泰瑞達 (TER) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the second quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

You may begin your conference.

Good morning everyone and welcome into 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 will provide you with details of our performance for the second quarter, as well as our outlook for the third quarter of 2005.

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

Teradyne's press release containing our financial results for the second quarter was sent out via BusinessWire 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 the simultaneously webcast over our website at www.Teradyne.com.

A replay of this call will be provided on our site beginning at noon today Eastern time.

If it is more convenient, you can also access the replay of the call by dialing 1-800-642-1687 in the U.S. and Canada, or 1-706-645-9291 outside of the U.S. and Canada, and providing the pass code 7400188.

Replays of both sources will be available through the third 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 third quarter of 2005 and beyond.

If at anytime 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, 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 inventory, bookings, backlog, orders, shipments, pricing, design-ins, 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 May 13, 2005.

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

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.

All financial metrics presented by us during this call will be provided as GAAP numbers.

The quarterly breakeven numbers targeted for the latter part of 2005 will also be provided on a pro forma basis -- that is the profit before interest and taxes line, or PBIT line -- and will exclude any possible restructuring charges and future stock-based compensation charges.

In accordance with SEC regulations, investors will find information relating to the breakeven numbers on the Company's website at www.Teradyne.com by clicking on Investors, and then selecting the GAAP to pro forma reconciliation link.

And finally, you may want to mark your calendar for the following investor events.

First we will be participating in the Moors & Cabot tech conference in San Francisco on August 10th and 11th.

Second, we will release earnings for the third quarter on Tuesday, October 18, with a conference call to follow on Wednesday, October 19, at 10 AM Eastern time.

And finally, we plan to hold an Analyst Day in Boston on Thursday, November 17.

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 second quarter of 2005.

And we 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 on our guidance for the third quarter of 2005.

We will then answer your questions.

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

Good morning everyone.

In our second quarter we had sales of 320 million, and a loss per share of $0.23.

Our orders of 349 million were up about 2% from the first quarter.

In Semiconductor Tests orders increased about 9%, with continued strong performance by our FLEX System-On-a-Chip tester line, which had order growth of 30% in the quarter.

In our other businesses orders were down about 4% with strong sequential growth in Assembly Test and Broadband Test, slightly lower bookings in Connection Systems, and a decline in Diagnostic Solutions after record orders in Q1.

We have also begun to have requests for delivery pull-ins in Semiconductor Tests.

These amounted to about $15 million worth of fourth quarter scheduled backlog being accelerated for shipment in the third quarter.

As a result, our guidance for the third quarter is for sales to be between 350 and $370 million, with a loss per share between $0.08 and $0.15.

Last quarter I discussed our two central initiatives.

First, to build momentum with our FLEX family of SOC test systems, and second, to improve the cost structure and financial performance of the Company.

Let me update you on our progress in both of those areas.

In our last call I described the SOC environment as dominated by performance buying, cases where customers needed added functionality for new SOC devices, or situations where they needed a step function change in cost per test.

In this performance buying environment, we have secured over 300 system orders through the first quarter.

In the second quarter we set a new record as we sold nearly 100 more FLEX testers with repeat purchases from 19 of our top 25 FLEX customers, as well as orders from four new customers.

With over 400 units now sold into nearly 50 customers, we're moving solidly into both a performance and a capacity buying phase, as the FLEX delivers on its promise of stretching across a wide range of device technologies with very cost-effective parallel test economics.

FLEX applications now spans from automotive to power management to wireless, to storage and set-top box devices, from High-Definition TV to SVGAs (ph) and next generation gaming systems.

And in every segment we have parallel test applications in production.

The FLEX is gathering momentum in a way that I believe will establish it as the new industry standard for consumer SOC testing.

Now let me turn to our progress on the financial side of the equation.

On this front we're doing two things.

First, we're shifting away from a platform engineering concentration to an instrument and applications engineering mode.

This is allowing us to scale back a portion of our engineering between now and the end of the year.

And second, we continue to variablize our cost structure and reduce our manufacturing cycle times.

Each of these initiatives is allowing us to deliver on our fourth quarter breakeven reduction plan by year end.

Greg will go into more detail on the financials shortly.

Now that covers our semiconductor test business and our breakeven objectives.

So let me spend a few minutes on the highlights in our other businesses, all of which were profitable in the second quarter.

In Assembly Test orders were up 29% quarter to quarter.

Our commercial bookings were up 26% from Q1, due in part of a strong rebound in orders from North American contract manufacturers.

We had significant design wins across all geographies, moved several of our customers to our new test station platform, and had some major competitive wins.

On the Mil/Aero side, orders were up 31% sequentially, with strong repeat business from all of the four military services.

Our Diagnostic Solutions business saw orders fall almost 60% from the record Q1 level, back to their normal run rate.

That grew strength in its market position for its GRADE-X diagnostic program, with wins at a major truck manufacturer, and at one of our major OEMs.

In Connection Systems, orders were down 3% with continuing strength in data enterprise markets being offset by delays in forecasted wireless infrastructure deployments.

We had another sequential record in design-ins, including wins for a next generation router and a next generation server.

These wins should provide us with new profitable growth opportunities going forward.

In addition, we are on pace to transition additional volume manufacturing to low-cost regions and to establish material supply chains locally.

In Broadband Test orders were up more than 80% sequentially from a low base in Q1.

Orders were driven by customers preparing their networks for new broadband services, and upgrading their networks with new lower-cost test technology.

Now I will turn the discussion over to Greg for more details on our financial performance.

Good morning everyone.

Our sales in the second quarter of 320.2 million were up 4.8% from the previous quarter and 39.2% below the level a year ago.

At a second quarter net loss of 45.5 million, or $0.23 per share, on 195,757,000 shares the net loss included net restructuring and other charges of 10.2 million or $0.05 a share.

Our gross profit of 98.3 million, or 30.7% of sales, was up from 29.2% of sales in the first quarter.

This increase of 1.5 point was primarily due to the increased shipments in SemiTest.

R&D expenses for the quarter were 60.9 million, or 19% of sales, compared to 64.2 million, or 21% of sales, in the first quarter.

The decline from a quarter ago was primarily due to reduced spending on the FLEX platform, as it moves past a heavy platform investment phase.

SG&A expenses increased 2.2 million to 67.5 million, or 21.1% of sales in the second quarter, as compared to 65.3 million, or 21.4% of sales, in the first quarter.

This increase was primarily due to increased spending in sales support as we are investing more application engineering resources in writing customer test programs on the FLEX family.

This is part of the expanding FLEX into other device segments.

Restructuring and other charges net were 10.2 million for the quarter, primarily consisting of 9.2 million for asset impairments on two buildings held for sale, 4.6 million of severance cost for about 160 people.

This was offset in part by 4.4 million on gains on the sale of certain property.

These and some other smaller items are all the further detailed in our quarterly earnings release.

We provided 4.7 million in income taxes in this quarter, as compared to 1.5 million last quarter.

This increase was due to taxes on the Japan (ph) property sales and overall increased profits outside the U.S.

Our quarter ending headcount was 6,436, including 5,678 regular employees, which represents a decrease of 240 people during the quarter.

Our headcount will decline further as the recently announced reductions of about 400 people in SemiTest take place through the end of year.

We are reducing our workforce over time in the second half of 2005 as a number of key engineering projects get brought to market.

Before I provide further details from the quarter and the outlook, I want to comment that we are on track against our prior statement about our fourth quarter breakeven reduction plan.

First though, as required by Regulation G, on a GAAP basis our fourth quarter revenue breakeven target is currently estimated to be about $336 million.

This includes approximately $3 million of known restructuring and other net charges.

On a pro forma basis this number would be the 330 million target we have described in our prior calls.

As a reminder, we have stated that at about 20 to $30 million in quarterly revenue, we would expect that in the fourth quarter we would breakeven at the PBIT line, excluding net restructuring and other charges and any possible stock-based compensation charges.

The pro forma model we have at this 20 to 30 million sales level is for gross margin to be about 36%, and operating expenses in total of an equal amount.

The gross margin improvements are expected to come from better SemiTest mix, primarily through greater implementation on the newest FLEX family members, completion of our legacy logic tester liquidation, lower fixed manufacturing costs, and material cost reductions on FLEX.

In addition, there should also be some gross margin improvements in Connection Systems as they continue to migrate manufacturing and sourcing to low-cost regions.

The gross margin component of our plan does not count on any favorable changes in the pricing environment.

Now moving to operating expenses.

The improvements here come primarily from lowering our SemiTest engineering spending in the second half of 2005 as we complete a set of important projects that will further extend the FLEX performance.

Now back to the second quarter.

SemiTest sales in the second quarter were 51% of the total;

Connection Systems 29%;

Assembly Test 12%; and other test 8%.

On a geographic basis our second quarter sales broke down as follows, U.S. 32.8;

Europe 15.8;

Singapore 6.2;

Taiwan 7.3;

Southeast Asia 19.5;

Japan 5.3;

Korea 5.2, the rest of the world 7.9%.

We had net bookings of 349 million in the quarter.

On a quarter-to-quarter basis our total net bookings were up 2.4%, SemiTest test was up 9%, Connection Systems down 3.3%, Assembly Test up 29%, and other test down 37%.

Looking on a year-over-year basis total net bookings were down 37.5%, SemiTest down 53%, Connection Systems down 11, Assembly Test up 12%, and other test up 20%.

Our book to bill ratios were 1.1 for the overall Company; 1.1 for SemiTest; 1.0 for Connection Systems; 1.3 for Assembly Test; and .9 for other tests.

At the end of the second quarter our backlog stood at 472.2 million, of which 82% is scheduled to ship within 6 months, up from 71% in the prior quarter.

We also had about 15 million of pull-ins into the third quarter from our backlogs.

On a geographic basis, our bookings for the quarter were distributed as follows, U.S. 34.7%;

Europe 18.7;

Singapore 4.5;

Taiwan 5.1;

Southeast Asia 19.4;

Japan 8.8;

Korea 3.7; the rest of the world 5.1.

Now moving to the balance sheet.

We ended the second quarter with cash, and marketable securities of 549.4 million.

Accounts Receivable stood at 235.3 million for 67 days sales outstanding, up two days from the prior quarter.

This increase was primarily due to shipments being toward the end of the quarter.

We ended the quarter with inventory of 257.6 million, or 3.4 turns, essentially, flat with the prior quarter.

We spent 32 million on capital in the quarter, net of sales of related capital equipment.

This was primarily driven by continued customer evaluations of our FLEX products.

Depreciation and amortization was 29.8 million in the quarter.

In the third quarter of 2005, as Mike mentioned, we expect sales to be between 350 and 370 million, with a loss per share between $0.08 and $0.15, assuming a 4 million provision for foreign taxes.

This guidance also includes pretax restructuring and other charges of approximately $17 million, or $0.09 per share.

We expect gross margins to run between 34 to 36%.

R&D will run between 16 and 17%, while SG&A will run between 19 and 20%.

We expect to decrease inventories by about 10 million, and expect to increase inventory -- AR -- Accounts Receivable, excuse me, by about 15 million.

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

Depreciation and amortization should be around 28 million.

And we expect to end the third quarter with cash and marketable securities of around 530 million.

And now I will turn it back to Tom.

We would now like to open the discussion for questions.

(OPERATOR INSTRUCTIONS) John Pitzer with Credit Suisse First Boston.

Congratulations.

A couple of questions.

As far as the breakeven is concerned, I thought you said in the first quarter you'd get sort of incremental gain both in Q3 and Q4, bringing down breakeven, especially given some of the headcount reductions you just recently announced.

I guess I'm having been kind of curious as to why you're not getting the breakeven lower in the third calendar quarter?

And what happened between Q3 and Q4 to really drive that 40 million down on breakeven?

And then I have a follow-up question.

This is Greg.

The headcount reductions that we recently announced July 12, about one-third of those reductions occurred July 12.

The other two reductions occurred at the end of September and the end of December.

So the timing of those reductions, because we need to complete engineering projects, will not in large part impact Q3.

They will impact much more so Q4, and also they will have some impact into Q1.

The other part of the breakeven plan are generally all-around gross margins, and gross margin is tied to getting material cost down, or lower sourcing.

And those all have plans in place that are being executed upon.

And it just simply takes time to work through your current inventory, get the suppliers, qualifiers and get the new inventory in place.

So we are on the plan that we have internally.

We're not slipping from it, and we expect to achieve our plan in the fourth quarter.

Wasn't there supposed to be incremental improvement though in Q3?

And I guess I'm a little bit confused, I thought we were going to go from 370 at the end of Q2 down to 350, and then down to 330.

Was I mistaken on that?

Yes, I think you are mistaken.

I don't think we ever said 370, 350.

There are incremental improvements in the quarter.

It may be less than what you were expecting, but we did not in the last call say that we would get to 350.

So we are in no way off our plan.

Second question guys.

If you look at the Semi book to bill data that was out last night it kind of implies that back end bookings grew about 47% sequentially in the June quarter.

That was versus your 9%.

I think what you look at the half on half numbers, it compares a little bit better for you guys.

I am just kind of curious how we should think about the book to bill numbers relative to your bookings growth and the marketshare question?

I think the thing that we see in the bookings' profile is that so far it has been an IDM driven recovery in the first six months.

And it is really a segment subset of the overall IDMs that have been buying more heavily.

The subcons, which in normal recoveries can represent anywhere from 40 to 50% of our bookings, currently are up -- are running at under 20% of our bookings.

So we haven't seen all the cylinders of the demand turning on across the market.

And since we are a very, very large supplier into the subcon market, the lagging of the subcon buying I think has some affect on that.

Timothy Arcuri of Smith Barney.

Nice job.

Actually, I have three things.

Number one, I believe last quarter the breakeven in SemiTest was 220.

And the goal was to get it to 195 by the end of year.

But it sounds like some of these layoffs could maybe get it better than that as you exit the year.

Is that the right way to think about it, or is that still the plan?

The plan is still to get from about to 220 to sub 200 by the end of year in the fourth quarter.

Since we are executing -- cost reductions are on a slope -- you would see some additional benefit in breakeven in the early part of 2006.

I think about that as our breakeven Companywide going down a little bit more than 10% in the year.

In other words the revenue level for breakeven has been reduced by a little over 10%.

You might get a couple of more points of breakeven reduction in the first part of 2006 from the gradual decrease in all of this cost structure.

Great, and then if I can -- just two more quick ones.

If you look at one of your key competitors, they are selling a tester out there that is a kind of sweet spot it seems you know for SOC right now.

It is kind in the 700 megahertz range.

Can you give us an idea of how many UltraFLEX's have shipped, and what number of those is operating, say, at a gig or higher?

I could answer part of it.

The UltraFLEX is now a full-fledged member of the family so that represents a significant portion.

It is not a small slice of the business.

But if you thought about the product line of FLEX, UltraFLEX and MicroFLEX, which is a very small footprint FLEX version.

The UltraFLEX is a significant piece of that business.

Those are in a variety of other applications.

I can tell you exactly, I don't have it in front of me here.

But I can't tell you exactly what the breakdown is of the high frequency configurations.

In terms of what the sweet spot is in the market, I don't know what you would define as a sweet spot, because the broad demand we are now getting for the FLEX goes across the entire spectrum, from advanced gaming processors at the top to automotive devices to microcontrollers, wireless devices and so on.

So there are a variety of sweet spots that are occurring.

And we are seeing very good strength in areas like automotive, wireless, microcontrollers and so on.

Then I guess the last question would be on TCS.

You mentioned that you saw a rebound from U.S. customers, but that wireless infrastructure still sounds like it is soft.

Can you maybe go into a little more detail in terms of what applications might be good and what applications might be bad?

The wireless infrastructure is lagging.

The stronger segments are in the data enterprise markets, in storage and in networking.

Is there any geographic breakdown there, or is it pretty universal?

I think it is spread.

Tom Diffely with Merrill Lynch.

Can you talk a little bit about the relative utilization rates between subcons and IDMs with your tools in the field?

First of all, the utilization rates we talked about last quarter were trending up.

The trough had been in the first quarter.

And over the first few months of 2005 we are seeing those utilization rates overall inching up.

The spread between the IDMs and the subcons has closed somewhat.

Last quarter we're talking about that as being about a 15 percentage point spread.

In our lens that looks to have closed to about 10%.

Now this is a gradual move in utilization.

Certainly the increase in our bookings, which is 9%, you would say is reflective of the gradualness of the change in utilization.

But FLEX obviously at 30% is being designed into some new applications, so that is what is causing that.

That is not a utilization driven phenomenon as much as it is is a new application.

Would you expect the subcons to slowly increase from the 20% of bookings today back to the normal level in a few quarters?

I think with the subcons it is always a question as to whether that will be gradual or whether that will be a spike.

Traditionally the subcons move into the market in a much more significant step function way.

So if I were predicting, I would say that when the subcons turn on a curse, it is likely to turn on less than a gradual structure than it would in a more dramatic way.

Jim Covello with Goldman Sachs.

Nice quarter.

A couple of quick questions.

One on the M&A front in the industry, obviously one of your big competitors' business is now seemingly up for sale.

Are there any market share gain opportunities that you're seeing as a result of potential uncertainty around some of your competitors' sort of go forward plans in the business?

That is kind of the first question.

The second question, I know you don't give hard order guidance, but if you could give us some qualitative thoughts on the orders?

I know you have talked about some pull-ins on shipments from Q4 to Q3.

Maybe some thoughts just qualitatively on the orders for Q3.

That would be real helpful.

Thanks so much.

I will comment a little bit on your question about is there uncertainty in the market.

There certainly uncertainty in the SemiTest market, as reflected by our customers.

Because they look at the current state of the industry, the financial performance through the last upturn, and they obviously have concerns about the overall health of the industry and the oversupply.

And they clearly have concerns about the R&D rate that the industry demands.

And you have to have profits to be able to make the R&D investments.

With regard to any particular uncertainties, I think the overarching uncertainty that customers have makes them think twice about the long term.

But in truth, all of the suppliers are working very closely with their customers to keep those customers secure.

So I don't think there is a disruptive effect that is out of the norm of what you would have seen six or nine months ago.

The general concern that customers have is can the suppliers keep pace with the R&D investments that are required.

With regards to the guidance for demand in the third quarter, obviously we continue to have only a very short horizon, because our customers have a short horizon.

But I think the tea leaves, the signs are more promising as we execute Q2.

Why do I say that?

The issue around pull-ins is, while it is not large in dollars, it is a significant shift.

In the past -- and I think it is fair to say in this quarter as well, you have -- you always have push outs and pull-ins.

There is always an in and out phenomenon.

The significance is that the net pull-ins in this quarter are a plus, and they come from a number of customers.

And interestingly, a number of those customers are subcons.

So while they are not putting their normal rate of buying in, they are beginning to accelerate their pull-ins.

That is a promising sign in my view.

Dave Egan (ph) with Lehman Brothers.

I have got a couple of questions.

One of that is a housekeeping on on taxes.

Taxes seem to have gone up quite a bit.

Could you just talk around that issue?

Is that something we should expect going forward?

Sure.

One oddball thing happened in we sold some land in Japan.

And because we don't have an NOL in Japan, we had to pay a tax on that gain on the sale.

That was about 1.5 million.

Apart from that, what is happening towards the rest of the year is in some overseas countries, say Taiwan as an example, we tend to be profitable in those locations, so we will have to provide taxes in some of those foreign locations even though we have net operating losses in the U.S.

So it is probably safe to assume $4 million of taxes this next quarter, as we expect higher profit in foreign countries where we don't have NOLs to use.

And then going further beyond that (indiscernible) I think that some of you guys have guided toward, or we just had assumed it, but we are thinking of like 12.5, 15% tax rate.

Is that reasonable?

Once we get through this year and on a longer-term horizon, you would generally think of Teradyne's rate as, if it is profitable, at 10 to 12% because a fair amount of our profits are still in the U.S. once we get to reasonable levels of revenue.

And the profits in the U.S. are taxed at a 2% rate as we use in our NOLs.

And that pulls down the rate.

Otherwise you might expect 30 something, way down.

But our foreign taxes still exist.

So last year I think we commented 10 to 12% was our tax rate.

And if we get back to a year like 2004, we would expect the same tax range, 10 to 12%.

It is an oddball year.

When you're losing money, your tax rate often doesn't make as much sense analytically as you might think otherwise.

That's helpful.

In terms of the R&D and SG&A, I'm a little -- I am wondering the additional headcount reductions, are they going to take us further down in terms of R&D, SG&A, or is this the amount of headcount that you really had expected -- or you think is going to be necessary just to get us through that 330 million breakeven?

To get to the 330 million breakeven, the 8-K we filed describing about 400 people in SemiTest would be leaving.

And rough math it is one-third July 12, one-third and of September, one-third end of December.

That is the plan that is the most significant element to get us to the 330 pro forma breakeven plan.

And much of those reductions are in engineering, because we are in very good shape on the platform investments, so we can scale back there.

And we're also in good shape on a number of these instrument projects.

So we are able to scale back in engineering given the product position and strength.

We have cut back in some other areas, but not as significant.

And in some areas we're investing in because we see now with FLEX being in very good shape, with investing with application engineers who can work closely with customers converting programs from perhaps a competitor's tester onto our testers could be very interesting to Teradyne.

So we have invested in application engineering resources and selling, general and administrative to go after more market share.

That makes sense.

Thank you.

One last quick question.

You mentioned that there are certain specific devices that are very strong for the IDMs right now.

Are there any that you can point to that are not strong that you think could come back in the second half of the year, or you would expect in the first half a little bit?

There aren't weak pockets.

There are relatively stronger segments.

The ones that I covered, they were the ones that are standouts for us at this point.

Mehdi Hosseini with FBR.

A couple of questions.

First, regarding your breakeven by Q4 and the charges you have taken.

Is there any of these charges is helping the inventory going down by 10 million?

In other words, is there any finished part in inventory that you basically have taken out?

I think the answer generally speaking is no.

The inventory change, or changes you might see on the balance sheet will have little to nothing to do with how we get to the 330.

Regarding the 17 million write-off, is that coming out of COGS or operating costs?

The 17 million -- the largest piece of that is severance for about 400 employees who have been asked to leave.

So it is simply severance.

It is not tied to inventory.

There are some other small items, very small items in terms of some software tools here and there that we might not need any longer.

But much of the charge is simply severance and other benefits employees get when they leave.

David Duley with Merriman.

Congratulations on a nice quarter and good guidance.

Could you help me understand in the quarter that was just reported what was the impact of selling some of your older logic testers on the gross margin line?

The impact, when you rounded it, it was about 1 percentage point held us back -- about 1 point rounded.

And were there any 10% customers on the order front or on the revenue front in test this quarter?

No.

I didn't hear that.

What?

No, there were not.

We did have -- let me just elaborate a little bit.

When we look at the FLEX demand and the record for the quarter it was, as I mentioned, it was broadly based with follow-on orders from a large portion of our customer base.

We did have a few customers who were buying in the 10 system order quantities.

But that didn't push anyone up to the 10% level. (inaudible).

Were any of the subcons at that volume rate or those are your IDM customers?

Those were IDMs.

One thing you mentioned in our press release about a lot of your systems are being used for doing parallel testing.

It is kind of interesting because a lot of the subcons don't practice that as much perhaps as the IDMs do, particularly with new parts and getting the test -- getting the new test programs down.

Is this -- are you starting to see that move into the subcon area with your FLEX systems where there are -- they are actually doing parallel tests on that platform, or is it still mainly in the IDM phenomenon?

Where the FLEX is at this point, even know we are in many of the subcons, our largest volume installed bases are in the IDMs.

So you would be correct in observing that the implementation, the number out of sockets on the FLEX in the IDMs is larger than in the subcons.

And also the practice of parallel tests therefore is more centered right now on the IDMs.

But as the IDMs outsource, and as the the fabless companies drive more FLEX volume into the subcon, they actually have a large say in the level of parallelism that will be done in -- on the production floor.

In fact, it is an essential part of a negotiation between the IDM or the fabless company and its assembly and test supplier.

I think you'll see a picture that has the subcons making the decision on that will at least be a joint decision.

And in fact will continue to be heavily influenced -- because of the economics of test, heavily influenced by the specifier.

One final question from me is, with the upcoming launches of the PS2 and the Xbox, would you suspect that your UltraFLEX orders or shipments would increase second half of this calendar year?

We are optimistic about the consumers buying those.

I know my son is in line.

We're optimistic.

We have put a number of tools in place to handle the customers who we have in that segment.

And that will show some growth in the future, but I can't tell you exactly what the amount of our forecast will be tied to that.

Peter Rice with CIBC World Markets.

Congratulations, guys, on a great quarter.

A couple of questions for you.

First, on the pull-ins you did characterize as a fair portion of that coming from the subcons, typically shares won through the down turns.

I am wondering if share is still shifting there, as arguably one of your leading competitors in that region is somewhat under investing in their competitive platform?

Is your question is the market share in subcons shifting?

That's right.

Of your customer wins you had four new ones.

Are some of those in that region?

The testing will be in that region.

But marketshare wins are typically not thought by us as -- if a subcon gets the business, we don't that count that as a marketshare, an account win by a subcon.

We think about that in the specifier terms, because we're focused on the silicon and the designers of the silicon, whether they are IDMs or fabless companies.

You wouldn't see in any of the lists of account wins the names of subcons in the way we took about it or count it.

IDMs also recently signaled obviously better volumes than what they were expecting in their gaming processors.

After a very strong -- kind of a follow up to Dave's question -- after a very strong contribution in the first half, was this already baked into kind of some of your expectations?

And if you were to look at the capacity utilization on those systems right now, is it possible that spending could be somewhat linear through 2005?

You're talking about just in the gaming segment?

That's right.

We actually can't comment on the trajectory of business from a particular segment.

I will say -- I'm sorry hang on -- or customer obviously.

I will say this, given our strategy which is a broad market coverage strategy, most of our insulations are testing a variety of parts -- whether they were initially bought against a specific SOC chip they generally broaden.

So it is very, very hard actually to track the specific driver of a buy, because it is shared capacity across a multiple segment.

And that is more so the case in the subcon.

Looking at the other end of your business, one of your other competitors I guess launched kind of a low end digital platform to compete against your kind of incumbent 8750.

I wonder if you have seen any competitive pressures there yet?

Or any -- if you could give us of the demand profile at that end of the business?

That is in the space at the low end.

We've got two products in the low end of the market.

We have the Legacy J-750 Tester, and we also have microFLEX, which is in a package sense looks like the J-750 in that it is a zero footprint tester in a test bed implementation of a FLEX.

The J-750 has been the work horse there since '98 or so.

And we've got over 1,500 of those testers in the market.

So it is an attractive space for us obviously, and it is an interesting segment of the market.

So we expect competition in that market.

We have think the 750 will do well there.

We know that the market has at the low end also has the requirement for a variety of instrumentation.

So at the low end you'll see both cost performance demand from customers who are in those segments.

You'll see in addition the requirements that those testers be able to move upstream so that they can test a broader range of devices.

So you will have an instrument demand on those testers as well.

That is why we have two testers down in that segment that cover both of those requirements.

But you are correct to say that there is more competition forming in that segment.

My last question is trying to get kind of a sense of the overall environment.

When all the test guys were introducing their new platforms while the applications people were a tough commodity to get, and a lot of that service was somewhat a giveaway.

I am wondering if the environment has changed where you're able to -- or the aggregate test company out there is able to actually collect revenue for a lot of the applications work today?

We have a base business in our applications portfolio, which is a sizable piece of our business.

That is connected to an organization of just under 500 applications engineers.

It is the case that in the launch of new products, because customers are not already trained on the product, the supplier -- in this case our FLEX trained applications engineers -- tend to carry the larger portion of that load.

So you have -- and we are investing in the silicon solutions.

So at that moment in time you do have a higher amount of SG&A cost in the product, because it is bundled in, if you will, to the initial solutions.

Now as the profile of the customer changes, in other words, if we have 500 let's say applications engineers in the field, in a mature state that is customers have anywhere from 5 to 10 to 15 times as many engineers trained.

So as the product matures and as more and more of the applications engineers inside customers move towards that new product, you get a different profile.

And you get the customer contracting more and higher percentage of their discretionary spending will go outside.

And so the revenue increase will occur later on in the cycle.

Right now you would be correct to say that we're putting a lot of investment in the applications side.

We think that trends down over time.

Murali Abburi with JPMorgan.

I have got a couple of questions.

In previous conference calls you talked about marketshare gain north of 300 basis points -- the associate market.

Is that mainly the IDM customer base, or is this more in the subcon customer base as subcons pick up in the second half or later you are going to outgrow the rest of the industry?

The question is what is the basis of the prior marketshare gains?

Just do it again for me, if you would.

The marketshare gains that you are seeing, the 300 basis points or more that you talked about before, is this more with your IDM customer base or more with your subcon customer base?

The reason I am asking that is as subcons pick up in the second half that would lead you to outperform the rest of the global subcon base, right?

Right.

The share gains that we had have been across both fabless and IDMs.

To the extent that has moved out into the subcons obviously that is where a large part of the equipment ends up.

I would say that the share gains that we've had -- over the past year the shared gains have been fairly evenly split between fabless and IDM customers.

The FLEX share gains that we are projecting -- the FLEX share gains that we have initially had also are spread across fabless and IDMs with a heavier amount in the IDMs at this point.

A couple of quick other questions.

Did you mention what subcons percentage of your overall bookings?

It is 20%, right?

It is actually under 20%.

It is at a low point.

If you look back over a twelve-month period, and that intersects a part of -- clearly half of the 2004 period, the subcons have represented anywhere from 40 to 50% of our business over a full cycle.

So it operating in the last three months less than 20%, and in the last six months of just around 20%, maybe even a little bit below 20% even (inaudible), that demand has been depressed and there may be some pent-up demand is really what the sense we get from our subcon customers.

In terms of them snapping back like you talked about, you said it could more of a snap back as opposed to a gradual pick up.

What would be kind of the indicator for that?

The utilization rate (indiscernible) 13 point or more of the unit -- end market unit demand picking up?

I don't mean to the flip but every time we have looked back after the smoke has cleared and looked back over what were the leading indicators of subcon demand, you cannot find it connected to utilization hitting some peak point.

At times they have waited longer, and the demand has come as the utilization has been very high.

Other times it has been early.

I think one thing that you're seeing in the subcon market now is some restraint in buying.

Because whether that is because of leverage with their customers, whether it is because of their concern for taking just peak demand in the cycles, whether it is a financial concern to have better returns going forward, I think all of those things play together.

A quick housekeeping question.

What was your gross margin and OpEx guidance.

I missed that.

Gross margin was 34 to 36%, and R&D will be between 16 and 17%, and SG&A will be between 19 and 20%.

Mark Fitzgerald with Banc of America Securities.

I was wondering if you could give us some slag at what option -- the stock compensation expense was for the quarter?

And could you help us think about this in terms of your going forward?

Have you changed any strategies here that would impact that?

Sure.

We have, as the (indiscernible) probably did notice, we accelerated a number of the (indiscernible) on invested options to avoid having large charges going through our financial statements for options that were likely never to the exercised.

But what is the impact of all that?

The impact is starting in Q1 '06 when we adopt the new accounting rules.

Right now we have about $2 million a quarter of stock-based compensation expense that is going to hit us, 2 million a quarter.

And we would expect there would be another award, a 2005 award at some point.

And we might move towards restricted stock as an example.

So something with the -- on top of that $2 million.

Long-term we thought about modeling this different ways in terms of what is about the right amount in the P&L.

And we're going to see where others end up on that and monitor that.

But (indiscernible) 2 million plus some other amount once we figure out what the 2005 award looks like.

In the June quarter you will have dropped to about 2 million, is that the point you're making?

The stock-based compensation is not in our numbers yet.

It is only the first quarter of 2006.

No, but when you release it in the Qs -- you will have to report it in your quarterly, right?

Did you mean the second quarter of '06?

Exactly.

No, the second quarter of '05.

The one that just finished here.

In the second quarter of '05 you're asking -- try me one more time?

This June quarter, what would be the stock compensation expense that will be being reported in the quarter?

Well, there is none in the GAAP numbers, because it is all done in a footnote.

Right.

I understand that.

That is what I'm looking for is that footnote.

The footnote -- I don't have the footnote.

We will have it when we prepare the 10-Q, but seeing Q1 2006 is $2 million it is probably not too far off that number.

And then just shifting gears here.

When you look at the kind of surge in business here, is there -- given the short lead times that you have for the equipment at this point -- is there opportunity that your customers are -- is there a possibility that your customers are kind of buying seasonally to debottleneck some of their constraints at this point?

And that this -- you know as we go into '06 that things (indiscernible) at this point.

Is that a possibility, or do you feel that this is -- you are pretty comfortable that this is a full-blown cycle for cash?

I think that is a possibility.

That is one of the great uncertainties when you are in a short lead time environment, as no one has to show his cards about what they think beyond the lead time of the equipment.

The rest of the applications that are driving the growth is a promising, more optimistic element to the outlook that our customers are talking about.

And finally the unit volumes that are currently being produced are at record levels.

So I think all of that puts us into a -- on the optimistic side or positive side of the outlook.

Sustainability of that is a -- obviously that is a question.

That is why we come back to what we think the fundamental market size is, and why we're moving our overall cost structure into the level that we have talked about.

The only other thought is that the customers would have a natural reluctance to buy for a bubble of three or four months.

So they are well aware of the issue, and they certainly wouldn't intend to buy if that is what they thought it was.

So if orders increase it says they expect it to be a longer-term phenomenon than three or four months.

There is arguably some hot products here that are definitely hitting the second half, Xbox being one of them.

I would assume some of your customers have to debottleneck that pipeline right now from a test point of view.

You have correctly said there is uncertainty.

We would agree with that.

There is uncertainty.

Thank you.

We will take one more question.

Patrick Ho with Legg Mason.

Good work guys.

Just a couple of questions.

Given what you said earlier about your efforts to get to the $330 million breakeven, and it is not a step line function to get there -- when you said it is not 370, 350 to 330.

Is it fair to characterize then that the biggest incremental gains will come sometime between 3Q and 4Q?

Correct.

And you said the biggest component of that is the headcount reductions that should get you to that breakeven level?

Correct.

And finally, in terms of seeing a pick up in the subcon business, are you also seeing a pick up in your catalyst business, given that it has been very successful out in the market, and it is something a lot of customers are still comfortable with?

Or are these FLEX orders that are replacing the catalyst with the subcons?

Our non-FLEX business has also grown in the quarter.

We had an overall 20% growth in systems business, 30% growth in the FLEXs.

So the other piece of it was growth in the catalyst, the Tiger, the 8750 products.

Great.

Thanks a lot, guys.

One thing I would like to say in closing is that obviously the tone of the market has improved.

Our business is reflecting back.

In particular, the FLEX has been moving at a rate that is very, very promising both in terms of the breadth of applications, breadth of customers.

And now what I would characterize as a shift from a straight performance volume market into a performance and capacity buying.

Having said that, our focus remains very squarely on our cost reduction, our breakeven, our financial structure program.

And that is what we control, so we don't intend to take our eyes off that ball.

Thanks everyone, and we will talk to you next quarter.