泰瑞達 (TER) 2006 Q1 法說會逐字稿

Good morning.

My name is Marvin, and I will be your conference operator today.

At this time, I would like to welcome everyone to the first-quarter 2006 earnings conference call. (Operator Instructions).

Thank you.

Mr. Newman, you may begin your conference.

Welcome to our discussion of Teradyne's most recent financial results.

I am 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 first quarter of 2006 as well as our outlook for the second quarter.

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

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

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 around noon today Eastern Time.

If it is more convenient, you can also access a replay of the call by dialing 1-800-642-1687 in the US or Canada or 1-706-645-9291 outside the US and Canada and providing the pass code 6934534.

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

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

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

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

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

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

Investors are cautioned that forward-looking statements are neither policies nor guarantees but involve risks and uncertainties that might 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-K, filed on March 14, 2006.

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 do make will be broadly disseminated and available over the Web.

We want to be 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 -- a Moors & Cabot Marketing Day in Boston on April 27, the Merrill Lynch Tech Gathering in New York on May 2, the CSFB Semiconductor Capital Equipment Conference in New York on May 3, Teradyne's annual shareholders' meeting in Boston on May 25, the SG Cowen Conference in New York on May 31, the Citigroup Conference in Boston on June 1 and 2, a Moors & Cabot bus tour to our North Reading facility on June 6, a Sandgrain Securities luncheon in Boston on June 9, the Bear Stearns 17th Annual Tech Conference in New York on June 13, a Morgan Stanley marketing trip to Boston on June 21, and a Sandgrain Securities luncheon in New York on June 23.

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 first quarter of 2006.

He will then provide guidance for the second quarter.

Then, our Vice President and CFO, Greg Beecher, will provide more details of our financial performance in Q1 and on our guidance for Q2.

We will then answer your questions.

For scheduling purposes, you should note we intend to end this call after 1 hour.

Mike?

Thanks, Tom, good morning, everyone.

Before I start, I would like to take a moment to let you know that Teradyne lost one of its two founders earlier this week, as Nick DeWolfe passed away in Aspen, Colorado at the age of 77.

Along with Alex d'Arbeloff, Nick was a guiding force in the birth of the automated test industry.

He will be missed; although, his legacy of innovation and engineering discipline is alive and well here at Teradyne.

On the business front, we got off to a strong start in 2006 with first-quarter sales of $363 million and earnings of $0.23 per share on a GAAP basis and $0.25 per share on a non-GAAP basis.

Orders of $364 million were down slightly from Q4.

The semiconductor test orders were up 10% sequentially with good momentum across all of our key products.

As you know, we have been focused on two major initiatives -- first, executing to our new financial model and second, expanding our FLEX customer base in the system-on-a-chip test market.

We have solid results in both areas this past quarter.

On the financial side, gross margins, operating expenses, inventory turns and cash generation were all favorable to plan.

Greg will flesh this out in more detail in a few minutes.

I'm very pleased with the progress we've made in improving our financial performance, and we remain committed to maintaining this discipline and leverage going forward.

On the FLEX front in the first quarter, we set another record for systems ordered, driven by strong order growth in wireless, baseband, and power management applications in addition to image sensors in a wide variety of other consumer end markets.

We added seven new customers in the quarter, and 18 out of our top 25 FLEX customers made repeat buys.

It is important to note that in the entire history of our very successful catalyst product, we only exceeded this quarter's FLEX unit bookings one time.

So, we continue to be very encouraged by the products' broad acceptance and momentum in the market.

In addition, our J750 order rate continues to be very strong, with the second quarter in a row of over 100 systems booked.

We shipped over 2,750 base systems to date, with over 1,000 sourced and shipped from Asia.

The major applications driving the 750 are microcontrollers and image sensors.

Both of these applications demand extraordinary economics of test, as they are increasingly pervasive in consumer electronics.

The 750's ability to keep pace in performance and parallel test has made it an industry standard in these areas.

I should also note that we had record bookings in Japan this past quarter, and that is a function of the 750's momentum coupled with increased penetration of the FLEX family into other SoC applications.

Finally, the catalyst product continues to contribute with sequentially increased bookings in the first quarter.

Our overall SemiTest booked total was split roughly 65% into integrated device manufacturers and 35% into fabless subcontract test accounts.

This has shifted slightly from the 60-40 split over the last 6 months and in my view, reflects the more orderly buying patterns of the subcon customers compared to the 2004 up cycle, where they represented about 55% of our business at the peak.

Turning to our non-SemiTest businesses, orders were down sequentially by over 40% as expected, given the seasonal nature of most of the businesses and given the tough compare with Q4, where orders grew 100% from Q3.

In the commercial and circuit test business, orders were driven mainly by the contract manufacturing suppliers for our major storage, server and high-end computer customers.

We also saw demand from more diverse markets, such as set-top boxes, automotive, security and communications.

On the competitive front, we had several major wins with our TestStation product, as the differentiation of SafeTest continues to be compelling in applications involving low voltage or high pin count or applications like storage test requiring multiple simultaneous voltage levels.

In the Mil/Aero test business, we won design-ins on the instrument side from several key customers with our new digital, analog and bus test instruments.

As you know, a key part of our Mil/Aero strategy is to grow our instrument business beyond our core digital test instrument base, and these design-ins were a big step in that direction.

On the systems side of the Mil/Aero business, we achieved record shipments for the Spectrum 9000 product in the quarter, including systems for the B-1 and C-17 programs; several new production systems for our system integration customers; and capacity expansion into other installed base accounts.

At Diagnostic Solutions, we followed up the successful introduction of our new automotive vehicle measurement module in Q4 with increased shipments in Q1.

This product increases the ability to identify failures at the dealership level, thus reducing manufacturer's warranty costs.

In broadband test, we continued the rollout of new line diagnostic units to support improved performance in voice networks, primarily for European customers.

Now, looking to the second quarter, we're projecting revenues of between 360 and $380 million and earnings per share of between $0.31 and $0.35, including an $0.08 net gain on the sale of real estate.

This revenue level reflects the increasing demand expected for SemiTest products and steady sales from our non-SemiTest lines.

Finally, we realized that there are some sharply divided viewpoints on the trajectory of business for semiconductor capital equipment companies for the remainder of 2006.

This debate centers on issues like IC revenue growth projections, IC inventory levels, CapEx plans, the proportion of capital spending in the first versus the second half and broader economic trends like consumer spending.

While we are affected by these issues, we actually operate in a much shorter lead-time environment with our customers.

As such, we're concentrating far more on what we can manage, rather than what we can forecast.

This has been at the heart of our lean manufacturing model, our supply chain management system and our engineering leverage strategy.

As a result, we continue to gear the Company for improved over-the-cycle profitability as well as an ability to respond quickly to positive or negative ramps in demand.

With all of this in mind, we remain very bullish on our product momentum, on our competitive position and on the end consumer products that drive so much of our business.

Now, let me turn it over to Greg for his perspective.

Thanks, Mike, and good morning, everyone.

Our sales in the first quarter of 363 million were up 5.1% from the previous quarter and 72.5% above the level a year ago.

Our non-GAAP earnings per share for the first quarter totaled $0.25 per diluted share.

On a gap GAAP basis, we achieved $0.23 per diluted share.

Included in our GAAP net income from continuing operations of 44.9 million was an $8 million inventory provision for non-FLEX products and semiconductor test and net restructuring credits of 1.1 million.

Excluding this inventory provision and the net restructuring credits which have been detailed in our earnings release, our non-GAAP net income for the quarter was 50.8 million or $0.25 per diluted share.

Our first-quarter gross margin without the inventory charge of 8 million was 49.2% of sales, up significantly from 46.4% of sales in the fourth quarter.

This 2.8 percentage point improvement is due primarily to more favorable product mix in semiconductor test and to a lesser extent, higher shipment volumes.

On a GAAP basis, our first-quarter gross margin percentage including the $8 million inventory provision was 47%.

This $8 million charge reflects a continued strong adoption rate and penetration of FLEX, thereby reducing the demand for some of our long-standing SoC testers.

R&D expenses were 52.2 million or 14.4% of sales as compared to 49.8 million or 14.4% of sales in the fourth quarter of 2005.

The dollar increase from a quarter ago was primarily due to stock-based compensation and variable compensation.

These increases were offset to a lesser extent by a reduction in SemiTest engineering expenses, as many key FLEX instrumentation projects were successfully completed in late 2005.

SG&A expenses were 72.2 million or 19.9% of sales as compared to 61 million or 17.7% of sales in the fourth quarter of 2005.

This increase was primarily due to stock-based compensation and variable compensation.

In addition, we had about $2 million of higher facility costs, primarily related to our North Reading consolidation that will be completed in late 2006.

As a reminder, our Q1 results include 6.1 of stock-based compensation and significantly higher variable compensation than in the fourth quarter of 2005, given the strong business performance.

Restructuring and other charges were a net credit of 1.1 million for the quarter and have been detailed in our earnings release.

Our net interest income was 6.1 million, up from 2 million in the prior quarter due primarily to a full quarter of the proceeds from the divestiture of TCS.

Our income tax expense was 8.6 million in the first quarter, reflecting a tax rate of 16%.

Our quarter-ending headcount was about 4,400 people, including about 4,000 regular employees.

Year over year, our regular headcount is down from 4,600 to 4,000, while sales are up from 210 million to 363 million.

First-quarter SemiTest sales were 81% of the total, assembly test 11%, and other test 8%.

On a geographic basis, our first-quarter sales in descending percentage order broke down as follows -- US 21.9%, Southeast Asia 19.5, Taiwan 18.4, Europe 15.6, Singapore 12.9, Japan 7.7, Korea 2.6, and rest of world 1.3%.

We had bookings of 364 million in the quarter.

On a quarter-to-quarter basis, our total bookings were down 4%.

SemiTest though was up 11%, assembly test down 27%, and other test down 58%.

On a year-over-year basis, that is Q1 '05 to Q1 '06, total bookings were up 51%, SemiTest up 87%, assembly test down 8% and other test down 47%.

Our book-to-bill ratios were 1.0 for the overall Company, 1.05 for SemiTest, 0.9 for assembly test and 0.66 for other test.

At the end of the quarter, our backlogs stood at 423 million, of which 84% is scheduled to ship within the next 6 months.

This compares to 422 million at the end of the fourth quarter, of which 80% was scheduled to ship within the next 6 months.

On a geographic basis, our bookings for the quarter -- again in descending percentage order -- were distributed as follows -- Southeast Asia 19.7%, US 20.8, Singapore 17.6, Europe 13.2, Taiwan 13.9, Japan 12.4, Korea 2.0, rest of world 0.3.

Moving to the balance sheet, we ended the first quarter with cash and marketable securities of 966 million, up 38 million from 928 million as of December 31, 2005.

During the first quarter, we reduced our debt by 19.6 million, of which 15 million went to pay down our convertible debt.

We also fully funded our US pension plan so that our pension assets equal our projected benefit obligation, which used another 20 million.

Cash generated from operations was $59 million before considering capital additions.

Capital additions, net of sales of related capital equipment were 14.2 million in the first quarter.

Depreciation and amortization for the first quarter was 25.7 million.

This includes 6.1 million of stock-based compensation.

Accounts receivable increased to 259 million or 65 days sales outstanding, up from 61 days in the fourth quarter.

This increase was due to higher shipments due at the end of the quarter.

We ended the quarter with inventory of 116 million or 6.6 turns on a GAAP basis and 6.4 turns on a pro forma basis.

This is down 27 million from the end of the fourth quarter.

This is a new record for Teradyne and exceeds our model of 6 turns.

Our much shorter final configuration and test cycle time from about 15 days with Catalyst and Tiger to about 60 hours or less with FLEX or the J750 product in what we call "supply chain express" is what has enabled the record inventory turns.

In the second quarter of 2006, as Mike mentioned, we also expect sales to be between 360 and 380 million, with net income per diluted share from continuing operations of between $0.31 and $0.35 per share on a GAAP basis.

This includes 18 million or about $0.08 of net gains on the sale of real estate.

We expect gross margins to run between 48 and 49%, consistent with our model.

R&D should be about 15%, and SG&A should run between 19 and 20%.

We expect to hold flat both inventory turns at 6.4 and accounts receivable day sales outstanding at 65 days.

In addition, we expect to spend 30 million or less on capital.

This capital includes about $12 million for the fit-up of our North Reading campus.

In the second quarter, our depreciation and amortization should be around $28 million.

This includes 6.3 million of stock-based compensation.

Our tax rate is expected to be about 15% for our operating income, while our real estate gains will be taxed at a rate closer to about 5%.

We expect to end the second quarter with net cash and marketable securities.

That is after deducting our convertible debt balance of 285 million of around 750 million.

This includes 35 million from the anticipated sale of three of our buildings.

In summary, our gross margins have improved as expected with the strong growth in FLEX and our J750 product.

While there will be natural period-to-period margin variation based upon exact product mix and of course the volume levels, the positive gross margin trend line is clear.

Our balance sheet is much improved with our new manufacturing model.

Further improvement should come from our fully FLEX manufacturing model and our real estate consolidation.

We have a steady hold on the cost structure and breakeven level.

Lastly, we start 2006 with strong financial performance in semiconductor test and as Mike commented on, continued strong design-in performance with both FLEX and our high runner J750 product.

Now, I will turn the call back over to Tom.

Thanks, Greg.

Marvin, we would now like to open the discussion for questions.

(Operator Instructions).

David Duley, Merriman.

Congratulations on a nice quarter.

I was wondering if you could give us an idea of what is behind the J750 strength.

That seems to be a little surprising that it continues to ship at that kind of volume.

That's my first question;

I will have a follow-on.

Dave, the 750 has had a strong position in two markets.

One is image sensor, which is principally based in Japan but there is obviously some business outside Japan, and in the microcontroller market.

So, the growth has been coming from both from an expansion of accounts and broadening of our base in both of those two segments.

Regarding the FLEX, could you talk a little bit more about how you see the shipments break out between the high and middle and low version of the product line and where you expect them, the most growth going forward?

We don't actually break that out.

The products -- the FLEX line includes the high-end UltraFLEX, the FLEX and the microFLEX, which is a zero footprint model.

We don't break those down, but they are all triple-digit volume unit systems.

Just as a follow-on, do you expect the Catalyst to continue to grow sequentially or will you be migrating those customers to the FLEX platform?

Or is it just there is some applications that will remain on that particular product line?

Many customers have shifted to the FLEX, but the Catalyst installed base is so large with 1,700 plus units that we expect that it will continue to have some demand in places where compatibility is a premium.

It's obviously going to be significantly lower if the FLEX continues to move ahead in our total volume.

Timm Schulze-Melander, Morgan Stanley.

Congratulations on the quarter.

Two quick questions if I may, one was just a housekeeping question.

When you talked about underlying EPS of $0.25 that excluded the inventory charge, did that also exclude the restructuring credit?

Yes.

Then just on the inventory, obviously, you know it came down nicely in the quarter.

Some of that being obviously getting a tailwind there from the inventory write-down.

Can you just sort of let us know how much of the sort of 116 million -- how that inventory just breaks down between the various business?

Particularly how much of that is sort of SemiTest, and then within that, how much of it is sort of legacy products versus FLEX?

Thanks.

I'm going to give you an approximation here.

The SemiTest piece of that inventory is probably about 85 million.

In the 85 million, the vast majority of it is going to be FLEX or J750.

There is a smaller piece that would be what we would consider past-generation testers that still have plenty of life in them, Catalyst and Tiger.

That number is certainly less than FLEX and J750.

Then the other businesses would make up the balance to get you back up to the total.

All right.

So maybe just ballparking, I mean Catalyst and Tiger would be sort of one-quarter to one-third of the inventory or less than that?

It would be closer to one-quarter.

Gary Hsueh, CIBC World Markets.

Great job here on the quarter.

But, looking at your guidance for next quarter, you are guiding FLEX up 5% in terms of revenues but you are guiding gross margins flat to down.

Can you help me explain that?

Are you recognizing or did Q1 have any benefit on the gross margin line from previously kind of written-off inventory that you might have shipped?

Your second question I will answer first.

No, there is no reversal of inventory charge that is giving us a bump up in Q1.

If that did occur, we would disclose that and treat that as a special.

What happened in Q1 and this can happen in almost any particular quarter is, there is a variation of what can occur within margin that's all within a reasonable range.

In Q1, we had a richer mix and some of our fixed costs were lower as well.

It was a little bit above where we would have thought one would be at our model, but we understand clearly that you are going to be up a little bit or off a little bit depending upon mix.

So, if you look at Q2 and compare it to our prior guidance, we are actually ahead of our past guidance and are tracking quite nicely to the model we have established for gross margin, which is not holding the very strong performance in Q1 but still are ahead of our plans to get to a gross margin of about 49% with some room left with the fully FLEX, fully J750 model.

There is a little bit more improvement to be had, but we are on or ahead of our gross margin plan.

Can I ask a follow-up here just to kind of help interpret your answer here?

Are you shipping more kind of lower margin Catalyst or capacity-driven products here in Q2, and that's maybe what is depressing gross margin momentarily down a little bit sequentially?

No.

That's not the driver.

In Q1, we had a very large mix of FLEX and J750 products, and there was a set of other factors that contributed.

I think you would need to understand with gross margin, it can move around a little bit in any particular period.

If you go back far enough, I think it was a quarter many quarters ago where it went the other way on us.

We are trying to describe some inherent complications that can occur with mix.

This time, it's in our favor.

But, if I take the upper level of abstraction, I think the good news is we are tracking to the model and are frankly a little bit ahead of our gross margin model, even looking at the Q2 guidance.

I might be nitpicking there.

Let me just ask a follow-up question.

Some assembly equipment suppliers have definitely seen upside, like you saw upside for your SemiTest orders in Q1.

But, yet, they are seeing a momentary pickup or step-down in their orders.

I know you don't talk about or guide to orders in Q2, but can you give us a sense of where SemiTest orders might be headed in Q2 in that context?

All we can tell you is that the revenue plan for Q2 reflects our best estimate of the level of demand.

It really represents our slot plan and commitments we're making to customers within our normal lead-times.

Chris Blansett, JP Morgan.

I had a quick question on kind of bookkeeping.

Do you disclose your FLEX systems as a percentage of revenue for the quarter?

We have described that they are a little over 50%.

We do it in bookings but not in revenue.

Can I get the bookings number then?

I apologize.

Bookings for FLEX are a nudge over -- just over 50% this quarter.

(multiple speakers) Then also, your test utilization rates in the field by your estimates?

They are steady to what we described last quarter.

In other words, we described that around the mid 80% level for the total installed base, and there is some variation between IDMs and subcons, with IDMs being about 5 points higher.

If I may, I just had one last question on kind of bookings linearity through the quarter.

It appears that from what other companies have said, there's kind of a lull in the middle of the quarter and then things picked up at the end.

Do you guys see that as well?

I have looked at that, and there's nothing in a pattern that would tell you anything.

The last five quarters are all different and this last quarter is in the pack.

It's not -- it doesn't stand out in any way.

Chris, one clarifying note on the FLEX percentage, just so that everybody understands, that is a percentage of semiconductor test system orders.

So, we take service out of that and look at system bookings.

Actually, one last question on, could you provide your option expense and breakout for the quarter?

Yes.

For the Q1 '06, the options was 6.1 million in total. 1.1 went to cost of goods sold.

R&D was 1.8 and SG&A was 3.1.

John Pitzer, Credit Suisse.

A couple questions here -- first, when you look at the gross margin strength in Q1, just help me understand, was the mix towards the J750 the biggest driver of the margin upside or can you give me a little bit more linearity or granularity there?

John, I would put in a bucket J750 and FLEX, as the percent of J750 and FLEX in a bucket was a fairly high percent and that drove up margins.

Those products, J750 and FLEX, particularly FLEX with the increased instrumentation that it has now compared to where it was sometime ago have the healthier margins.

That would be point number one.

Point number two would be we did lower some of our fixed costs this quarter, and it's a long list of small items that add up.

Then, point number three is just simply higher volume.

But I think it's best to think about J750 and FLEX almost together.

As that mix of products increases, you should see strong margin performance from Teradyne.

Then secondly, guys, when you look at the reduction in lead-times you guys have accomplished over the last 12 months, is it right to start thinking about this business as being sort of a one-to-one book-to-bill?

Certainly with lead-times in the 8 to 12 week range, which is where we are, it becomes a turn business.

With our larger customers, John, we obviously have to do longer-term planning.

But, that's really macro planning with them on what their buying patterns might be.

Then, just a last question, when you look at the mix between IDM and subcon in the June quarter, would you expect it to say at about the same ratio as the March or would IDMs be stronger or subcons be stronger?

We don't forecast the total, and we don't forecast that mix.

I will say that the subcons have lagged in this cycle significantly.

The IDM book rate is higher than it was in the '04 cycle.

But the subcons are substantially lower at about half the rate they were booking at the peak of the '04 cycle.

So they've held back significantly.

We attribute that principally to really the discipline that the subcons are trying to bring to the market of not bringing capacity on in large chunks and then try to fill it.

I guess like when you look at your Q2 forecast, I'm trying to get a sense as to whether or not that's being driven by an uptick at the subcons for the back half of the year or is that something we get to look forward to for the calendar third quarter?

The forecast for shipments is reflective of what's in the bookings looking back in the trailing bookings.

The going-forward forecast changes constantly between customer to customer and subcon and IDM.

So, I couldn't predict for you right now what that's going to be.

What I would say is that there is some -- if past patterns hold, there may be some buying strength in the subcons in the future.

Mehdi Hosseini, Friedman, Billings, Ramsey.

Just a follow-up to the previous question -- when I look at the subcons' test CapEx, it seems to me that it could be up only 15% this year.

IDMs, as you suggested, have been a major driver behind the SemiTest booking.

So, if the previous pattern were to hold, where subcons would have to spend more, does that suggest that they have to increase their budgeted CapEx?

Sure.

It may.

I think the relationship with the subcons that will play out over the next quarter or so is they have been showing much more restraint in their capital investment.

There is a lot of pressure they have from investors.

But, I think the real test for the subcons is going to be determined over the next quarter or two because I suspect there might be some increasing pressure on them, as the IDM have bought a reasonable amount of test equipment.

So, I think the subcons -- watching them over the next quarter will be interesting.

What are the probabilities that subcons with the average utilization rate of 80% be able to squeeze out another 20% of units to get fully utilized or better utilized older-generation testers migrating some of the non-critical customers to older generation so that they can better improve utilization rate.

What are the -- what are those prospects that would actually limit any kind of upside to their projected or budgeted CapEx?

They've been doing that for the last year.

They have absolutely a heavy emphasis on capital utilization, so they do everything they can to drive utilization up, including moving product across different platforms.

Obviously, they can do that to some level.

They're not test development heavy so that they can't totally get the liquidity that they might want.

But, that has been ongoing for many quarters now, which is what has sustained the overall utilization high.

Product by product, it looks quite high.

If I may, just one more question, product specific on FLEX -- any kind of color or any comment on the difference in momentum demand between microFLEX and UltraFLEX?

UltraFLEX is the most recent product, and the FLEX and microFLEX represent more than two-thirds.

So UltraFLEX is expected to grow at a faster rate now that it's on the playing field.

UltraFLEX is higher HB, higher margin?

It really depends on the configuration.

If you had a fully-configured FLEX system midrange performance but lots of instrumentation and lots of parallelism, you can buy an UltraFLEX which is scaled down for lower cost.

They overlap.

Mark Fitzgerald, Banc of America.

Can you refresh our memories here in terms of what's left in terms of the cost cuts and where these impacts will show up over the next couple quarters here?

We've described in our last call that our plan was to hold our breakeven flat within a range coming off of a significant reduction in 2005.

We are on or a little bit ahead of that plan.

We do not have anything to announce in terms of further cost reductions.

We think we are at the size that makes sense.

Of course, there is a lot of work in many areas to continue to improve productivity.

But you referenced earlier the consolidation that is still left to be done on the facilities.

So I assume that's going to be some cost benefits by the fourth quarter.

Yes, that's true.

But that by itself, it is just not going to add up to a lot.

But let me just give you the numbers, so you see what I'm talking about.

That is going to take about $35 million of assets off our books, and we're going to end up with a reasonable amount of cash.

So we're going to have a better asset picture in cash we can invest in interest income or something else with.

The real estate consequences counting the interest income, we're going to come ahead by about $1 million a quarter.

So, it's not 5 million a quarter; it's not a big impact but is going to improve productivity, collaboration, a better place for our workforce to collect and operate.

So, the financial side of it is better cash, better interest income and about when it's all done maybe $1 million a quarter savings.

Jim Covello, Goldman Sachs.

A quick question going back to the orders for the June quarter again.

You know, we know that you don't give hard guidance, but could you give us maybe a little more granularity on potential book-to-bill by segment?

It sounded like from your earlier comments, you were thinking of a book-to-bill of about 1 in SemiTester -- or at least 1 in SemiTest.

Didn't get a lot of granularity on the other business.

So, am I right on the SemiTest assumption and any granularity on book-to-bill in the other segments?

The shipments in Q2 are based upon what our slot plan is, and we have much of that slot plan already in place.

So, it's really not based upon what the forecast -- what a forecast is for Q2, Jim.

Let me come back to you off-line with a little more on that.

If I could follow up then on just some share count guidance for the next couple of quarters?

Yes, go ahead.

In Q2, the share count guidance per diluted shares given where we will end up on EPS will be a little bit higher.

It will be closer to about 210 million shares.

Then, should we expect that to be the base-line level going forward beyond that?

Only if we are at $0.24 or higher.

$0.24 or higher, that's the cutoff for the inclusion of the convert shares?

Correct.

As I'm sure you are familiar, we adjust the interest expense back out once we put these extra shares in.

So, it's not a -- it doesn't have much of an impact because we take out the interest expense.

Timothy Arcuri, Citigroup.

Two things -- number one, in the past, you've talked about maybe what the book-to-bill might be, i.e., higher than 1, lower than 1 in the out quarter.

Can you give us an idea if you hit the midrange of your revenue guidance, would book-to-bill be greater than 1 or less than 1?

Well, they are all questions about the forecast for the second quarter.

Maybe I should try to give you a picture of what I -- what the level of the market is with regard to questions around, is it overheating or is it -- still have a lot of juice in it.

One thing we look at and I'm sure many of you track is what the CapEx rate is in the business.

The current CapEx rate is a little bit over 2% on a moving average over the last few quarters.

That rate in the last up cycle was about 2.4%.

So, there is -- if you modeled it against the past, you'd say, looks like there is some additional upside before you hit the last peak -- number one.

Number two, we have had in the last six quarters plus, we've had a very heavy -- in the industry -- a heavy tooling in the microprocessor segment.

That provides a higher amount of buy rate if you will during that period.

So, if you put those together, those would argue for a picture that says there is not an overheating.

Therefore, we could sustain this level of business for the coming quarter.

Does that help?

Yes, it does indeed.

I guess my second question on that front might be that we're hearing that some of the big subcontractors are considering placing their entire test or CapEx budget in terms of orders, placing them all in the June quarter.

So, i.e., kind of a big slug of orders coming from the subcontractors in June.

Is that -- is that not what you're hearing or is that not the right way to think about it?

I don't know if that's the right way to think about it.

I know that in the past, they certainly have bought in very much heavier slugs than they have to date.

If they did that and they told us that that's what they were doing, that would obviously create a bubble in the short-term.

As I said earlier, the demand is significantly lower than it was in the last cycle.

So, if the subcons continue to participate at the market share that they have had in the past, then there is upside to the demand from subcons through the rest of '06.

But, you're not going to endorse the view that there is a large amount of orders coming from them in June?

I can't endorse that at this point, no.

Tom Diffely, Merrill Lynch.

When you look at the adoption FLEX, are you seeing any kind of a difference between the IDMs and subcons as far as their interest level?

Tom, good question.

The -- any new product actually, if you look at the business strategies of IDMs and subcons, you see a significant difference in strategy.

Therefore, the answer to your question is yes, big difference.

IDMs tend to adopt the new products early and subcons late.

The simple reason for that is that the subcons have a built-in objective of high utilization.

They would therefore lag in bringing new capacity, new platforms in.

Because in essence, it decreases potentially or in reality decreases the utilization on their old products.

So, we have seen in this cycle with the FLEX that the subcons have been late adopters.

I would expect that trend to continue based on this issue of utilization.

So the fact that the subcons as a percentage of business went down a bit increased your percentage of FLEX and your margins a bit in the quarter as well?

No, I wouldn't conclude that the profit rate is anywhere noticeably different between subcons and IDMs.

Then if you look at the family of FLEX products, is there a meaningful difference in margins or lead-times between the Ultra, the FLEX and the micro?

No.

Then finally, is the plan still to phase out the J750 with the microFLEX?

Or the fact that it's been quite profitable, is that going to keep it around for a while?

The 750 is -- think about the 750 as a niche version of a compatible software-based system to the FLEX.

With 2,000 units and running at 100 units the past two quarters, it is a strong player and will be continued going forward.

It will be the basis of new product development in the future as well.

Edward White, Lehman Brothers.

I know it's hard to look out to the latter part of the year.

But, when you talk about the drivers in the end markets, which have been wireless, baseband and image sensors, one thing we see in the second half of the year are the new gaming platforms.

Can you talk a little bit about the impact that may have on your business as you look out?

There has been some delay, as you know, in end products in the gaming space, and that has put a pause into some of the CapEx in the first half of this year.

But, as we talked about on the last quarter, we are involved in all of the gaming platforms.

So what is a plus in one area -- or a minus in one area can be a plus in another area to us.

None of these segments amount to even 10% of our business.

So, if you see a pause in one of these, in particular in gaming, you have this offsetting effect.

Plus in general, we've got many, many markets served, and that is a shock absorber to any individual market, either moving up or down in a hard way.

Second question is, in -- if you look at the semiconductor test orders, if you exclude service, how -- you know, for the first quarter, how strong were the bookings?

How much bookings was there on the product side?

Hang on; we're going to get that.

Can we come back to it in a minute?

Let's take another one.

Sure, yes.

Then final question is, if you look at the SG&A expense trend, you factor in options and variable comp expense for the second quarter, what would you expect the trend to be in SG&A expense?

Well, it's so much to the guidance we provided.

We would expect SG&A to be between 19 and 20%.

Here comes the answer on your system versus service.

The product growth was 12%.

Patrick Ho, Stifel Nicolaus.

Can you give a little color on what your other test businesses will do in 2Q?

Maybe that can answer I guess a little bit about the gross margins.

Are we projecting an uptick quarter over quarter in that end of the business?

Sure.

Those businesses first in the first quarter in total, the businesses were profitable.

The plan in Q2 is to grow those businesses and frankly grow them throughout this year.

You might want to think about them as in the prior year, they are about $65 million a quarter in revenue if I add them all together.

We have a plan to grow them to 70 to 75 million, so upwards of 15%.

I guess, just to follow up on that question, in terms of the margin structure with those businesses, which I got to believe are lower than the core SemiTest business, whenever that becomes a bigger mix, that's obviously going to weigh on margins, correct?

It depends.

There are some parts of the business -- the automotive diagnostic solutions, which is performing very strongly.

There are other businesses that are not as strong right now but have plans to improve.

Having said all that, when SemiTest is at this level of revenue and profitability, it's going to be tough for some of these businesses to match.

But, we look at these businesses over a cycle and do not get overly concerned if one -- how they compare in any particular quarterly period.

It is really over the cycle, what do they look like.

Shekhar Pramanick, Moors & Cabot.

If Shekhar is not available, why don't we proceed?

Michael O'Brien, Bear Stearns.

Just a quick question with regard to subcon activity.

If that comes back, will that drive a higher percentage of higher mix towards Catalyst?

If so, what's the gross margin impact, or will you see FLEX start to get adopted more broadly by the subcons?

Thanks.

Michael, the FLEX is already into all of the major subcons, so the mix probably will not change.

In other words, we're not going to see a FLEX penetration; that's behind us.

We've got the FLEX in all models into the subcons at this point.

So, I don't think you could expect a change in mix based upon an increase in subcon buying.

So, Catalyst -- the Catalyst wouldn't potentially see a pop if the subcons started increasing their percentage of the business?

No, the Catalyst would see a pop based upon the installed base of 1,700 plus units being driven for additional capacity, whether that's IDM or subcon.

It could come from either.

[Stephen Delayle], [Delayle Securities].

Sorry to beat on the gross margins a little bit more here, but your incremental gross margins were in excess of 100%.

I think revenues were up a little less than 18 million, and your gross profit was up about 18.5.

And that actually includes another 1 million or so in stock options that sell on the COGs line.

So, I know in your guys's 10-Q, you guys talk about percentage of revenues that came from service versus product.

You also break out gross margin on those two lines.

Do you have that information?

It looks like your product gross margin was probably a record around maybe 52% or so.

We're looking.

I don't know if I have service with me right now.

The service margin did improve, and that was due simply to volume.

But, the large story is J750, FLEX.

That got us most the difference.

Then once you go beyond that, there's volume which we talked about every 25 million growth in shipments.

We get about 1 basis point of gross margin help.

Then, service helps a little bit as the growth occurs and then when you had some fixed costs that we've been able to reduce through some reliability work that we've done.

So we're very obviously excited about where we are in gross margin at this point in time.

In going forward, we've talked in the past about we have 2 points yet to get from a fully FLEX.

When I say fully FLEX, I should say fully FLEX and J750.

Both of those product lines have a new manufacturing model that is very, very lean.

We see at this point that we probably have about 1 point to get because we have accelerated 1 of the 2 points.

So, we see there's another point to get, which we will achieve in the future.

Okay, Greg, that's fine.

You also guys didn't want to talk about the mix of -- that was from FLEX.

You talked about it a little bit from a booking's perspective.

Maybe you could just talk about it from a revenue perspective the growth in FLEX quarter over quarter, the growth in the FLEX contribution of the revenues.

Maybe that would help explain or to help us at least better quantify the mix shift.

See, I like to do it personally with J750 and FLEX because (multiple speakers) --

I'm sorry; you can combine both of them.

Yes.

I like doing that together because I think those two products really are the products that are the very, very long-term attractive, very attractive products and have a different manufacturing model.

So, let's quickly do the math on those two products, what percent they were.

Maybe while you work on that, just the quick housekeeping ones.

I missed I think your cash flow from operations.

Did you say it was 55 million this quarter?

I think I said 59.

Yes, 59 million.

Then my other housekeeping one was, your CapEx was quite a bit less than what you had thought 90 days ago.

Was there something different there?

Well, some of our customers are buying our demonstration equipment faster than we can replace it (multiple speakers).

That's good news.

Then that last question?

So the -- let me just make sure I got the question.

Can you ask the question one more time?

So, FLEX and J750, you guys didn't want to talk about it as a percentage of total revenues.

I was just wondering what was the quarter-over-quarter growth then from those two products in revenues?

I guess I don't have revenues.

I have it in bookings, and it was 10% growth.

I don't have revenues.

We can get that to you off-line.

Marvin, we would like to take one more question.

Raj Seth, Cowen & Company.

Your performance in the SemiTest business over the last couple quarters up 12%, up 10% here, do you think that roughly reflects the market or other meaningful short-term share gains that you think are behind that?

Well, it's been -- for a number of quarters, it's been 10 or 12%.

We had a 40% increase in there a few quarters ago.

So it certainly has been steadier in most quarters than we've seen in other cycles.

We think that the trajectory on share is moving up for us, and that's on the back of both the FLEX line and the 750 line.

In any quarter, it will be ahead or lagging, but the trajectory on the design-in front is very positive.

As we said at the end of last year, the tooling that took place in the microprocessor segment was a depressant on share for all but the suppliers for the leading microprocessor manufacturer.

But, if you looked at design-ins by account and then the penetration inside the accounts, we're pretty optimistic about what's happening on the share front.

Can you quantify that excluding the Intel business?

Well, I can't quantify it in -- the numbers for '05 are actually not finalized by the companies that track that.

But, what we said at year-end was that based on the end microprocessor business, all players including Teradyne had moved back in share a few points down in share in '05.

First quarter, obviously, we can't tell at this point.

All we're doing is looking at the design-in velocity, and that is on a very positive uptick for us.

Another real quick one if I might.

Should we assume further buybacks of the convert in Q2 and that 210 million share guidance I am assuming includes the convert?

Yes, it does.

The 210 share guidance includes the convert as EPS is $0.24 or above, and we would look to buy back more of the convert.

It is a simple financing calculation we go through because we can invest in treasury securities at 4.6% with the same maturity.

If we can get a little bit of a savings, we will buy them back.

So, it all depends upon the math.

So, I would expect we buy some back.

Let me just make a couple of summary comments.

Thanks for your questions today.

The picture in the short-term is strong, as I think we've described.

Our revenue guidance is increased.

Our backlog is -- more of our backlog is within 6 months than it was last quarter at this time.

The demand that we're seeing is very promising.

The FLEX momentum, it may sound like an old story at this point, but we've had six quarters of sequential unit growth in both revenue and bookings growth in the FLEX.

It is really beginning to outstrip the histories of some of the best products we've had in the past.

We are almost at 800 units booked for that product, and we're very optimistic about the future, both the breadth of penetrations and the depths that we're now getting inside accounts because the product is used and fans out into additional segments within those accounts.

The story we haven't been emphasizing that much in these conference calls has been the J750 story.

We haven't been doing that really because the FLEX has been such a big story.

But, the J750 is really the best product Teradyne has had over the last 5 years.

It remains, as I said, 100 units for two quarters in a row.

Those are two of the top five quarters in the history of the product.

So, the J750 as it moves into more customers, both in the explosive image sensor and microcontroller areas, is a very, very positive story for us.

Finally, we want to emphasize that we're going to keep the discipline on the cost structure and the financial model.

So that as we go forward here, we continue to develop on a better business model for investors.

Thanks very much for your calls today and your questions.

We look forward to the discussion next quarter at this time.

Take care.

Thank you.

Bye-bye.

This concludes today's conference call.

You may now disconnect.