of about 169 people during the quarter, as we began cutting back, primarily in our manufacturing employee workforce in the second half of the quarter.

These cuts also extended into the early part of the fourth quarter as we continued to trim our capacity in light of the current conditions.

In our prior calls we have commented on our improved operating model and provided a number of examples of what has enabled us to improve the rate of incremental profits, dropping to the operating profit line on each dollar of sales growth than in comparable prior cycles.

This improvement, which amounts to about eight points, again, from comparable points in the prior cycle, was a result of many changes, a number of which we have commented on in prior calls, and I will not recount them now.

Some of these prior strategic actions have been realized, while some others have not been fully realized such as the shortened manufacturing cycle of making our Flex product, or the SemiTest engineering leverage resulting from consolidating multiple divisions.

The productivity gains from these changes naturally occur over a longer period of time than a few quarters.

While we are attempt to go accelerate these gains, we are committed to further lowering our PBIT break-even level through near inactions.

As Mike said, we have set a target for 2005 to have PBIT break-even of $330 million per quarter or less of revenue.

We'll update you on our progress against this target on future calls.

Now, back to updating you on the quarter.

Third-quarter semitest sales were 65% of the total, connection systems 21%; assembly test, 9%; and other test, 5%.

On a geographic basis, our third-quarter sales broke down as follows: U.S., 27.1%;

Europe, 14.5;

Singapore, 13.3;

Taiwan, 16.2;

Southeast Asia, 18.8;

Japan, 4.4;

Korea, 4.7; rest of the world, 1.0.

We had net bookings of 284 million point one in the quarter, on a quarter-to-quarter basis, our total net bookings were down 49%.

SemiTest was down 67%, Connection Systems, down 10%; assembly test, down 13%; and other tests was up 5%.

On a year-over-year basis, that is Q3 to Q3, total net bookings were down 16%;

SemiTest being down 32%;

Connection Systems up 2%; assembly test was up 1% and other test was up 26%.

Our book-to-bill ratios, based on net bookings, were .62 for the overall company, .43 for SemiTest; 1.03 for Connection Systems; .95 for assembly test; and .81 for other tests.

At the end of the quarter, our backlog stood at 487.1 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., 37.0;

Europe, 18.2;

Singapore, 6.2;

Taiwan, 8.2;

Southeast Asia, 19.7;

Japan, 3.3;

Korea, 5.9; rest of world, 1.5.

Now, moving to the balance sheet.

We continued to grow cash as we have ended the third quarter with cash and marketable securities of 675.6 million, up 26.2 million over the end of the second quarter.

We also purchased $8.5 million of our convertible senior notes.

This was, frankly, a opportunistic part -- move on our part as these notes were trading below face value, and we took advantage of that.

Accounts receivable stood at 255.5 million, or 50.9 day sales outstanding, essentially flat with the 51.2 days in the previous quarter.

We ended the quarter with inventory of 292.1 million or 3.69 turns, up 8.2 million from the end of the second quarter.

We spent 37.4 million on capital in the quarter, net of sales of related capital equipment.

This was primarily related to increased customer evaluations of our new SemiTest products.

Depreciation and amortization was 30.9 million.

In the fourth quarter, as Mike mentioned, we expect sales to be between 360 and 380 million, with EPS between break-even and 4 cents per share, assuming a 10.5% effective tax rate.

Please note that this guidance also includes a restructuring charge of 3.1 million, principally for severances that took place in the early part of the fourth quarter, along with a smaller charge for expected vacated lease.

We expect gross margins to run between 37 and 38%, while R&D and SG&A should each run between 17 and 18%.

We expect to decrease inventory by at least 10 million and expect to decrease AR by at least $15 million.

In addition, we expect to spend 25 million or less on capital.

Depreciation and amortization should be around 30 million, and finally, we expect to end the fourth quarter with cash and marketable securities of around $700 million.

And now I'll turn it back to Tom.

Thanks, Greg.

Before I move on to questions, I'd like to make a small edit to one of Greg's comments.

On the backlog of 487 million, 83% is scheduled to ship within six months, not 92 as we commented on, that was a last-minute edit.

Other than that, Kimberly, we'd like to now open the discussion for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad.

Your first question comes from Tim Arcuri of Smith Barney.

Hi, guys, thanks a lot.

I actually had two questions.

The first question is, you know, -- you know, Greg, can you actually go into a little more detail as to how you plan to cut break-even down to, you know, kind of the 337 TROF and even below that, do you plan to close some facilities and can you run through some specifics as to how you're going to get there.

Let me just comment first, and then Greg you can elaborate.

Just the backdrop of -- of the past year and a half.

Our break-even, as you will remember, was about 480 million per quarter.

And over the five or six-quarter period to the end of '03, we brought that down into this $350 million level.

So, the low-hanging fruit is off the tree and has been for -- for a bit.

So, the areas that we're focussing on, obviously, come a bit harder as this point.

But, Greg can elaborate, in a couple of the areas that we're targeting to have the effect of that reduced break-even.

Greg, why don't you --

Sure.

A couple of the areas that we see that could im impact 2005 and some of these occur over time.

One, as we move more of our products to the Flex family, the manufacturing cycle times are much shorter.

You can actually count the cycle time within our factory in hours or days compared to the past products we've sold.

So, there will be savings in people and longer term some floor space.

There's other opportunities in low-cost regions that can be -- and will be exploited much more aggressively.

We've talked about those opportunities principally in SemiTest but there are other divisions that will be doing more sourcing in those locations, and we believe savings will arise from that.

There's another piece where we started in Asia an application development center that has little less than 50 folks developing test programs.

We think that's another advantage in terms of lower costs that we will get in place.

But, as you can imagine, while the easy -- well, nothing's easy.

The program going forward is going to be made up of a lot of very detailed changes across the business' SemiTest and certainly some significant changes outside of SemiTest.

Okay.

So, I guess maybe just two quick follow-ups on that.

What's a target, if you look out, maybe, say, six months, what's the target to, you know, where you think vacating can be at that point?

And then I had one more question.

Tim, we haven't spread it across the year.

A lot of it is depending upon the product mix.

Because the differential in cycle time for manufacturing Flex is -- in plant is about four or five times shorter than it is for a Catalyst or Tiger type product.

So, it is going to be somewhat dependent on how that mix and the timing of that mix shift.

Secondly, we're here in October, and we don't have all of the time frames delineated on it and we are deploying that at this point.

But, I think it's mostly because it's dependent upon some of the mixshifts that we expect to see during the course of '05.

Okay.

And then I guess just as one last question.

You know, with ATE orders down here at about $130 million a quarter, it looks like historically it's been lower than this but it's been lower than this primarily because of the large cancels.

So, have you gone through and just kind of looked at what the base business is?

So, if all the capacity purchases basically turn off, have you looked at what the absolute kind of worst-case base business is for ATE bookings, and if you have, you know, what does that look like?

Well, that's a hard task because there are very few orders that are tied to just capacity versus new silicon -- and some mixture of new silicon and capacity.

It's very hard to say what the base business is.

The way we think about it is that we say, what's the underlying buy rate in the industry?

How's it moving over time?

To what extent is it above the trend line, and for how long, and therefore what kind of adjustments might you see?

So, the baseline in the business varies around an average -- an average of, I would say, this year about $800 million per quarter in business.

That's what the industry's operating at.

And, there's a piece of that that's technology and there's a piece of that that's -- that's capacity.

So, I don't think we can say that there's a baseline that we can split that total demand into those two pieces.

Tim, it's Tom.

One way you -- you -- you have thought about that, frankly, in your recent write-ups, I think, which I think is a valid way to approach this, is to look at back-end spending and peaks and troughs.

And, as you pointed out recently, I believe, that spending as a percentage of the total as -- as measured by bookings, at least is near its all-time lows, and that may be one way to think about a base level of investment here.

Indeed.

Thanks, Tom.

Okay.

Your next question comes from Mark Fitzgerald of Banc of America Securities.

I'm curious if -- just looking at the last couple quarters here, you've been basically shipping about 70 to 80% of your prior-quarters ending backlog.

Is that a pretty standard rule for you guys going forward?

That relationship is generally consistent with what we've done in prior periods.

And, if you look forward we generally don't have high book shifts any particular quarter.

So, we'd expect that -- that trend to likely continue, and we'll ship a high per cent of this quarter backlog.

Yes, the shipments, Marc, are very much driven off of the cycle time and demands from customers, so, it's less a top-down managed number than it is a response to what customers want.

Right.

And, interestingly, in this coming -- in this current quarter, we actually will have a lower amount of turns business in Semitest.

As our shipment has come down, we have a smaller buffer, if you will, for very short lead time -- lead-time business.

So, the backlog coverage in the fourth quarter, if that's a related question you have, is actually higher.

Yes..

That's where it's going next.

And then just in talking -- as much as these guys in Asia have been the major issue here, the big part of the problem, in terms of the orders.

A conversation with those guys would suggest that a lot of them are not going to be there in the fourth quarter again.

I mean, is that consistent with kind of what your own salespeople are telling you out of the field?

Well, you know, at this time last quarter, the -- the conversations with customers and the rate at which orders were coming in would have projected out to a quarter that looked like our first quarter.

In other words, the first four or five weeks of the quarter were -- looked almost identical to the -- to the first quarter configuration of bookings.

Obviously, there was a great deal of -- of talk going out at the beginning of last quarter.

But, you know, it's very schizophrenic.

There was as much pulling in going on as there was pushing out as we entered the -- as we entered the third quarter.

I think the tone is very uncertain.

I don't think that looking to the end markets, or the discussions with our customers is giving us any clarity on what the demand profile is gonna be, which gets us back to trying to say what we think the underlying level of the business is over a few quarters.

Okay.

But, bottom line, you wouldn't expect a very sharp snap-back in orders in the fourth quarter at this point, given conversations with these customers?

I think the snap -- I would agree with you that when you have a cautious environment that has followed a high-appetite period, the likelihood is that that caution will prevail for a while and you won't have this quick response.

The counter, obviously, is, this is a pretty unprecedented drop-off in bookings, so, the sharpness means that our customer base is more willing to make sharp inflections because they have some confidence in the industry's ability to respond quickly on the other side.

So, it's a very changing landscape, and it's hard to just extrapolate from the past and say it will -- it will be similar.

But, I don't disagree with you that the tone out there is certainly much more cautious, and that would lead to a more gradual recovery.

Okay.

Thank you very much.

Your next question comes from Jim Covello of Goldman Sachs.

Good morning.

Thanks so much.

A couple questions.

First, this notion that we can use back-end bookings as a percentage of total bookings to sort of figure out the -- you know, what levels we're at, if we're at a bottom.

What happens if front-end bookings come down a lot over the next couple quarters, which is normally what happens after backend bookings come down, so then your ratio goes up.

So, how (indiscernible) that number?

I think it's just one of the lenses.

I don't think we're pinning our -- our business here on that ratio.

It's just, as the different ratios look like they're moving in directions that are at the extremes of what they've been in the past, it gives you some -- some indicator.

So, I think we just factor it in as one thing, Jim.

Okay.

That's helpful.

The next question on the backlog.

You -- obviously you're going into this downturn with a much lower backlog than you went into the last downturn with, how does that -- how do you think that's gonna play out in -- in revenues over the next couple quarters?

In other words, why wouldn't your orders in Q3 be your revenues in Q1 '05 in this cycle?

Well, I think the -- if -- if the question is how healthy is the -- I think the heart of the question is how healthy is the backlog.

And, once burned, twice shy on that subject.

We, obviously, had a very, very different backlog health in the '01 period.

We have been much more rigorous with our customers in testing out the solidity of the backlog.

In fact, all of the bookings that are in our third-quarter bookings are shipping in the fourth quarter.

A little bit is out into the -- into the first, but the vast majority is shipping in the -- in the fourth quarter.

And we've gone through order by order, customer by customer and tested out what the real demand is on it.

We did have some adjustments to our backlog.

I would characterize a slight uptick in our total cancelations, half of it was customers changing their orders and rebooking something, different, so, it's a net zero on net bookings.

And the other piece was we looked through the backlog and saw about half of that adjustment was instituted by us, we just say, is this customer likely to take this shipment in the next six months?

And there was about four or five million dollars of that.

That's very helpful to understand.

I guess, maybe, if I think about it another way, though, you know, the backlog doesn't seem like it's large enough to prevent revenues from being any different than the bookings this quarter, or, you know, maybe over a two-quarter period.

So, I guess what -- where I'm really going with it, I should have just been more direct.

You know, if break-even's going to be in the 330 level and orders this quarter were 2, you know, net orders were 285, you know, doesn't that imply a loss over the next couple quarters at some point?

Well, I think that if the bookings stay down or drop down, I think we get much closer to -- and have the potential of being in the red over the next few quarters.

But, if they stay or -- around this area, I think we have a picture of revenue around this level for the next six months.

Thanks very much.

Your next question comes from Medhi Hosseini of Friedman, Billings, Ramsey.

A couple questions.

When I look at historical trendline, I see an inflection point in the [rural] industry booking as the -- I see in the shipments, or the year-over-year changes in -- I see in the shipment troughs, and based on the recent SI data, we are very far from seeing kind of a troughing in the changes in unit shipment.

So, to that extent, I'm just looking to the next couple of quarters, and, assuming that bookings could stay flat to down, what gives you the confidence that 330 million break-even would keep you above red?

The 330 million target is a target that we have set, that we think at this point, after having made very significant changes over the past year and a half, is a credible and aggressive target, and we'll update you on how we're doing with more specificity in the next call.

But , your first comment I thought had to do with the trend of unit growth, and the unit growth is not falling off like it did in the last cycle.

So, the data we see and we looked at would -- would suggest that the nonmemory units seem to be still increasing, which might suggest there is just too much inventory versus -- versus, if you saw the unit trend declining, like it did in the last cycle back in 2000, that would be much, much more concerning to us.

I agree.

Maybe -- go ahead, ask your next question, I just want to comment on the overall picture here.

Sure.

About --

Given lack of visibility on increased turn nature of SemiTest, you know, considering how utilization rates are around 70%, unit volume growth is decelerating, so, what is going to entice your customers to step up in the next six months and order more SemiTest where their focus is on more of keeping the utilization rates where it is?

And, then that's where the bulk of my argument comes in.

We may not see any rebound in bookings for quite some time, based on that argument, which goes back to keeping the utilization rates where they are.

Well, the utilization rates are very mixed by product, first of all.

You know, the idea that it's a liquid and a fungible set of equipment that can be used across a variety of applications isn't -- isn't a pure thought.

The utilization that has been lowered is in the subcon segment and it is in the Catalyst.

If you were to look at our utilization rates across the different products, you'd see very stable utilization rates on all of the other products, actually the Flex is growing and the Tiger has had some uptick as well.

The total utilization's down about three points for the overall install base, but it's heavily Catalyst driven inside the subcons.

So, there is absolutely a case that the Catalyst will be, will pause in new orders until that excess capacity is worked out.

Medhi, I think also as a reference point here, the -- the 70's are not a utilization that -- that we would -- that we do see in our data.

What -- despite a fall-off, as Mike said, of three points or so, we still end up in the low to mid-80% range, and the IDMs, are, frankly, stable for several months at a level higher than that, and the sector that's fallen, as Mike said, is the subcontract section and those guys -- there is some indication they have excess Catalyst capacity, but again, as he said, the other systems actually are either, are growing or at least holding flat.

So, this is not a story where all is falling off and there's excesses everywhere.

In fact, we can't really find indication of raw excess capacity in the industry beyond the Catalyst in the subcontract space.

Okay.

Thanks.

And just one follow-up for Greg.

Going back to the days of inventory, actually went up, is there a consigned doubt -- consigned equipment that is -- has been added to total inventory?

On the inventory picture, we have some consigned inventory but we keep that in fixed assets, it doesn't show up there, and that's relatively small amounts, and that's driven by customer evaluating our new products, so, we're getting pull from customers to evaluate our Flex products.

In terms of just the inventory numbers themselves, if you thought about our inventory balances compared to last -- last cycle, and you said, well, geez, one quarter down after the peak, how does inventory look, whether it's on our balance sheet or where we have commitments through our contract manufacturers, there's actually a pretty good story there that we've managed that part of our risk quite well this quarter and the excesses we have we think will work off in, literally, one quarter versus the last cycle it took, you know, many, many, many quarters to try to work off those excesses.

And there's a series of actions we've taken to improve the management of inventory, cycle-time reductions, supply-chain express, and some other time I can get you those in greater detail, if you're interested.

Great.

Thank you.

Your next question comes from John Pitzer of Credit Swiss First Boston.

Good morning guys.

A couple questions here.

First, at these new levels what did IDM represent as a percent of overall SemiTest bookings?

It's -- it has been 50/50 over the last, oh, four or five quarters, John.

It has moved to rounding 60/40. 60 is IDM and 40 is subcons.

And then, guys, can you look at the semibook to bill data, it would apply to the industry SemiTest bookings were down about 50 % quarter on quarter, you guys are down 67%, can you help me understand if you guys have put any thought into why you would be underperforming in the September quarter?

Well, we've seen those numbers -- I think those will shake out and be adjusted some, but the -- I think that gets -- you're asking the overall question of what's the market-share trajectory if we're down in the September quarter, does that put us in a market-share loss?

That -- is that the he essence of -- of the question?

Yes.

Yes.

Let me spend a couple minutes on that.

We came out of '03 with a 31% market share in SOC.

And, as we have gone through six months of the year, we think that our share position, based upon a triangulation here, market data that gradually solidifies from the external tracking entities, as well as tracking competitive financial statements and breaking all of those pieces down, we think our share position through the first six months within an estimate of the third quarter incorporated into it, put us in a share position up, something like three, possibly four points.

Now, if that -- and that's factoring in the data that we have in the third quarter.

So, we think on the year we've gained some ground.

So, then we say, well, let's test that out, where would we have gained some ground?

And, in this market, it is fractional points of share are typically gained, because it's a socket-based business, you gain it on the basis of new silicon going on, testers, and then growing.

So, we think we've got about a third of the share gain is coming from the Flex.

As you remember last quarter when we talked, Flex had under 200 units, it now has broken through the 200-unit mark in bookings.

We've got about 1/3 of that 3 point growth, or point 1 to 1.5 point to share growth just in socket gains inside the catalyst, because the catalyst has 1500 units installed in the field.

And, then the other point of share gain, we think, comes from the J750 and the Tiger.

In particular, the J750 has been adopted in Taiwan much more heavily as a probe test platform because of its low cost and small footprint.

So, I think we're pretty confident that the share position that we've got through three quarters of the year has got a few points of gain in it.

Hey, John.

Yes, Tom.

One -- one clear -- one quick way to describe what I think happens in Q3, is that -- and these will be demonstrable numbers, not necessarily totally accurate, but, I think the total subcon market is probably -- pick a number, 25 or 30% of the total, and IDMs is about 70, currently.

We've been running at about 50/50 in terms of bookings and shipments and there's some indication that in the first half of the year our share with subcons was actually higher than the 50% indicated by bookings and shipments, because that's a different measure, obviously.

To the extent we were higher in the subcons, that portion fell off much more dramatically than the IDM piece.

So, it's a matter of how evenly you straddle those markets, and we clearly have had a bigger play recently in the subcons and the fall-off has been bigger there.

I think that's part of our problem in the third quarter.

Makes sense.

Last question, guys.

I think you said that the 350 to 360 million revenue level is a good number for the next couple of quarters, if I heard you correctly.

Is that predicated on some pickup in order rates, either in Q4 or Q1, or do you think you could maintain these revenue levels on sort of a flat booking environment over the next six months?

I think over the next -- meaning for shipments through the first quarter, I think we could -- (indiscernible) for six months, yes.

Even on a flat-booking environment.

I think we'd have to see a little bit up in SemiTest.

Perfect, thanks, guys.

Your next question comes from Uralli Aburi of J.P. Morgan.

Thanks, guys.

Can you talk a little bit about how your Flex and Tiger platforms did in 3Q, and how you see them going into 4Q?

I'm sorry, say once more?

The -- can you talk a little bit about the Flex and Tiger platforms in 3Q, and how you see the bookings trending into 4 Q for those two particular platforms?

Well, in the context of very, very uncertain markets, I would describe the trajectory as follows: The Tiger has been, as we said in the past, it's a high-performance, high-end low-volume product.

It's driven by graphics and chipsets, PCI Express applications.

And it's a -- obviously, much lower volume system than our other systems.

We've got 100 to 120 of those systems now installed.

So, the trajectory on that is likely to be gradual in growth.

It is all upside for us because we have not had a system in that space up until the Tiger was introduced.

The Flex is a different story.

The Flex is targeting the sweet spot in SOC, what is called consumer SOC.

So, it has a very wide range of applications.

And, why we've seen a unit pause in the Flex bookings, the Flex loading capacity utilization, at this point, is very high and it's making its mark in these applications where it's a combination of instrumentation requirements for a wide range of applications, combined with very high parallelism.

So, as those sockets are loaded onto the Flex, and that is gaining momentum, we'll see a much higher volume growth in the Flex platform.

Now, that's all in the context of this whole issue of how much inventory there is.

There's a tremendous bias, as you might expect, that if a customer has an idle Catalyst and he also has fully utilized Flexes, and, in many cases, you can test some of the same parts, but not at the level of parallelism on the Catalyst, customers might still opt to keep them on the Catalyst to try to get that utilization up.

And, I guess what I was driving at as a percentage of mix of Flex and Tiger is going to go up next quarter then that hopefully will be a margin profile, right?

As the Flex comes -- becomes a larger percentage of the mix, yes, that helps our gross margin.

Okay.

But we can't predict when that crosses over.

I mean, it has been very unpredictable in the past and it -- and it will still -- it's still an uncertain picture.

Okay.

And, can you give us a little bit more color on the 10 million cancelations that you saw for the quarter?

Let's see.

I don't know how much more color I can give you.

I think it's -- it's -- it's 50% reduced by the customer and 50% of it is our judgment as to whether those orders will, in fact, be shipped in a reasonable time frame.

So, we've adjusted the -- the net orders -- gross orders have been adjusted by 5 million and we had about $5 million in cancelations.

And it's all SemiTest related I guess, right.

That's -- that is all SemiTest related.

And it is -- it's -- it's a mix -- I think it's roughly half IDM, half subcon.

Correct.

So, there 's not a -- that's as much flavor as I can give you around it.

All right.

Thanks.

Your next question comes from David Duley of Merriman.

Good morning.

Could you talk a little bit about have you already gone out through the Flex and Catalyst crossover, or did that happen this quarter, or is that going to happen this year, or is that early next year?

And, did you see any stability in your order rates in the, first couple weeks of October to suggest, you know, clearly I'm not signing up for a scenario that orders snap back, but with orders being down 57% in test in the September quarter, could we see a scenario where order rates are somewhat flattish in test in December?

Let me do them in reverse order.

The picture of early fourth-quarter bookings is never very helpful to us in terms of indicating how the quarter's gonna end up.

And, that's a function of the phenomenon of a very heavy backloaded business from -- and, so, the demand really materializes in that last four weeks of any quarter.

So, the tea leaves on October, David, are -- just don't tell us much.

On the Flex and Catalyst crossover, I don't think we can use Q3 as an indicator of anything.

It's really a question of speculation as to when Flex would move to a higher volume than Catalyst.

Because in Q3 you had all of these issues of -- of Catalyst-high -- lower utilization and Flex being more heavily loaded.

So, if you extrapolate it on that, you you'd say that's right on us with the Flex taking over.

I think that has always been gradual, and I think we'll see the same phenomenon here.

Obviously, there are some places where the Flex and Catalyst do overlap in applications.

And, in that case, the value proposition of the Flex is better because of the parallelism.

So, in those overlap areas, it will have that -- that eroding effect, or cannibalization effect on the Catalyst.

But, think about it, the Catalyst has got a couple of thousand engineers in our customer base who are -- who have hundreds of man years of experience in -- in developing test programs, and who know that -- and have built their careers around it.

So, there's a big wheel turning on the Catalyst that will continue to drive silicon onto the Catalyst systems.

I think this -- this temporary cutback in -- or reduction in our Catalyst utilization, obviously, puts a -- puts a damper on -- on today's demand around catalyst, but, I think that crossover and that transition is a more gradual process.

I guess -- you know, just to follow on, it kind of makes sense to me that the Catalyst has the lowest utilization rate given that, you know, you're kind of swapping it out for the Flex and it's become your most capacity-oriented platform, and that's the first thing to shot off in downturns.

So, anyway.

I guess that's it for me, thanks.

Just one comment.

You know, I think that if you said that that was a rule of thumb, you would expect the Flex would be also having an affect on J750 sales, because it does over overlap with some of our J750 applications.

But, we're seeing growth in new applications on the J750, as we're seeing it on Catalyst , as well.

So, it's not a replace -- you know, it's not an overlap replacement product for the Catalyst and Flex.

It does encroach on some of the space -- market space, because those have both been positioned against the sweet spot of SOC.

Your next question comes from Edward White of Lehman Brothers.

Hi.

I was wondering if you're seeing any of the kinds of pricing pressure or grey-market activity that we've seen in other downturns when things have slowed up?

I think, Ed, that if the -- let me ask myself some questions that you may be asking in -- in that single question.

One question would be, are we reducing price in order to stimulate -- to try to stimulate demand?

And the answer to that is no.

Okay.

So, in our mainstream business there is stability in pricing.

Okay.

Now, if I take the very competitive design wins, the -- the areas there, future market share are up for grabs, not installed-based conversions and so on, those are very intense competitions.

And, the kitchen sink is thrown into those on the part of all the competitors.

So, that's the arena in which the very aggressive economic packages are being offered.

And, obviously, the less capacity buying there is, the more it is new -- new turf, and so you see intensity on pricing in those areas, but it's a smaller piece of the overall pie.

Okay.

Ed, I think there's another issue on your question, that there's no indication that there -- the market is -- is being flooded at this point with new systems.

If that's a specific point you were trying to get to on the grey-market issue?

Yes, right.

That's what I was looking for.

In terms of geographic regions, as we look out to the fourth quarter.

Do you expect any difference in terms of the -- in terms of momentum in different geographic regions?

In other words, is there any area that you can see now that's more likely to be weaker or stronger than others?

Well, geography is driven by where the customers are, and, I think the clear picture is that if the subcontract test market comes back, that will drive geographies of Taiwan, or China, Asia.

So, the drop-off has been in the Asia countries, the comeback would be in the Asian segment.

Okay.

The third question is, you know, in this kind of environment, is there anything that you can do, either product -- you know, product-wise, positioning-wise, to try to gain market share as we see a -- you know, a climate when everyone's sort of under some pressure, you know, so, as you look forward to 2000 -- 2005, are there things you can do today to try to gain market share over the next -- say the next year or so?

Well, I think there's two things that we're try to go do.

One is the -- the value proposition around the Flex.

This issue of broad instrumentation portfolio and high parallelism is unique.

And, that economic value that addresses both utilization, so that customers don't find idle systems in one area and utilized systems in another area, is -- is the heart of the strategy.

And, that is really just unfolding, because the Flex is at a 200-unit base now, and we've got 750 and Catalysts that are 1500 to 1700-unit base, so, that's thrust one.

The second issue in what we're going to be doing in '05, '05 is really going to be the year that we extend the Flex family.

So, we have under development some derivatives that are built off the Flex platform and we'll be seeing -- you'll be hearing about those more in the future, but those will enter the marketplace in -- in 2005.

And, by doing that, we move further and further towards this business model of leverage in our manufacturing, leverage in our engineering, and we give customers the opportunity to buy into that platform at any point in the device portfolio, and to get very, very good utilization at the same time they're getting high parallelism on the systems.

So, those are the two things we're concentrating on.

Great.

Thank you very much.

Your next question comes from Shekhar Pramanick of Schwab Soundview.

Hi, good morning.

Most of my questions have been answered.

Maybe a more long-term question, you know, what we are seeing in the DRAM space, you know, frequencies arising and, you know, we can look beyond like [DDF] 3,000 -- one gigahertz and above DRAM showing up about two to two years down the road, and, you know, Teradyne has the niche on this so-called high-speed, high-bus rate system -- chip test.

Would you relook at those opportunities again?

Oh, for DRAM testing?

Well, DRAM has -- obviously, was a -- was an element in our portfolio over the last 20 years.

And, as we talked on the last couple quarters, we have moved out of that market to focus on the system on a chip market, which is twice the size of the DRAM space.

We retained the technology in DRAM testing because a lot of memory testing is done embedded into the SOC devices.

And, we look for inflection points, discontinuities in the DRAM market, or in the Flash market to look to see if we have a -- an offering that would be a disrupter to that market.

At this point, we don't see that, Shekhar, but it's -- it's in our portfolio of technology, and we may act on that in the future.

Okay.

My last question, on this IT750, what you are seeing on that market, both CCD and Cmos test and also, you know, the -- there have been some new entrant in that space competing against you, but any -- any kind of (indiscernible) dynamics, that would be great, thank you.

Okay.

Just very quickly, we've got somewhere between 350 and 400 image sensors testers, both CCD and Cmos technology testers.

And we have a very good position with the leading developers of the image sensor devices that are in all of the cameras that all of us are buying these days.

I think our -- we continue to push on the capability as the speeds move up, and densities on those devices move up, and as the economics require very good cost of test.

So, that's a momentum business for us.

We're located -- our development team is located, as you know, in Japan.

We have a new division manager there that we hired in the last two years, and he is driving the next generation of product development.

So that's a -- a good product story and a momentum story for us in that segment.

I wanted to take just in the last 60 seconds here, just to try to wrap one point up that -- that was threaded into a number of the questions around our (indiscernible) here to bring the company's break-even down further.

The thing I want to be sure that I expressed here is that the objective we have -- principal objective we have in our core business of SemiTest is to gain market share.

And we have held our business level there through this downturn, our market-share position, in the low 30% range.

Now, if you do some quick math, what you would see is that there's a market, that if it doesn't have any growth, and I'm taking that as a downside scenario, the market share that you need to -- to have to be able to support the R&D investment in that space, is really in the mid-30% market-share range.

And, I could go through the math with you, but it's -- it's fairly simple math that would explain why you need to have a fairly significant market-share position.

We sized that division to break-even at about 200 million.

So, 200 of this $350 million break-even is SemiTest.

To get at a 2% buy rate in a market, the size that we have now, you have to have a business that moves -- that operates in the 30-plus% market share share range.

So, we think we're very well sized in that part of the business right now.

And, while we are driving to get that break-even lower through these leverage -- the leverage in manufacturing that the Flex product gives us, we also see some very, very strong opportunities for new engineering initiatives inside the Flex product line.

And, those are part of this equation.

So, we're not in a let's see how we can reduce the break-even and cut the costs alone, we're into some opportunities here to invest in R&D that will drive the Flex and some of these derivative Flex products over the next couple of years.

So, you will hear more on that -- on that later.

Tom, I will turn it back to you.

Yes.

I think we've over extended our time, so, we'll end on that note.

And, I'd like to thank all of you for participating in the call, and we'll talk to you in January.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect your line.