泰瑞達 (TER) 2005 Q4 法說會逐字稿

Good morning.

My name is Lee, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Teradyne fourth quarter and fiscal year 2005 earnings conference.

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

After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]

Thank you.

I will now turn the conference over to Mr. Tom Newman with Teradyne.

You may begin, sir.

Thank you.

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

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

Following our opening remarks, we'll provide you with details of our performance for the fourth quarter for our 2005 fiscal year, as well as our outlook for the first quarter of 2006.

First, however, I'd like to address some administrative issues.

Teradyne's press release containing our most recent financial results was sent out by a business wire yesterday.

It is available on our website, or by calling Teradyne's Corporate Relations office at 617-422-2221.

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 approximately 1 p.m. 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 1-706-645-9291 outside of the U.S. and Canada, and providing the passcode 3787254.

Replays from both sources will be available through the first of February.

Investors should accept the contents of this call as the official guidance from the Company for the first quarter of 2006 and beyond.

If at any time we communicate material changes to this guidance, it is our intent to do so simultaneously to all investors to the best of our ability.

Investors should note that only Mike Bradley, Greg Beecher, and I are authorized to supply Company guidance.

The matters that we discuss today other than historical information include forward-looking statements, relating to future financial performance and other performance expectations.

Statements as to inventory, bookings, backlog, orders, shipments, pricing, design ends, and demand for our products, capital spending, and other opinions of management.

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 than 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-K filed on March 16, 2005, and we incorporate here the discussion of those factors.

We caution listeners not to place undue reliance on any forward-looking statements, which speak only as of the date they are made.

While Teradyne is under no obligation to update the forward-looking statements made today, updates we make will be broadly disseminated and available over the web.

We want to make it clear to investors that our prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principals, or GAAP.

Therefore, if we use any non-GAAP financial measure during the call, you will find the required presentation of and reconciliation to, the most directly comparable GAAP financial measure on the Company's website at www.Teradyne.com, by clicking on Investors, and then selecting the GAAP to non-GAAP reconciliation link.

Also you may want to note that Teradyne will be participating in the following Investor events between now and our next conference call.

The Thomas Weisel Tech conference in San Francisco on February 6 to 8, The Goldman Sachs Tech Investor Symposium in Phoenix, February 27th to March 1st, The Morgan Stanley Semiconductor and System Conference at Dana Point, California, March 6 through 8.

The Citigroup Small and Midcap Conference in Las Vegas on March 14th through 16th.

And the CIBC Vail Semiconductor Summit in Colorado on March 16th and 17th.

Finally, you may want to note that we plan to issue our earnings release for the first quarter of 2006 on Tuesday, April 18th after the market close, and to hold a conference call to discuss our results on Wednesday, April 19th at 10 a.m. eastern time.

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, as well as our financial performance for the fourth quarter of 2005, and our 2005 fiscal year.

He will also provide guidance for the first quarter of 2006.

Then our Vice President and CFO, Greg Beecher, will provide more details on our financial performance, and on our guidance for Q1.

We will then answer your questions.

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

Mike?

Thank you, Tom.

Good morning everyone.

Thanks for joining us today.

We had a very good finish to 2005.

Sales of 345.2 million were up 18% from Q3 on an apples-to-apples basis.

That is without Connection Systems.

We earned $1.07 per diluted share including gains from the sale of TCS, and $0.25 per share on a non-GAAP basis.

Orders were up 26% to a total of $378 million, with SemiTest up 12% sequentially, and our other businesses up 98% sequentially.

Q4 put a cap on the year of significant achievements at Teradyne.

We had strong sequential growth in sales and orders.

We had steady profit improvement across all of our businesses, and we ended the year with a much stronger balance sheet.

In the first quarter, we plan to ship between 340 million and $360 million, based only our system orders in Q4.

Earnings are expected to be between $0.18 and $0.22 per share, including $0.03 per share of equity-based compensation.

Since we now run our business on reasonably short lead times, we have the ability to move our capacity up or down on very short notice, should customer demand change.

Looking at the fourth quarter for SemiTest, we had our fifth quarter of sequential growth in orders, driven mainly by our FLEX and J750 products.

Most active end markets for us were consumer, automotive, and wireless.

FLEX had another great quarter.

It continued its recent run of bookings of over 100 units in a quarter in Q4.

It surpassed prior generation products as a percentage of product sales for the first time, and the FLEX garnered a number of competitive wins in a wide variety of applications and geographies.

The J750 orders were from a broad set of customers, who were adding major increments of capacity in automotive and consumer digital applications.

In our Assembly Test business, orders were up 78% sequentially, driven mainly by our Mil/Aero business, which had a seasonally weak quarter in Q3.

Orders in Commercial In Circuit Test came mainly from Tier 1 EMS providers, to serve storage, PC, and server applications.

On the Military/Aerospace side, the often lumpy profile of program awards in the business worked in our favor this quarter, as we had orders from multiple programs each from the Navy, and from the Air Force.

Our Diagnostic Solutions business had an unusually strong sequential order growth of 149%, driven by initial volume orders from its largest customer, for our new vehicle measurement modules, in North America and Europe.

In Broadband Tests, order growth was about 50% sequentially, and was driven mainly by continued buying of line diagnostic units, to support both cost reduction and enhanced DSL services.

As I said earlier, 2005 was quite a year for us.

The roller coaster that has characterize the industry for more than 40 years was in evidence again in 2005.

We started the year with first quarter sales down almost 60% from our quarterly peak in Q2 of 2004, and lost about $0.28 per share, after being profitable every quarter in 2004.

Over the course of the year, our quarterly sales grew by 64%, and we earned 50 million, or $0.25 per share on a non-GAAP basis in the fourth quarter.

On the surface, the year might not sound any different than a lot of other years in our cyclical business.

For some in the industry, it might not have been different.

For Teradyne, however, it was a watershed year.

In 2005, we achieved many milestones that we shaped the Company, both in its strategy and its structure.

These efforts started well before last year, but 2005 was the year in which key goals were accomplished.

The first of these was to focus our total energy in the Test arena.

Our divestiture of TCS reflects our intent to concentrate on our core Semiconductor Test and System Level test businesses, and to grow from those core businesses.

Second, we're now fielding a full line of FLEX family testers, all with a common software system, a parallel test architecture, and a broad range of instrumentation, providing economical tests of semiconductor devices used across the complete spectrum of end products.

And third we have significantly strengthened our non-Semi Test businesses.

And finally, we substantially lowered our cost structure and improved our balance sheet.

So we're exiting 2005 in stronger shape than any year in recent history.

Let's look at some of the specifics.

Our Commercial Board Test, Mil/Aero, and Automotive Test businesses, are all solidly profitable, with a significant turnaround in bottom line profitability on essentially flat sales over the last two years.

Commercial Board Test has moved into #1 market share position, in in-circuit tests.

Mil/Aero is consistently winning new platform decisions.

And Automotive Tests has posted 17 quarters of profitability, as it expands its manufacturing and its service bay testing business.

In Semi Tests, the FLEX continues to broaden its customer list in IDMs, in fabless companies, and in subcontract test houses.

There are now between 600 and 700 FLEX testers sold, and about 75% of our Semi Test business is now centered in Asia.

Our FLEX product is configured and tested in 54 hours, versus 12 to 15 days for prior generation products.

The FLEX key supplier base compared to our catalyst profile is 40% smaller, and parts counts have been reduced by more than 50%.

Our field applications organization numbers over 450, with a growing workforce at our applications development centers in Shanghai, Singapore, and Taiwan.

Finally, our fixed costs and breakeven targets have been met, and we closed the year with a net cash balance of about $625 million.

So we're standing at the end of a year of very good progress and a great deal of change.

We're profitable.

We have great product momentum across all of our businesses.

And we're tied to some end products that should have great momentum this year.

Now let me turn it over to Greg for the financial perspective.

Thanks, Mike.

And good morning everyone.

Our sales in the fourth quarter of 345.2 million were up 18% from the previous quarter, and 22% above the level a year ago.

Our non-GAAP earnings per share for the fourth quarter totaled $0.25, and exceeded our fourth quarter guidance of $0.16 to $0.21 per share.

I'll get back to that quite shortly, but first let me take you through our GAAP results.

Net income was 224.1 million, or $1.07 per diluted share, on 212 million diluted shares.

This includes 89.6 million, or $0.44 per share, from our continuing test operations, and 134.4 million, or $0.63 per share, from our discontinued Connection Systems operations.

Included in our net income from continuing operations was a large one-time tax benefit of 29.2 million, for the current year operating losses that will be used against the gain from the sale of Connection Systems.

This amount is recorded both as a benefit in continuing operations, and as an expense in discontinued operations, netting to zero.

We also had net credits that are recorded in restructuring and other charges net in our operating statement amounting to 10.4 million, or $0.05 per share.

Excluding this tax gross-up and the net restructuring of other credits, which have been detailed in our earnings release, our non-GAAP net income for the quarter was $50 million, or $0.25 per diluted share.

This performance exceeds the top end of our non-GAAP guidance, and it's due to both lower operating expenses, and lower foreign income taxes.

Before I comment any further, though, I want to report that we have achieved our previously communicated breakeven reduction goals for 2005.

Our gross margin goals were achieved primarily through lowering our Semi Test fixed manufacturing costs.

This was achieved by much greater outsourcing, and shorter cycle times with our FLEX tester.

Our operating expense goals were achieved primarily through lowering Semi Test engineering spending.

This was primarily in platform engineering with FLEX hitting its full stride.

Our non-Semi Test businesses as a group, also improved their financial health, particularly with a doubling of profits in the fourth quarter, over the same period a year ago, on about the same sales level.

In short, we delivered on our 2005 breakeven reduction goals.

We also planned to hold our quarterly non-GAAP breakeven level between 250 million and 260 million in 2006.

As a reminder, this is at the PBIT line, and excludes stock-based compensation, and any restructuring or other net charges or credits.

Before moving back to what was a accomplished in the fourth quarter, let me first say as a reminder that all reported amounts and percentages are after removing Connection Systems from our continuing operating results.

This is true not only for the fourth quarter, but for all past periods.

Our fourth quarter gross profit was 160.2 million, or 46.4% of sales, up from 89.2 million, or 30.4% of sales in the third quarter.

This 16 percentage point improvement, was due to the fact that in the third quarter we had an inventory provision of 38.5 million in Semiconductor Tests for excess non-FLEX inventory, which accounts for 13 percentage points.

The remainder of the 3 point percentage increase, is primarily due to higher shipment volume in the fourth quarter.

As we've mentioned in the past, we get about 1 point of gross margin improvement on every 25 million of sales increases, up to about $400 million, and 0.5 point thereafter.

R&D expenses were 49.8 million, or 14.4% of sales, as compared to 53.7 million, or 18.3% of sales in the third quarter.

The dollar declined from a quarter ago, was primarily due to reduced Semi Test engineering spending, as instrumentation projects get completed and brought to market.

SG&A expenses declined 1.6 million to 61 million, or 17.7% of sales.

As compared to 62.6 million, or 21.3% of sales in the third quarter.

This decrease was primarily due to lower compensation related costs, and lower foreign exchange losses.

Restructuring and other charges were a net credit of 10.4 million for the quarter, and have been detailed in our earnings release.

Our income tax expense was 1.4 million in the fourth quarter on a non-GAAP basis.

That is, excluding the one-time tax benefit of 29.2 million discussed earlier, versus 2.8 million a quarter ago on a GAAP basis.

This reduction was due to lower annual foreign income than we had estimated a quarter ago for 2005, which is taxed at a higher rate.

Our quarter ending head count was 4400, including about 4000 regular employees.

Year-over-year, our regular head count is down from 4700 to 4000, while fourth quarter sales year-over-year are up from 284 million to 345 million.

Fourth quarter Semi Test sales were 80% of the total, Assembly Test 12%, and other Test 8%.

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

U.S., 18.7%.

Europe, 14.7.

Singapore, 17.6.

Taiwan, 14.9.

Southeast Asia, 19.7.

Japan, 9.0.

Korea, 3.5.

And rest of the world 1.9%.

We had net bookings of 377.6 million in the quarter.

On a quarter-to-quarter basis, our total net bookings were up 26%.

Semi Test was up 12%.

Assembly Test up 78%.

And Other Test up 123%.

On a year-over-year basis, that is Q4-to-Q4, total net bookings were up 71%, Semi Test up 90%, Assembly Test up 2%, and Other Test up 89%.

Our book-to-bill ratios were 1.09 for the overall company, 1.03 for Semi Test, 1.20 for Assembly Test, and 1.53 for Other Test.

At the end of the quarter, our backlog stood at 422 million, of which 80% is scheduled to ship within six months.

This compares to 389 million at the end of the third quarter, of which 81% was scheduled to ship within the next six months.

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

U.S., 27.5%.

Europe, 19.2.

Singapore, 11.0.

Taiwan, 11.8.

Southeast Asia, 17.3.

Japan, 8.3.

Korea, 4.7.

And the rest of world, 0.2%.

Moving to the balance sheet, we grew cash both from operations, and from the net proceeds of 385 million from the divestiture of Connections Systems.

At the end of the fourth quarter, with cash and marketable securities of 927.7 million.

During the fourth quarter, we also purchased 71.5 million of our convertible debt at favorable prices, leaving us with a current balance on our outstanding convertible of 300 million.

Cash generated from operations was about 50 million before considering capital additions.

Capital additions net of sales of related capital equipment were 11 million in the fourth quarter.

The additions were primarily for FLEX evaluations and spares.

Depreciation and amortization in the fourth quarter was 20 million.

Accounts receivable stood at 232.5 million, or 61 days sales outstanding, down from 64 days in the third quarter.

We ended the quarter with inventory of 142.7 million, or 5.2 turns, down 26.9 million from the end of the third quarter.

In the first quarter of 2006, as Mike mentioned, we expect sales to be between 340 and 360 million, with net income per diluted share from continuing operations of between $0.18 and $0.22 per share.

Before I go any further, let me reconcile for you our fourth quarter performance to our Q1 guidance.

Our first quarter guidance would suggest that on about flat sales of 345, our EPS would be about $0.19.

This is $0.06 lower than the fourth quarter non-GAAP EPS of $0.25.

The factors that are pulling EPS down include about $0.03 for stock-based compensation, with the adoption of Financial Accounting Standard 123-R in the first quarter.

Next our variable compensation arrangements, including profit sharing, is expected to be higher with improved financial performance, which is another $0.03.

Lastly, our tax expense in the fourth quarter, excluding the one-time grossup described earlier, was at about a 2% rate on a non-GAAP basis, versus the estimated tax rate for 2006 of 15%.

This amounts to another $0.03.

The total impact of these factors was about $0.09 before considering other positive factors, such as improvements in product gross margins and slightly higher interest income, that essentially get us back to the $0.06 per share difference.

We expect gross margins to run between 46 and 47%.

R&D should be about 15%.

SG&A should run between 20 and 21%.

SG&A guidance includes about a 2 percentage point increase from the fourth quarter, for stock-based compensation and increased variable compensation.

We expect to hold inventories flat at 5.2 turns, or just slightly better, and Accounts Receivable day sales is expected to increase slightly to about 65 days.

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

Depreciation and amortization should be around $20 million.

We expect to end the first quarter with net cash and marketable securities, that is after deducting our convertible debt balance of 300 million, of around 625 million, essentially flat with the fourth quarter.

As we settle a number of our annual liabilities, related to employee compensation and benefits.

In summary, we have achieved our 2000 breakeven reduction goals.

Each of our core Test businesses were solidly profitable in the fourth quarter, and we are poised for growth in 2006, with FLEX leading the way.

Now I'll turn it back over to Tom.

Thanks, Greg.

We'd like to now open the discussion for questions.

[OPERATOR INSTRUCTIONS] I'll pause for just a moment to compile the Q&A roster.

Your first question comes from Murali Abburi with J.P. Morgan.

Hi, guys.

Couple of quick questions here.

First one was, going forward should we model R&D to be at 15% or lower, now that kind of, most of the FLEX R&D has been done?

How do we look at that?

I think the R&D model should be about 15% going forward for 2006.

That would be a reasonable assumption at about this level of sales.

Obviously, as sales goes down, that R&D percentage is going to increase.

All right.

And then, if I look at kind of your order profile, can you tell us how much of that was from IDM and Passant?

Can you give us an outlook of what that looks like into the first quarter?

IDM and sub con-mix was 60% IDM, 40% sub cons.

Very, very close to what we had last quarter.

We don't forecast the first quarter, Murali.

Directionally, do you expect sub-cons to stay strong, given that it is a seasonally weaker quarter for them?

I don't think we can estimate that.

The sub cons at this point are buying at the pace at which they're increasing is comparable to the place in the IDM.

So it is not possible for us to say directionally which way they're going to go.

They have not overheated.

Final question from me.

Has pricing gotten any better, or is it pretty much business as usual?

Business as usual.

All right.

Thanks.

Your next question comes from Timothy Arcuri with Citigroup.

Hi, guys.

A couple things. #1, if I look at the bookings in the fourth quarter, and then I look at the revenue guidance, it seems a bit conservative, given the amount you booked in the fourth quarter.

Can you give us details as to why that might be?

Sure.

If you looked at the backlog and what's shippable within the next six months and you compared that to the prior quarter information, you'd basically see that what's shippable in the next six months is up about 20 million from a quarter ago.

In my script a little while ago, I read backlog this period versus last period and what's shippable within the next six months.

If you did the math on the backlog times the percent shipped, you'd see it is up $22 million in the next six months.

If you said, well, that's two quarter periods divided in half, it's about a $10 million increase, and we did increase our range by about 10 million, so we think the numbers hold together, and it really is what the demands are that is driving our backlog and what shows up in our ship plan.

Just on that topic, so we shouldn't conclude that maybe some of the orders being placed in the fourth quarter were for a little bit longer delivery, so you're not kind of forward booking systems?

No.

You should conclude that there are longer lead times, but that's outside of SemiTest.

The program business that you see in both Automotive and Mil/Aero have that element to them, and there is some service growth that always occurring in the fourth quarter.

But from a SemiTest standpoint, the backlog is as described.

The pushout, if you will.

The post six months is really a non-SemiTest phenomenon.

Last thing for me.

At the analyst meeting, you put up, I think, a model gross margin of kind of in the 48 to 49% range.

Now we're in the 46.5 to 47 range, and we're kind of guiding 46 to 47.

So we're almost at that gross margin target.

So I guess, when you try to relate this to kind of a baseball game, if you will, is the restructuring, it seems like it's maybe in the seventh or kind of eighth inning in terms of the benefits that you're actually getting from it.

That is the right way to think about it, or are you going to extend the model even higher here?

I think that's close.

That's a good way to think about it.

We expect to get the final 2 points absent other changes in the marketplace as we, over a longer period of time, move to a FLEX product line. 100% FLEX.

And that is going to be determined by when our customer demand decreases for some of our non-FLEX products, such as Catalyst and Tiger.

So some of that comes time as the FLEX percent increases, you'll see improvements.

But then the last point or so is fixed costs, that's necessary to support our customers with Catalyst and Tiger.

So I think we're looking at something that is probably two years away.

You might see some gradual improvement over latter part of next year, but it's really a two-year timeframe, before we would likely get to this position.

Okay guys.

Thanks.

Your next question comes from Tom Diffely, Merrill Lynch.

Good morning.

Could you give us a quick update on the utilization rates you're seeing in the field for SemiTest?

Tom, utilization is up and is holding.

It's up a few points.

Mid 80s would be the way that we track our internal systems.

So, and that's pretty close between IDMs and sub cons.

So there previously was a fairly large gap between the two, but you've seen that close then?

It's still a little bit of a gap between the two with IDMs a little bit higher, but that's single digits.

Okay.

And then quickly on SG&A, the variable compensation the $0.03 hit from that, is that going away after the first quarter?

Let me explain that a little bit further, because I know it can be confusing.

The variable compensation has two pieces.

One is profit sharing, and one is variable compensation.

The profit sharing is done on six-month increments.

So for the profit sharing piece, we would not expect that to go away in the next quarter period.

And generally speaking, whenever results are positive and we're profitable, you should expect numbers like that.

It hits the numbers because if you come off the fourth quarter, the six-month period ending in the fourth quarter had a loss in the third quarter, so therefore the fourth quarter profits really didn't get much of a hit for profit sharing, because they had the third quarter as a buffer.

Once we're in a profitable six-month window, yes, you should expect that to occur.

As we go south of healthy profits, those numbers will come down because they're variable, and tied to the health of the business.

It sounds like SG&A will probably stay in this range for at least a little while longer.

As long as the results stay at about this level of revenue, yes.

Thank you.

Your next question comes from David Duley with Merriman.

Congratulations on a nice quarter.

I was wondering if you would be able to tell me about how the games platform order rates were during the quarter, and if you'd seen some upticks in that area from the next set of game platforms coming out in the middle of next year?

David, we don't report on segments within the overall SOC space.

It was a broad quarter of demand, though, if you talk to the sub cons who typically see the breadth of demand, they would tell you that their demand from their customers is across the board.

Gaming processors is a piece of our business.

The way I would think about it is there's no single segment.

If you look at it on a device basis, there's no single segment that is anywhere close to 10% of our business, so there are always ups and downs in the different segments.

You did mention a couple of segments that were particularly strong, and this one wasn't mentioned.

That's why I brought it up.

Right.

I had said -- well, in truth, I said consumer, and I think that's such a big basket.

But if I detailed drivers this quarter underneath the consumer segment, you would find HDTV, GPS navigation, hand-held graphics, ace band, microcontrollers, gaming processors, disk SOC, server chips.

There's a whole, whole wide range.

Okay.

One question inside the Test business again.

You mentioned I think that the FLEX now accounted for, did you give a breakout of percentage of the systems in the quarter?

It's more than 50%, but I might have missed that.

We didn't.

We did it on dollars, and this is the first quarter that FLEX has nudged above our prior generation products.

Just a little bit over half.

And would you expect ta trend to continue as perhaps J750 and Catalyst sales can slow down, or FLEX improves further?

That's hard to tell.

Clearly the adoption rate of FLEX is increasing, as we said between 600 and 700 units, so that trend is going to continue.

The prior generation products, though, have as you know, there's 1500 or so Catalyst systems, and more than that on J750s, so we're still seeing demand for those products and they still represent almost half of the business.

In particular, the J750 has a very long life horizon.

It had a very strong quarter that was driven by some new design ends we've had in recent quarters, and it centers on microcontroller applications, on image sensor applications, and then a large segment of what we would call moderate digital performance, with high parallelism and very intense cost to test economics.

Final question from me.

Could you just give us an idea in your SemiTest business where your lead times are now, and how they might have increased?

Last quarter we said we were about 8 to 12 weeks depending on product and configuration.

We're still in that window.

Thank you very much.

Congratulations on a nice quarter.

Thank you.

Your next question comes from [Gary Schway] with CIBC World Markets.

Great quarter.

One point of clarification.

You mentioned that you'll see basically 1 percentage point of gross margin improvement for every incremental $25 million in sales.

Is that first of all correct?

That's correct up to 400 million.

After 400 million, it would be 0.5 a point.

But that's correct.

So if I get up to 400 million, that implies it should be running already at kind of a target gross margin level of 48 to 49% this year.

Right?

That is correct.

And when I made the comment 49, that's at model.

And at some point you may go above model, and therefore you'd expect to get higher gross margin.

So I don't have to wait two years out from now to basically see a 48, 49% gross margin.

It's really dependent on where revenues go.

What's kind of a mix assumption for FLEX on the 1 percentage point of gross margin for every $25 million of incremental sales rule of thumb, and underlying kind of percentage increase in mix for FLEX, or is it just kind of flat on what the mix is today?

The mix of FLEX over a period of time would have a slight change, but it's not significant that I think it's meaningful for the sensing of when we'd hit 49, but I would just recap that, yes, we could go above 49, hit 50 all based upon volume, and then on more normalized revenues, if you said, and we all have different definitions of normalized revenues.

About if I had a model, at that model, our gross margin should come up 2 points over time.

As we go above that model of shipments, then obviously we should do even better.

If I were to kind of look at risks, the upside and downside to that 1 percentage point rule of thumb, now downside risk is obviously pricing, but upside risk is increasing FLEX content, and increasing instrumentation on each platform?

Would that be right?

That means the risk would be, and we're not worried about this risk.

Would be that our non-FLEX products have much longer lives.

That's okay.

We have a bunch of inventory.

We'd love to sell that.

That would be great for cash.

So they have generally lower margins.

So that is a risk, but we don't think that, in terms of an enterprise issue would matter, because we're going to come ahead on cash.

We need to buy less parts to service the non-FLEX.

I think the only real risks are, tend to be mix, opposite pricing is always an issue.

One quarter versus another, you could get a different set of products or configurations shipped, relative to another quarter.

And how does that all play out in the mix?

So a point or so, maybe 2, can move based upon mix.

One last question.

Are you seeing increasing ASPs for FLEX Q1 over Q4?

Well, average ASPs are more dependent on the configuration than they are upon any pricing, and so in answer to your question, if it's a pricing question, we're not seeing any difference in pricing.

Yes.

So FLEX pricing would be flat in Q1 over Q4?

It would be flat for the relative configuration.

Yes.

Okay.

Great.

Thank you.

Your next question comes from Mike O'Brien with Bear, Stearns.

Adam Pullen for Mike O'Brien: Hello?

Hello, Mike.

Adam Pullen for Mike O'Brien: This is Adam Pullen.

I have a couple of questions.

A lot of your competitors in the past year have recently implemented some new strategic initiative to reduce their raw material costs by establishing a better line of communication with their supplier base.

I'm interested, Mike, if you'd provide some color to us on the call today, as to what you guys are planning on doing to reduce your overall raw materials cost, by establishing a better line of communication with your suppliers?

Let me give you a quick synopsis of it.

That is, a lot of that is behind us.

It doesn't mean the work is done, but we've done over the last couple of years two major things.

One is that our supply lines and our [age of] sourcing is significantly higher than it was two years ago.

So our cost initiative is around low cost region sourcing is much more substantial, #1.

#2, the design of the FLEX and the structure of the product is giving us this step function change in our in-house manufacturing cycle.

As I said, that's measured in hours, versus a few weeks in our prior generation.

And the third thing under the hood is, we have a process we've been working with our suppliers over two years now, called supply chain express, and what that is fundamentally that is, that we look back into the supply chain and find our suppliers' bottlenecks, and work with them to relieve those bottlenecks either through a change in their inventory configuration, a change in their manufacturing model.

So we've got our suppliers in hand here, locked in hand with us in streamlining this, and that's showing up in the FLEX manufacturing model.

Adam Pullen for Mike O'Brien: Mike, what risk do you see moving forward with any raw materials?

Are there any particular risks or challenges that you see for particular raw materials for the next year?

Nothing standing out.

We always have, when we get a bubble of configurations that are unique, we scramble, but there's nothing on the horizon of commodity types that we are concerned about.

Adam Pullen for Mike O'Brien: And final question.

I really like what I'm hearing today.

Congratulations.

For the remainder of 2006 and into 2007, would you say your top three challenges are that you're planning on implementing to reduce cost, and how you plan time to implement those?

Well, our top challenge is really in continuing accelerating the FLEX.

And if you said what would you, what bottleneck would you like to relieve, it would be in the test development engineering side of the equation.

We've got 450 field applications engineers, and our customers could use that many more to accelerate silicon onto the testers.

We're working very hard to build these applications development centers in Asia.

Really the challenges that we're facing now after '05, are much more on the growth side and accelerating growth, than they are on the cost side.

Adam Pullen for Mike O'Brien: Great.

Thank you very much.

Continued success down the road.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

Good morning, guys.

Terrific job on the continued restructuring here.

Question on that.

You've done such a nice job divesting the TCS business, which is allowing the Company to be very profitable in the industry upturn.

How do you think about what the divestiture of the TCS business does, when business inevitably softens up a little bit, as Mike alluded to in the opening comment?

Jim, if you're asking do we lose a shock absorber in TCS?

Yes.

We really don't.

Two things.

One is TCS, in terms of its earning power, it was never a substantial shock absorber on the EPS side.

It was on the top line, but not on the bottom line, #1.

And #2, 10 years ago when it was a military connector-oriented business, not Commercial, it had a bit of this counterbalancing effect.

It's businesses are now tied.

As we exited the business, it was tied much more to the Commercial space, to communications applications, et cetera.

So it was more on the biorhythms of SemiTest than it was on its own.

I might than remembering this wrong, but I thought that during the last downturn TCS kind of broke even on a P&L basis.

If I can ask that first, because the rest of my question might be moot, if that's not right.

Depending on what period you looked at, TCS if you went back, say, over a five-year period, TCS has been dilutive to the Company in total.

Absolutely.

No question about that, which is why the divestiture was such a positive thing, but just thinking about what your normalized earnings are now.

If when you were losing $0.23 on an operating basis in March of '05, if TCS was breakeven during that period, doesn't that mean there's more volatility in the downturn?

I think it absolutely was the right thing to do, because over the course of the cycle, you're a lot more profitable as a result of this.

I'm just trying to get a sense of what the new normalized numbers look like, based on what the downturn would look like without that buffer if there was one when you were losing money in the rest of the business?

The way I've thought about it and we've done a fair amount of work here, in a good year for TCS, not a bad year, but in a good year they could give us $0.02 help per quarter. $0.02 EPS help.

And that's not much help.

And there's many down years, and then they take it back.

So cumulatively, five years, three years, it's been dilutive.

We think strategically it's clearly the right move, and financially it's the right move.

If you look hard enough, I'm sure you'll find a quarter somewhere where they helped.

If you look at it over a longer period of time, I think you'd have to conclude it did not help, or it's inconsequential.

Absolutely.

Couple other quick things just on the model.

The share count going forward?

I think about $198 million.

It's only when we get above --

million shares.

Pardon me.

198 million shares.

Right, 198 million shares, and if we get above $0.24 EPS, then it would increase with the convertible debt, but that increase we also take out interest expense, in this as-if GAAP calculation.

I think I'd use 198 to 200, that range.

Terrific.

Does that tax rate you said 15% for '06, is that pretty ratably over the year, or does that change on a quarterly basis?

Well, we think that's the rate for the full year, and in this volatile business and where income can move around, it certainly could change if you ask me what the range was, I'd say it's 10 to 18%, but I think 15's probably a pretty good estimate.

And so we should be using 15 for Q1 also then of '06?

Yes.

'07 tax rate, would you start to pay a little bit more taxes as you get some more cumulative profitability?

I think the subsequent year would likely still be about 15%.

Final question from me.

I know this is becoming less of an issue as your lead times continue to shorten up, but any early indication on the orders for the first quarter qualitatively?

As you know, we don't forecast, the thing Greg said before.

The backlog and the increased shipment range is really mapping our customers demand into our slot plan.

That's really all we can say.

Your next question comes from John Pitzer with Credit Suisse.

Yes, guys.

Couple of follow-up questions to Jim's questions.

First on the first quarter orders, given that some of the non-SemiTest business had some pretty strong performance in December, and that tends to be more lumpy, did that put you in a hole so to speak in the first calendar quarter?

Well, in non-Semi, we're always going to be in that hole.

We're either going to be in, as we say, yay, boo.

Some quarters are going to look great, because it looks like it's a big growth, and others will go down.

So sequential bookings, that's why we don't get into the forecasting, because we have to speculate on that, as well as on overall demand from customers and the changes there.

So lumpy business in the program-related businesses, and that will always cause some volatility.

Greg, just relative to the tax rate question, you gave guidance for '06 and '07 of about 15%.

What should we assume the fully taxed number will be longer-term?

That's a very good question, John.

We are doing work to change our international tax structure, so long-term we'd be shooting for a rate under 30%.

So you might want long-term, you could think about 28%, but that's going to take some time to implement that strategy.

And then last question here for Mike.

Mike, just relative to the gaming platform and the tooling that's going on for gaming, it's clearly an area where you guys have gained some market share.

Can you help us understand how far along on those tooling programs are we?

Are we 50% there, 40% there?

Can you give us a sense on the gaming side?

Well, it all depends on the consumer demand for the products.

We're relatively indifferent.

As you know, there are products coming in market and coming to market, on the gaming side.

The trajectory of growth on those is all speculated by industry watchers, and we don't have a better view of that than anybody else does.

The which game will be successful, or which game will come to market on schedule is the other variable, and we are somewhat indifferent to that, because we're into really all of the major gaming systems.

So I really can't tell you what the trajectory is going to be, because our customers don't know themselves.

Just maybe was a follow-up there, if you look at sort of when we would expect a gaming platform to hit the market in volume, how many quarters before that would you start to see an accelerated ramp on the testing side, or is that ramp fairly linear?

Customers put equipment in place three or six months in advance of the gaming launch, as their products become more mature and stable, that can be shorter than six months.

Great.

Thank you, guys.

Your next question comes from Mehdi Hosseini with FBR.

Hi, guys.

When I look at your commentary regarding the overall install base for FLEX, to what extent should I think about the install base a year from now, assuming that FLEX is not intended to replace Catalyst?

Is it going to, the installed unit, is it going to get around 1000?

I'm not asking you for a number.

I'm just trying to think about the units of FLEX, and how you're planning, as we go forward, and as bookings for Catalyst comes down.

And also on the market as a follow-up to John's question, can you help us understand how your position is among the two different platforms?

Is it fair to say that you would have more exposure to a Sony-based platform, compared to the other one?

Okay.

Mehdi, thanks.

On the first question, you're asking a tougher question than, what is a forecast for Q1?

You're saying what is the outlook for the whole year on FLEX, and obviously we can't, if we knew, we wouldn't forecast it, and we don't know.

But the real questions is that, are we playing it, would we be playing it differently, in terms of our ability to ramp and manufacture, and we have lots of flexibility in the mix between Catalyst, Tiger, FLEX, J750.

So we really aren't concerned about the trajectory.

We do know that customers are adopting FLEX, both into new applications and into successor or transitions from the Catalyst and the Tiger.

On your second question, we're agnostic with regard to the success of the gaming platforms, because we're into all of the major gaming platforms.

And therefore obviously we hope consumers adopt them, and we hope they all get to market rapidly.

But we are not betting on one horse versus another.

Sure.

Going back to my first question as a follow-up, I'm sure you would have some sort of a model that would look at the overall units of semiconductor out there, and expectation for the growth.

And to that extent, I would expect maybe, okay, you're gaining market share.

You have leverage with the select end markets.

So you would continue to grow bookings for FLEX?

But at some point, maybe by mid this year, the market has booked and installed so many FLEXs, that sequential growth may not be there.

Is that possible?

That's always the, that's the question in any capital equipment deployment.

There is growth in breadth of applications and in market share growth, and in penetration into new markets.

Sure.

But I'm looking at it as FLEX model.

Now we're in the phase of capacity purchase, and we don't really have a significant tech, or technology-related upgrade.

And to that end, I'm just trying to understand, or hear your opinion where I'm wrong, in terms of assuming that maybe by mid or third quarter of this year, the continued growth in bookings for FLEX may come to an end.

I think that would speculate that there's a finite amount of capacity, and that growth in the end market slows.

There's a lot of head room with FLEX.

We've got between 1000 and 2000 of other testers.

When FLEX gets to that, we'll obviously break through those records, because it's a single platform.

So the curvature of growth in the market will be dependent on the unit growth, and the dollar growth in semiconductors, and in FLEX's ability to ramp and fan out into more and more SOC segments.

Great.

Thank you.

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

Thank you.

Just a quick question on the convertible here.

Do you just plan to buy it back through the course of the year?

Is there a plan here in one fell swoop to clean it up?

Mark, that's certainly possible.

We'll look at what makes sense from a finance perspective.

If it's at attractive prices, we'll look to buy it back.

If it is not, we'll just keep it the cash in our balance sheet, and pay it off at maturity.

So it all depends upon the Net Present Value of the alternatives.

Nothing's been decided.

It depends what it's trading at.

The interest expense I assume is largely attributable to that convertible.

My comment earlier on interest expense?

Yes.

I was referring to the proceeds we received from Amphenol on Connection Systems.

The net proceeds were worth 385 million, so that's extra cash we have on our balance sheet.

Obviously, that extra interest helps our Q1 results.

That's what I was referring to.

Thank you.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Congratulations on the nice quarter.

I guess a question for Greg.

In terms of the stock options expensing, can you break down what will be in the cost of goods, and what will be in the OpEx line?

I think in that number you gave in the outlook.

In the first quarter of 2006 in costs of goods sold, it will be 1.3 million is our estimate.

R&D expect about 2.1 million, SG&A expect about 3.5 million.

That's very helpful.

In terms of the FLEX and the strong traction you've been gaining, can you characterize whether you believe the big driver of that is even through market share gains, or in some ways a replacement of some of your older test systems?

Patrick, the FLEX 600 to 700 units have about 15% of those, a little bit higher in more recent quarters, but if you looked at about 15 to 20% of those units have gone into an installed base outside of the Catalyst, Tiger, J750.

So a portion, obviously a portion of the footprint is into our existing accounts on new silicon, and some transition silicon.

About 20% of it is in new turf.

But I guess then a follow-up on that, do you see additional market share gains in other different applications, and can we assume that we'll see new, I guess, FLEX instrumentation that will penetrate additional markets going forward?

That's the phase we're moving into, which is the platform part of the equation is essentially complete.

The instrumentation development is where the R&D money is going.

That allows us access some sub segments inside the market that will give us some opportunity for growth.

Great.

Thanks a lot.

Your next question comes from Shekhar Pramanick with Moors & Cabot.

Yes.

Hi.

Good morning.

Two part question.

My first question is your Q1 guidance is pretty much flat.

Does that include the SemiTest?

Maybe a little color on it.

SemiTest business is somewhat unit-driven business, so there is a Q1 little bit of seasonality.

I hope you are factoring in the potential for maybe a slight decline in the business.

If you could give us a little bit of color how Q1 revenues, how you're thinking big picture-wise?

Shekhar, the forecasters outside over some number of weeks have been talking about a dip in the first quarter, and our customers are holding firm, as evidenced by the bookings in both IDMs and sub cons in the fourth quarter.

So our first quarter is consistent with our fourth quarter in Semiconductor Test.

Somewhat of a flattish thinking at this point?

Yes.

Okay.

My next question was on UltraFLEX, there has been a lot of chatter regarding particularly one gaming platform having some glitches, and what not.

There may be some validity to it.

But at the same time, we are picking up maybe you're gaining a new win on the graphics side.

Would that be the right way to think?

If there is a small, two, three-month glitch given the other wins, UltraFLEX wouldn't suffer.

Well, if we had a win, and if our customers told us we could tell you, we would tell you.

Okay.

All right.

Lastly, a question for Greg.

Did you say your breakeven is going to be 250 million for Q1?

Or between 250 and 260?

I thought it previously was closer to 250.

Was there something I'm missing there?

What I said is that, throughout 2006, our quarterly breakeven goal, this is at the PBIT line excluding stock-based comp and any restructuring items.

We expect that to stay between 250 and 260 throughout next year.

Some quarters will be a little closer to 250.

Some quarters it will move up closer to 260 based upon mix and other factors.

But we're going to keep it within that range.

What was the breakeven for Q4 of '05?

253.

Thank you.

Operator, we'll take the last question now.

Thank you.

Your final question comes from Edward White with Lehman Brothers.

Thanks.

Looking at the non-Semiconductor Test business, can you talk about some of the qualitative factors that are going to be important going forward?

I know it's hard to predict orders specifically, but in other words, will there be a point in time during this year in which you're probably going to get a larger concentration of [Bellero] business, or do you expect anymore of the kind of competitive dynamic wins that you had in the fourth quarter, to recur at some point during the year for other Diagnostic Test or Assembly Test?

The macrofactors, it's very different businesses, but the macrofactors are very program-related on these, and they come at long spacing, and they come in lumps, as we've said before.

But the factors that we watch and the strategy around two businesses that are program-based, in diagnostic solutions in the Automotive space, we're counting on two things happening in those markets.

One is that customers move more to an automated test environment in their manufacturing lines, and we're designing in the diagnostic solutions products into the factory, if you will.

On the service-based side, really the thing that we're banking on, is that the car companies are spending massive amounts of money on their warranty costs, which in some sense are uncontrolled costs, as the service-bays send-back modules, there is essentially no fault found when they get back to the factories.

So inserting our products at the service bay gives them a better screen, and that's part of their overall initiative to reduce warranty expense.

On the Mil/Aero side, our strategy there is platform selection for big programs, and then fanning out our instrument modules into our existing install base of Mil/Aero test systems, and we do that by having an integrated set of instruments that tie into the architecture of our Mil/Aero system level test businesses.

Those are the macrofactors we're counting on.

A quick financial question.

In looking at employee stock-based compensation for the year, should we be thinking that the quarters will be very similar to what we see in the first quarter, or is there likely to be a pattern of that changing through the year?

No.

They should be similar, and I would expect over a period of time it's going to be between 2 to 3% of sales, but the numbers I gave you for Q1 '06, that's probably pretty close.

I think over a period of time the range is going to be 6.8 to about 7 million, maybe 7.2 million.

But it's in that neighborhood.

Great.

Thank you.

Let me just make one closing comment if I may.

This past year we look back on '05, and say we had three thrusts.

The first one was around new product momentum.

The centerpiece of that has obviously been, to try to expand our penetration of FLEX into IDM, fabless, sub con environments.

As we close the year, we're very encouraged by the results we've had on that front.

That gives us a really strong foundation for future growth.

Second was to renovate the cost structures, both in SemiTest and in the non-SemiTest or the system level test businesses, and that has all been communicated in our break even goal, and we are very pleased to say that we have gotten to the level of this 250 to $260 million objective, which was not easy to get to this year, and an important foundation for the financial performance of the Company going forward.

And finally, strengthening the balance sheet and really, more than the TCS divestiture, was to really focus our business around what we believe we do best, and that is in the test arena.

And that's going to be the basis for our growth into additional markets, and expansion in our share going forward.

Thank you, everybody, for joining us this morning.

We'll talk to you next quarter.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's presentation.

Thank you for participating.

You may now disconnect.