泰瑞達 (TER) 2007 Q1 法說會逐字稿

Good morning, my name is Molly and I will be your conference operator today.

At this time, I would like to welcome everyone to the first-quarter 2007 earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you.

I will turn the call over to Tom Newman, Vice President in corporate relations.

Thank you, Molly.

Good morning, everyone, and 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 2007 and of 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 978-370-2221.

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

Note that during this call we will be providing some slides on our web site that will summarize and reinforce some highlights of our discussion.

They may be helpful to you in following the discussion.

To access them, simply dial into the investor portion of our site and click on live webcast, followed by click here for webcast.

In addition, a replay of this call will be provided on our website starting about noon today eastern time.

If it's more convenient, you can also access a replay of the call by dialing 1-800-642-1687 in the U.S.

and Canada or 1-706-645-9291 outside of the U.S.

and Canada and providing the passcode, 6116387.

Replays from both sources, as well as the slides that I mentioned earlier, 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 2007 and beyond.

If at any time we communicate any material changes to this guidance, it's 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 in, and demand for our products, capital spending, market share, 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 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 1, 2007, 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 of the date they are made.

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

We want to make clear to investors that our prepared remarks will be presented within the requirements of SEC regulation G regarding Generally Accepting Accounting Principles or GAAP.

Therefore, if we use any non-GAAP financial measures 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 investor call: The Merrill Lynch Tech Conference in New York on May 1 and 2; the Credit Suisse First Boston Supply Chain Conference in New York on May 15 and 16; the JPMorgan Tech Conference in Boston on May 21st to 23rd; Teradyne annual shareholders meeting in Waltham, Massachusetts, on May 24th; the Cowen Tech Conference on May 30th, 31st and June 1st; the Sand Grain Securities luncheon in Boston on June 5the; The Bear, Stearns Tech Conference in New York on June 11th and 12th; and the Sand Grain Securities luncheon in New York on June 18th.

Now let's get on to the rest of the agenda.

First, our CEO, Mike Bradley, will review the state of the Company and the industry in the first quarter of 2007 and will provide guidance for the second quarter.

Then our Vice President and Chief Financial Officer, Greg Beecher, will provide more details on our financial performance for the first quarter and on our guidance for the second quarter.

We will then answer your questions.

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

Mike?

Thanks, Tom.

Good morning, everybody.

As I recap our first quarter results and describe what's behind our guidance for the second quarter, I'd like to spend a portion of my time this morning on how the first quarter fits into our overall game plan for the year and beyond.

In particular, I want to comment on our new product plans and on some important new initiatives in the manufacturing arena.

Our first-quarter bookings of $253 million were down 12% sequentially from Q4.

Semiconductor test orders were flat at $203 million, with a 22% increase in product bookings.

As you know, we've historically had strong fourth quarters in service contract renewals, and this past fourth quarter was no exception.

The short hand inside the semi test bookings number in Q1 is we that had $30 million in new systems business replacing a $30 million service spike in the fourth quarter.

This uplift in product bookings was driven by strength in higher-end consumer products and printers, automotive applications, networking, and high-end servers.

Cellular handsets and storage devices were the soft spots in this generally strengthening environment.

We had very good auto momentum from all of the FLEX and J750 products in the quarter, with a near-record number of UltraFLEX orders.

The ability of some of our leading-edge customers to integrate RF capability into their complex digital devices makes the UltraFLEX a particularly good solution to their testing problems.

17 of our top 20 customers added to their FLEX-installed base of systems in the quarter, and we added three new names to our customer list and five new buying centers within our existing customer base.

The tone from our customers is mixed, but with general optimism for a strong second half of the year.

But there's still a good bit of hesitation on how far they want to lean into this.

In total, it seems clear that the trough in the market is now behind us, but more importantly, I'd characterize our increasing demand as half driven by the market and half driven by the rate of our recent design wins.

You'll recall that we added $100 million of new design wins last year, so follow-on business from those customers plus the new socket wins this quarter is fueling a good piece of our increased system orders.

In our system test businesses orders fell about 40% from seasonally-high Q4 level.

In our PC board test business we saw order weakness from the top-tier contract manufacturers, which is often the case early in the year.

In addition, we saw a fall-off in the storage market, which has been an area of strength for us in recent quarters.

In Mil/Aero, the seasonal fall-off was tempered by a win at our third commercial airline customer.

The order reduction in diagnostic solutions was expected after a year of strong new product deployment for our major customers in 2006.

So our revenue guidance for the second quarter is from $275 million to $300 million, with earnings between $0.08 and $0.13 per share.

While order visibility is very short, we're obviously playing this with the expectation of somewhat higher demand on the quarter.

With a very responsive supply chain upstream, we see little risk in opening up our capacity, as we will want to keep a very responsive lead time profile.

Let me now spend a few minutes on our new product plans for the year.

We introduced a higher performance version of the J750 in China last month called the J750Ex.

With the current J750 model, this new product gives us two price performance points for high parallel, mostly digital test applications.

The Ex is compatible with the J750, which has an install base of well over 2,000 units, and this new model has been introduced for higher speed microcontroller testing.

In addition, the Ex will serve as the base for a new image sensor test model, as well as the platform for an entry into LCD driver testing.

As you know, we have a strong position in image sensor testing, but no market share in the LCD driver segment.

Now, I'm not going to comment today on exactly when these products begin to generate revenue, because that will develop over the next four quarters, but it's important to see that we'll be expanding our product line in ways that offer very high leverage to existing customers, as well new capability for customers in markets we don't currently play in.

One other brief comment in the product development area.

You saw in the first quarter that we acquired some technology from MOSAID.

This is enabling technology for longer-term product developments and therefore will not be a prominent subject in my discussions during this year.

I think it's clear that we're intent on expanding our served market in the coming years and this acquisition should add an interesting piece to that puzzle.

Now let me turn to the manufacturing arena, which I mentioned earlier.

We've been very pleased with the partnerships we've developed in our supply chain over the last couple of years, as well as with the innovative work our manufacturing team has done in lead time management and inventory turn.

Much of our electromechanical sourcing is already from low-cost regions for both the FLEX and J750, and our J750 final configuration and test is all done in Asia today.

We are now staging two other moves.

The first is to migrate our FLEX final configuration and test to Asia, and the second is to transfer legacy product manufacturing to our service facility in the Philippines.

Each of these will roll out over the next four quarters.

So our first-quarter ends with some important progress.

First, market demand is back on an upwards trajectory and our design-in momentum is fueling a good portion of that recovery, and we're positioning ourselves for some upside demand in the short term.

Second, new J750 products this year will expand our offerings in cost-sensitive segments and open up new market opportunities longer term.

Third, we continue to accelerate our efforts in low-cost region manufacturing and short time -- short lead-time execution.

And finally we remain focused to delivering to our business model and on improving our over-the-cycle performance.

Now let me turn it over to Greg for his perspective on our financial results and our guidance.

Thanks, Mike, and good morning, everyone.

We've started 2007 off with first-quarter sales of $258 million, down just 2% from a quarter ago.

Our first-quarter's loss of $0.04 per share includes $0.09 for an in-process R&D charge for our acquisition of enabling technology from MOSAID.

Our non-GAAP EPS for the fourth quarter amounted to income of $0.04 per share, which exceeded the top end of our guidance by $0.01.

This bottom-line improvement was due to reduced variable compensation and lower income taxes.

As we are guiding for increased sales in the second quarter of between 7% to 16% over our first-quarter sales, we expect the first quarter of 2007 to be the trough quarter of the cycle.

That for us started back in the second quarter of 2005.

While we normally speak to our full-cycle model, it is nonetheless noteworthy to highlight that our first-quarter 2007 EBITDA is significantly improved against the trough-level EBITDA's of the prior three cycles.

Our first-quarter 2007 EBITDA totals $27 million or 11% of sales.

This calculation excludes the in-process R&D charge and some small severances as detailed on our website.

While full-cycle profitability and growth are what we focus on, delivering more healthy results at trough sales levels provides a measure of confirmation to our past initiatives and adds fuel to the many initiatives that our employees are currently executing against what are cost-related or growth-related.

Our improved model is also evidenced by our significant reduction in operating break-even from $295 million at last quarter's trough, which was in the first quarter of 2005, to our first-quarter 2007 trough level break-even level of $253 million.

Now if I can take you back for a moment to our full-cycle performance.

Through the most recent cycle that we believe, again, ends in the first quarter of 2007, our free cycle -- our full-cycle free cash flow totaled $272 million or 11% of sales over this eight-quarter period.

This significantly exceeds our performance of the past three cycles.

Improving on our free cash flow generation with each cycle is very important to achieving our overall operating model.

Now let's look forward.

What more are we doing in cost or productivity?

Well, there are many initiatives under way.

Let me highlight what we are doing in operations in 2007.

First, we are well under way in moving the printed circuit board assembly for FLEX from our outsource partners U.S.

plant to their China plant.

Following closely behind the printed circuit board assemblies, we have also begun moving the final configuration and test for our volume products to our outsource partner in China.

Once these moves are completed, the instruments, the electromechanical integration, and final configuration and tests, which encompasses the entire manufacturing build process, will all be in the same low-cost outsource site for FLEX.

The cost benefits from these moves should be fully realized in our result in early 2008 and should also further lower our break-even level.

In addition, we should also gain an advantage in responsiveness and inventory levels with the FLEX volume build being in one location in Asia.

Lastly, we have also been updating our tax strategy in anticipation of eventually using up our carry-forward net operating losses.

These tax changes will better match our expanding International operations and are expected to result in a long-term tax rate between 26% and 28%; however, in the nearer term, we plan to continue to benefit from the significant carry-forward net operating losses and credits and to maintain a tax rate just under 20%.

Now let me take you through some of the details of the first quarter and then our guidance for the second quarter of 2007.

Our first-quarter gross margin percentage was 44.8% of sales, down 1.4 points from 46.2% in the prior quarter, due -- primarily due to a change in product mix.

R&D expenses were $50.2 million or 19.5% of sales as compared to $49.6 million or 18.9% of sales in the fourth quarter.

SG&A expenses were $64 million or 24.8% of sales as compared to $69.5 million or 26.4% of sales in the fourth quarter.

This decrease was primarily due to the completion of our IT outsourcing and facilities consolidation into our North Redding, Mass, campus.

Our net interest income was $9.7 million, down from $10.3 million in the prior quarter, due primarily to lower cash balances.

Income tax expense was $1.4 million, slightly favorable due to adjustments on the filing of certain 2006 foreign tax returns.

Our quarter-ending head count remained at about 3,800 employees.

In the first quarter, semi test sales were 75% of the total assembly test 16%, and other tests 9%.

On a geographic basis, our first-quarter sales in descending percentage order broke down as follows: U.S., 29%; Europe, 16%; Singapore, 16%; Japan, 14%; Southeast Asia, 12%; Taiwan, 7%; Korea, 4%; and rest of world, 2%.

We had net bookings of $252.8 million in the quarter in the quarter, On a quarter-to-quarter basis, our bookings were down 12%.

Semiconductor test product booking was up 22%, while semiconductor test total bookings was flat against the fourth quarter.

Assembly test was down 38% and other tests was down 45% due to the normal lumpiness in the timing of program business orders.

Our book-to-bill ratios for the first quarter were 0.98% for the overall, 1.04% for semiconductor test, 0.76% for assembly test, and 0.81% for other tests.

At the at the end of the quarter our backlog stood at $334 million, of which 79% is scheduled to ship within the next six months.

This compares to $339 million at the end of the fourth quarter, of which, 73% was also scheduled to ship within the next six months.

On a geographic basis, our bookings for the quarter, again in descending percentage order, were distributed as follows: U.S., 24%; Singapore, 19%; Japan, 17%; Europe, 13%; Southeast Asia, 12%; Taiwan, 10%; Korea, 3%; and rest of world, 2%.

Now moving to the balance sheet, we ended the first quarter with cash and marketable securities of $884 million, down $61 million from $945 million as of the end of the fourth quarter.

We use $17.6 million of cash to acquire enabling technology from MOSAID and we used $3.6 million to purchase about 237,000 shares at an average price of $15.07.

To date, we have repurchased 10.8 million shares at an average price of $13.01 totaling $141 million.

This leaves with us a remaining authorization for our share buy back of $259 million coming into the second quarter.

In the first quarter, capital additions, net of sales of related capital equipment, were $13 million.

Depreciation and amortization for the first quarter was $26 million, including $7.5 million of stock-based compensation.

Accounts receivables stood at $169 million or 60 days sales outstanding, up from 55 days in the fourth quarter.

We ended the quarter with product inventory of $82 million, down $11 million from the end of the fourth quarter.

This balance is well under half of what we have had at inventory levels back over the past three cycles.

In fact, at the prior three troughs, which extend back to the fourth quarter of 1998, the next lowest trough level inventory balance was over $200 million.

We are quite proud of our operations group in achieving an industry-leading position in inventory turns.

In the second quarter of 2007, as Mike mentioned, we expect sales to be between $275 million and $300 million, with net income per diluted share between $0.08 to $0.13.

We expect gross margins to be about 46%, plus or minus a half a point.

R&D should run between 18% ann 19%.

SG&A should run between 22% and 23%.

We expect to be about flat in inventory dollars and accounts receivable to increase about $30 million.

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

In the second quarter, our depreciation and amortization should be around $25 million, including $7 million of stock-based compensation.

Our tax rate is expected to be 18% for the balance of 2007.

Now I'll turn the call back over to Tom.

Thanks, Greg.

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

Molly?

[OPERATOR INSTRUCTIONS] Your first question comes from Chris Blansett from JPMorgan.

Hi, guys, thanks a lot for taking my call.

Two things, one is how were the test utilization rates during the quarter?

What was the trajectory and how did they exit the quarter and what are you looking at for Q2?

Chris, the utilization rates in the install base, both IDM and sub cons, has turned.

As I mentioned in our last couple of calls, it has been trending down through the second half of '06, gradually trending down.

That has turned up.

It hasn't made a dramatic increase in our numbers, but it has turned.

And the turns has been led by the FLEX, which has had the biggest increase in utilization, both IDM and sub con.

When you look at this cycle versus the last two as far as trying to judge the magnitude of the purchase of test equipment, what are you looking at now that's different from the prior two cycles in order to give you a sense of the size of how much that'll be?

Well, let's see, this is short-term and a long-term issue.

The short-term issue obviously doesn't tell us anything other than where the infection point is, and we feel that we're in that now as we entered March.

So how much growth we could see, I then look to what the cycle buy rates have been over the last few cycles.

The buy rate in the second half of -- for the last six months has been at very close to historic low over the last five or six years.

So as I look out at our customers' optimism about the second half I tie that to the fact that the buy rate has been in about the 1.4% -- 1.3%, 1.4% rate and it has been averaging about 1.9% for the last couple of years.

So I think they see that same thing and their utilization's going up, so there's some short-term demand and we don't know if it's going to be sustained, but it certainly -- that argument will be supported by the depressed buy rates we've had the last six months.

Thanks, guys.

I appreciate it

Your next question comes from Gary Hsueh from CBIC World Markets.

Thanks for taking my questions.

Greg, some questions here surrounding gross margin.

Obviously a great job executing on gross margins here in Q1.

But as I start to look at your guidance here for Q2 at 46%, it seems like the incremental drop through on the gross margin line is substantially less in Q2 than it was in Q1.

Can you talk about some of the mix dynamics that might be influencing this in Q2?

The gross margin change to Q2 does make sense in light of the volume increase.

Each quarter, we can have variation in product mix within semi test, and that can throw off the gross margins, but our rule of thumb has been on sizable changes in revenue, that you get about a point of gross margin for every $25 million of incremental product volume.

And that generally has held true for some period of time, and if it's a $50 million increase, it becomes even more apparent that that model does hold.

So there's nothing in the margin for Q2 that is not unexpected or unusual, and it does fit the model we have.

Okay.

And -- a little bit longer-term question here on gross margins.

As you said, Greg, in your prepared comments, these cycles in between inventory corrections seem to be about eight quarters.

When you look out here in '08, clearly '07 being a recovery year, in '08 if you potentially hit close to prior peak revenue levels -- which I think you probably should with new products on board -- let's say that number's $400 million, $425 million, given the changes you're doing here in terms of your manufacturing strategy for FLEX, materializing in '08, what could be basically a reasonable gross margin assumption here at roughly the $400 million to $425 million range?

Could we definitely see gross margin here north of 50%, because the last time you hit somewhere close to $400 million you did 49%.

Right.

Our model has been 49%, and that's based upon the model size company we're trying to get to in the short term.

If we got to over $400 million a quarter, you would see a gross margin in the low 50s.

Okay.

But -- I mean even at $400 million, 49%, what is the upside you're driving to with the manufacturing transition for FLEX here in Asia?

Well, the -- the moves we're doing with FLEX in terms of gross margin will certainly help gross margin, but that comes into play largely in the end of this year and early Q1 '08.

As we get further into the year, we would likely comment more on the impact of some of those moves with what other factors that are going on that are affecting gross margin.

These are important moves that will help news our goal towards hitting our model.

Okay, perfect.

Thank you so much

Your next question comes from Satya Kumar from Credit Suisse.

Yes, thanks.

Good quarter.

Just wanted to clarify is there any contribution at all from the MOSAID acquisition or are these new products in your Q2 revenue guidance?

There is no revenue from that acquisition.

This is enabling technologies, so there is extra cost, no revenue, no customers.

How about the the new product activities with the new J750 that you introduced?

Satya, because that is a complimentary product to the 750 that we've introduced for microcontroller testing, that'll be bought by customers who either have the high-performance microcontroller demands on it or by customers who want headroom.

And because it's building on our install base, we're not going to break out the differentiation between that product and the existing J750 going forward.

I'm sorry, I meant LCD driver testing that you'd talked about, is that contributing -- is that even a meaningful thing to talk about for Q2 is what I was trying to get?

We haven't introduced -- I wanted to outline for everyone today that -- because I think there has been some confusion around the J750 product development plans that we've introduced one model of that product, and we intend to introduce those other models in the future.

When we get to the point where -- where we are introducing them, we typically will have customers for them and to the extent of those customers let us talk about the revenue, we would do that.

Okay.

Is there any changes in the dynamics that you're seeing right now in terms of competition of pricing for your products?

It's business as usual on that front.

There's always -- there's always some very fierce, intense competition on price, that's why we work the cost side of it so hard.

And one sort of longer-term question.

Clearly there's been a lot of talk in your industry about declining industry growth longer term.

Your own test [70's] have declined 5% from '04 to '06 in a period where unit growth rates [inaudible].

Where are we in the life cycle for improving productivity of testers?

As we look into '08, is there an argument where you can see the convergence in terms of tester CapEx and the semi revenue and unit growth rates?

Well the trend line for semi revenue -- for semi units has been about a compound growth rate or trend line with a slope of about 10%, 10%, 11%.

Semiconductor revenue because of ASP compression has been more like 6% to 7% over that same period.

And testers have been 3% to 4%.

So there has been a constant productivity contribution by the tester segment and we expect that that continues.

That's why, when we talked last quarter on the subject, we emphasized that we see the need for growth beyond what we can get in organic growth inside the C space, and that's why we are doing development -- long-term development, and adjacency product development here so we can expand our [TAM].

Thanks much

Your next question comes from Mehdi Hosseini from FBR.

Thank you.

Thanks for taking my question.

When I look at your revenue guidance, it seems like you at least got to do about 10% growth in bookings to be able to hit that revenue target, given where you closed the backlog.

If you could help me understand what is out there that would give you confidence in that regard?

And also regarding the semi test, you mentioned a couple of end-market application, but when I look at the gaming console, it has remained relatively weak and the only area is the handset.

So to that extent, are you concerned that so much dependency on this uptick is driven on handset and that may go away, and to that extent it may actually keep bookings at relatively same level in the second half of the year?

Okay, two -- your two questions.

On the -- why growth in the second quarter for revenue.

We're basing that on the very short-term visibility that our customers are giving us and the strength through March.

And the signals they have for tooling and their expectations for the second half have resulted in our leaning into this a bit and giving a -- expanding our revenue and slot plan in the -- in the second quarter.

Now we've opened up our revenue guidance a bit because our lead times are short, and we don't give guidance really well beyond six or seven weeks.

But we are anticipating that this demand will probably be on the side of strength versus on the side of -- of a pullback, so we're just playing it a little more aggressively on this quarter to be able to respond to the short-term demand.

On -- in terms of reliance, we're playing across 20 or so individual sub segments of the SOC space so we don't have a single segment that we're relying on.

I would say that, as we look forward -- I talked about the different segments that were in the first-quarter bookings -- wireless will be the strength of the -- of the short-term demand that we see, and we expect to have a very strong uptick in the wireless segment.

Sure.

Fair enough.

If I may just I have one more question here.

You talked about the buy rate, but given how overall pricing in the back end -- equivalent pricing in the back end, especially in the test, has been going through more of a secular, deflationary trend.

Is that really relevant to look at the buy rate on a revenue basis?

On any short-term basis, I think buy rate is not.

But as you look over long term, buy rate has moved in a way that reflects the overall productivity contribution of test.

And the productivity is coming principally from velocity, from through-put parallelism.

Sure.

So that's why we use it as a long-term indicator, but we don't peg it as if it won't move.

It does move and we expect to contribute to that through the parallel capability of the FLEX and 750.

Sure.

So going forward, how should we think of cycles given how cycles have become smoother, because going back to the historical trends and looking at the test revenue as a percentage of semi revenue may not apply any more.

Is there any other metric that you would encourage us to look at to better evaluate cycles?

Well I think -- you mean about how steep and how sharp the cycles are going to be?

Yes.

My sense -- and I think this is shared by many -- is that the cycles are muted somewhat, but when I talk in the test phase, we think muted means like this last cycle, about a 40% reduction in the market from the peak quarter to the trough quarter.

That's an easier go than it's been in the past.

My instinct that this is -- this is a smoother -- this is lower peaks and higher troughs.

And the issue for us is, can we manage against that level of volatility, and with the supply chain work we've done, we're pretty confident that we can handle at least that level of volatility.

Yes, certainly.

Thank you.

Your next question comes from Dave Duley from Merriman.

Congratulations on a nice quarter.

Couple of questions from me.

I was just wondering -- I was a little surprised with the magnitude of your product bookings increase, and I'm wondering if you're seeing this from a broad base of customers or if it's from some specific niches and how you really characterize this first leg of the uptick if it's more broadbased or company specific?

And then as a follow on -- I got these numbers right -- looked like the book-to-bill was quite strong in Singapore, maybe you could talk about that a little bit?

Dave, the -- the product momentum in the first quarter, since we cover so many of the segments, I'll will give you some sense of -- addition to what I commented before about the segments that were driving it, we had some competitive wins in, new socket business from -- that we won you know, new socket business from -- that we won from three different competitors.

One was in digital TV, one was in the gaming space, and then power management and automotive applications.

So those are sort of the anecdotal pieces.

Those aren't enormous current revenue, but they're the -- part of the momentum in that uplift and $30 million that we had from Q4 to Q1.

Regionally, I think Greg gave you the break down on regions.

The -- Japan and South Asia grew; U.S., Europe, and Korea declined in the first quarter.

Our sense from what our customers are saying is that the uplift we see in the second quarter is pretty broadbased.

I'd say strength in Korea and Taiwan.

Japan -- of all, Japan will probably be the weakest of the -- of the regional segments.

Okay.

And maybe just a little bit of commentary on the end markets.

It seems like there has been improvement in analog and perhaps some spaces of the wireless market, I was won -- and I guess maybe game consoles.

And I'm wondering what you are seeing from the PC space, which is traditionally a big user of test capacity?

Well, let's see, we've had some momentum on the graphics side of the equation.

But, I don't know, -- I don't see anything in particular in the PC space.

As I said before, wireless is where we think the action's going to be in the uplift.

Oh, and I'm sorry, power management.

Tom reminds me.

Power management has been strong.

But automotive was the strongest of the segments for us this past quarter.

So it's a -- a lot of keys on the piano are playing is the point, and it is shifting quarter to quarter.

But I guess the commentary --just to interpret those comments -- haven't really seen a lot of activity in the PC space as of yet, and hopefully that would be something that would help you in the second half of this calendar year?

Yes, it's not a standout in the last six months.

Okay, thank you.

Your next question comes from Timothy Arcuri from Citigroup.

Hi, guys.

Couple of things.

First of all, can you give us some ideas of what percentage or what the dollar amount is in your June guidance, your June revenue guidance.

How much of that revenue is from new products, for example, the new LCD driver tester?

Can't do it, Tim.

We are not going to break that out.

Okay.

But it would be safe to say that some -- some of that uptick is due to that new product, correct?

Can't comment.

Okay.

So there's no way to give us any idea what the pro forma comparison might be?

Not until we've got the product introduced, and we don't have the product introduced, so it would really would be premature for me to talk about revenue contributions before we've talked -- we've introduced it formally to our customers.

Okay but there will be some from it in June?

I don't know what -- not to put you off, but I -- I have to pass.

Okay.

All right.

I guess next thing, if you look at your orders.

It looks like you have to do roughly $290 million, maybe $300 million in orders in June, and if you look at how that probably segments out, it looks like maybe semi test orders $190 million to $200 million of that mix.

If you then go back and look at what they were across the last cycle, that's a little higher than what the average was across the last cycle.

So in a span of six months, you are back above what the average dollar number was across the last cycle, and there's probably some compression in ASPs in that time frame.

So -- so I'm wondering if, already in June we're back above what the normalized level, call it, would be, does that suggest that this could be a short-lived uptick?

Or do you think that -- that this has more legs, simply because you have some new products coming out?

Tim, are you talking just product bookings or total semi bookings?

I'm talking about to -- I am talking about product bookings.

Yes, I don't think -- I am going to do this without looking at the numbers, but we're not -- we're not threatening the peak levels of the past.

No, no, definitely not, but you are probably above the average.

So, June is above what the average was in product bookings the last cycle -- across the last cycle.

Yes.

I don't think that is true, Tim.

Why don't we check and we'll get back to you on it.

But the overall tone here is not, for pulling 6Gs in terms of the speed of the slope in the short term.

This is fairly broadbased, but it's not screeching off.

Okay.

And then last thing really is on the cash side.

If you look at the cash balance, right now you have about 29% of the entire market capitalization of the Company is sitting in cash.

And there's no other company in this sector that has a percentage of cash that's that high relative to the market capitalization of the company, so -- and now you've made it through the trough and you've proven that you can be profitable or -- or essentially break-even in the trough.

So I'm wondering when the trigger will be for you to get more aggressive on the buy back, because certainly you do have the highest cash balance of any company in this sector one could really argue.

Okay, this is Greg.

If you went back a few years, we were on the other side of this coin.

We had to borrow money.

So this is a great place for Teradyne to be to have a much-improved model, very strong free cash flow and an attractive growth plan.

So with that said, we will be increasingly over time working our balance sheet to a more optimized balance sheet over some period of time.

I acknowledge your point that we have too much cash now, and we will continue to buy back shares at a pace that makes sense, given all the factors we evaluate.

What do you think the right cash is?

I think the right cash for us would likely be $400 million -- $400 million, maybe $350 million.

And in getting to a balance like that, I'd want to get there once our tax rate went up -- went up a bit.

Our tax rate is quite low, and in the weighted average cost of capital calculation, obviously you get a better deal with debt if you have a slightly higher tax rate.

As our tax rate moves up, over time I'd be more interested in looking at lowering cash even more dramatically and possibly have some type of debt in the balance sheet.

Makes sense.

Great, thanks a lot

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

Thanks.

I am curious here, if you look back over the last three or four years, there seems to be big seasonality built into your business, and if that's going on today versus defining these things as cycles given the consumer applications being the big drivers, would you get the big first halves and then things fall off in the second half?

I think there is some more of that.

We used to have theories about different -- about seasonality and different ways in the second half of the year.

I think, Mark, that's fair to question as to whether some of the first-half uplift that the industry has over of the last couple of years isn't part of the -- the build for the end of year.

So I would have the same kind of caution about that that you're raising.

Okay.

And then second, when you look at your cost of sales and this big push to going to China, when you get done this over the next 12 to 18 months, however long it takes you, what exposure do you have to Chinese exchange rates at this point from a cost-of-sales point of view?

We think very little will.

We'll be contracting with Selectron in dollars, and much of the material is dollars.

The local value add will be in local currency, but that will be quite a small amount.

So there are some hedge considerations, but none of it is significant because the major -- major commodities will be dealt with in dollars.

Okay.

Thank you.

Your next question comes from James Cavello from Goldman Sachs.

Hey, good morning, guys.

Thanks so much for taking the question.

A couple of quick questions.

First just a housekeeping.

When should we think of higher tax rate kicking in?

My sense would be the earliest it would kick in would be 2008 and that the earliest.

Okay.

And then more important question, on one hand you guys have done an absolutely great job of being able to break even in the downturn, and shame on us who didn't think could you do that and congratulations to you guys for that.

On the other hand the model is still a lot less profitable than the most profitable competitor.

And you guys have the best market share and some of the best technology, so why can't you make as much money as the most profitable folks in the industry?

Well, thank you for the congratulations, not what we've done in the past.

And we are working toward that model.

As we've described in the past, we do have a ways to go.

We're making some long-term investments obviously, and we're making some -- the first phase of this is to make progress on the -- on the market share front in the SOC core.

So, we absolutely are committed to getting to that -- that model profitability position that you described, which is a few points above where we currently are over the cycle.

But we're also playing this as a long-term game, which has some investments that we think will yield over the next few years with a much more interesting portfolio.

Its market share and new products that you think will help bridge the gap between yourselves and someone like a [Berrage]?

Yes, Jim, and we're spending a fair amount of R&D to get into these new markets.

So there is a plan to get into the new markets, and that will, in our opinion, change the look of Teradyne.

Now on your earlier point, if you look at Teradyne over a longer period of time, you might have a different conclusion than the one you've reached, so I think you also need to look at these companies over longer periods of time, not one or two quarters, because they can vary from period to period.

Sure.

Great.

Listen, thanks so much.

Yes.

Your next question comes from Edward White from Lehman Brothers.

Hi, two questions.

First, can you give us a sense as to what the potential positive impact to margins can be as you finish with the -- as you complete the efficiency improvements in China, what sort of impact that can have longer term?

Secondly, can you talk a little bit about -- when look at your product families and you look the evolution of the J750, the J750 Ex and the FLEX, how will you position those with customers to avoid confusion as to whether -- say, a new customers coming in ought to look at the J750 Ex or the FLEX or -- how are you -- how will you market that to your customer base?

Why don't you do the first, I'll do the second.

In gross margins, the impact will be one that will get us to our model faster of 49% gross margin.

And where we are now, this will absolutely help us.

And what's tricky about describing gross margin a year from now from some set of actions is what other events will affect the gross margin line.

That's why it's very difficult to say, from this action a year from now, you'll find this extra point, because there might be other items that get into gross margin for the right reasons.

But let me just leave it with this.

It's very significant.

If nothing else changes, it could be a point, but there'll be other things that get factored into our gross margin and we'll need to see where it nets out a year from now.

Ed, on your question on the -- on the product proliferation, I -- I'm smiling because I think we have a lot less product proliferation than we've had in the past, so in --

I would agree with that, yes, I agree.

But in answer to your question, I don't think it's a big complex positioning question.

The FLEX appeals to customers who have a broad range of technologies that they want to test and where utilization is very important to them.

And it also has good economics through parallelism.

750 is a small -- is a small footprint, obviously, tester.

Much more focused instrumentation.

And the customers in the -- the match-up of the product to the customers is actually very, very simple, because if you're an image sensor customer you're buying a focus tester for image sensors.

Now slightly, Ed, an added point may be -- your question may be around you've got another companion J750 product, how does a pers -- a customer decide between the existing 750 and now the Ex.

And that is that they're very clearly -- there's a different price performance for each of those in each of the market segments.

In microcontrollers now it's very clear that they can buy something lower cost with lower performance, and then they can buy an Ex with higher performance and slightly higher costs, so I don't think it's a big problem.

If you hear that it's a problem, please call me and I'll get back to that customer.

Okay.

Great, thank you very much.

Your next question comes from Patrick Ho from Stifel Nicolaus.

Thanks a lot and nice work on the quarter.

Just some clarification for us.

I missed the earlier -- Greg, what was the amount of stock repurchase in both dollars and shares again?

It was about 236,000 shares and the dollar amount was $3.6 million.

Great, thank you very much.

In terms of business trends and the potential impact on margins, especially with you looking to expand your TAM, how are you going to account for the entry into new marketplaces and the potential effect on your overall business mode,l which I think as we can see is taking hold and has really improved over the last few cycles?

What -- what is the potential negative effect that could come from that?

May I comment here?

I think some of the effects in theory could be some of the percentages in our model change, but the bottom-line number actually improves.

So it's very conceivable that the gross margin could come under pressure, but we're going to have such high leverage with our engineering and our applications that our SG&A and R&D percentages are going to go down.

So net-net on the PBIT line, I would expect it to go up.

So, we're more focused on that line than getting overly fixated on any one line, because it's the whole P&L that we need to manage.

Okay, great.

So I can assume that the operating margins will basically still confirm to your overall business model?

Yes.

Great, thanks a lot.

Your next question comes from Gavin Duffy of A.G.

Edwards.

Thanks, guys.

I want to follow up on something real quick on what Patrick was asking about operate margins.

Do you think that operating expenses will trend around these levels as percentage of revenue for the rest of the year?

I think they generally will.

What causes them to vary more than anything else is the level of profitability that we are having.

We have a fair amount of variability in our compensation systems, so the operating expenses can go up or down depending on the profits that Teradyne generates or profits that Teradyne does not generate.

But apart from that they should be fixed.

Okay.

Thanks.

And kind of bigger question.

Is it -- are the IDMs or the sub cons that appear to be more aggressive in the near term and how do you see them playing out in the second half of the year?

Gavin, the IDM's in the first quarter actually declined on their actual bookings.

It was -- the fourth quarter's split was much more driven by the sub cons.

If you look back in the last up cycle, our split would be 60% IDMs, 40% sub cons.

In the pull-back period last six to nine months, that went to a 70/30, so sub cons as overall bookings went down; they only had 30% of the pie.

They're back to 40% of the pie in this first quarter.

I think that's probably what we see as a split going forward.

Okay.

Thank you very much.

Your next question comes from Tom Diffely from Merrill Lynch.

Yes, good morning.

I was hoping you could talk a little bit about the size and growth rate of this new LCD tester market, and also the current image sensor market?

The -- those two markets -- image sensor's smaller than LCD driver by a fair amount; I'd put that between $100 million and $150 million annual market.

And LCD driver by our estimates is probably two to three times that size -- three times if it's a low end on image sensor.

Maybe $300 million -- $100 million to $150 million and $300 million plus in those segments.

Image sensor has been growing a little bit faster over the last couple of years, driven by all of the handhelds and so on, and so -- but it's considerably smaller.

So obviously, having a product for LCD driver gives us a TAM expansion, and the SOC it's about 10% expansion in our TAM, because our overall SOC market's about $3 billion.

Okay.

Have you seen increased competition.

I know [Nexses] has an image sensor tester out there now, too.

Just wondering what the dynamics are in that industry?

We've got a good position.

This Asia based -- almost all of that business is Asia based.

We've got a very strong market position with the market leaders, so we're in Japan and other parts of Asia.

You're correct that there are other companies that are fielding products for image sensor testing and we're in battles with all of those.

Okay.

Great, thank you.

Your next question comes from Nalay Mehta from [inaudible]

Hey, how are you guys doing?

Good.

I just have a question on the MOSAID acquisition.

I was just hoping you could give me maybe more color on what the technology is and how that may fit into your longer-term plan to expand TAM or or grow your markets?

Yes, we are not trying to be too inscrutable on this, but it's a techno -- we didn't acquire a business, we didn't acquire a set of customers, we acquired some technology and the idea would be can we integrate that technology into future products that we'll be developing.

So it's more of a -- it's nuggets of technology more than it is systems or customers.

Can you describe maybe what its technologies are?

I can't at this point, and that probably would be well into the future when we would start to describe that.

Okay.

Thank you.

Yes.

That's it

Your next question comes from Steven Pelayo from HSBE.

Yes, some questions on market sizing here.

You said in the last six months the buy rate's been coming around 1.3% to 1.4% with historical average around 1.9%.

First of all, what are the metrics behind those numbers?

What was you sizing here of the nonmemory markets?

And then secondarily, where do you think this buy rate is, let's say, exiting 2007?

I got to just look here quickly, Steve, so I can not just wing it.

The size of the -- the enumerator on this market on an annual basis last year was $3.4 billion, so that's the SOC test market size.

And that ranged from quarterly revenues in test of almost $1 billion to -- as I said before, 40% down, so about $600 million.

And that's serving a market that's about -- last year about $175 billion device market.

And the device markets are tracked pretty carefully by a lot of enterprises out there, but think of that between the $40 billion and $45 billion dollar a quarter market.

So you do the quick math on it, and that's how you get the low rate that we have been in for Q4 and Q1 on a shipment basis in testers.

Coming out the year, it really depends on how -- on how you draw the slope of -- of the SOC testers.

And if it's a slow slope, then we're going to have a very low buy-rate year overall for 2007.

That's why I think some of our customers are thinking that there's more demand potential in the second half of the year.

But I think you'd have to just draw a bunch of lines on it and you'd see that if you draw it at 1.9%, that's a very, very strong recovery in the back -- in the second half of the year, and so on.

But the bottom line is whatever the slope is, because of your expanding TAM market share gains that you should be ging at a faster rate than this, that line that we draw, correct?

That's what we're trying to do.

Yes.

Fair enough, guys, thanks.

Molly, we'll be taking two more questions.

Okay.

Your next question comes from Raj Seth from Cowen and Company.

Thank you.

Mike, last quarter as you were going through the strategic discussion, talking about the SOC market, I think you talked about a historic growth rate of the market of around 5% and suggested that the market overall would continue growing at that rate.

I'm curious as you look into adjacencies and work through strategic planning on entry into new segments if you have perspective on how fast the DRAM test market is growing and how fast you think the NAND test market is growing.

Thank you.

Okay, hang on one sec.

The -- Raj, you're right.

We talked last time about a SOC growth rate that was -- and I think I have said today 4%.

It's low single-digits, 3% to 5%.

And that's why we said we need to expand our served market.

But DRAM market is attractive to test companies because its overall size and buy rate -- it's about half the size of the SOC market, but its buy rate of 1.5 times plus, more than 1.5 times.

And the NAND market is -- actually has a high buy rate right now, but is under very, very heavy economic pressure, so we expect that buy rate to come down.

We're looking at it, Raj, more as how do we get into an overall market that is -- that has significant expansion for us, and if the growth rate is equal to the market that we've got, then we have still a substantially larger market to address.

At this point, I think it's a little bit higher than the growth rate that you've got in SOC, but that's not really what its attractiveness would be to us where we'd enter the memory market.

It would be more that it would have a significant expansion in overall TAM for us.

Yes, clearly you'd be a share gainer and you could outgrow that assuming you had good product more easily.

Do you -- what do you think -- do you have a perspective on what the long-term market growth is of Flash.

Have you looked at that?

Not enough to give you a number.

Okay, thanks.

Your final question is a follow-up question from Mehdi Hosseini from FBR.

Thank you.

Just to be on the record, I want to congratulate you on the execution and being so flexible to change your business model over the past year or two.

Just one final question.

Going back to the -- going back to the pricing environment, do you think that with the cycle bottoming and actually bids overall your -- your overall semi test business is rebounding into Q2 that semi tests prices have stabilized or is there still a pricing pressure here?

Mehdi, I think that pricing is independent of where you are in the cycle.

The idea that as the market strengthens, pricing stabilizes.

Pricing is much more an issue in the contests for sockets that can move market share, either defensive or offensive.

So that's where you see the pricing intensity more than you do the rest of the business.

So it's not as much a cycle-related issue as it is the dynamics of competition.

If you looked at the pricing as of today and compared to, like, six months ago, do you still need to be flexible to help with the incremental market share?

Yes.

Okay.

And then, on the nonsemi test, is there any normalized run rate for the overall revenues on the -- on a yearly basis.

How should we think about more of in a long term or the growth prospects?

That business is between $60 million and $70 million a quarter.

It has some bumpiness in it because it's a program-based business.

For example, last year automotive was very strong.

This year we expect and into next [Inaudible] may be the leader in it.

So it's a bit lumpy, but if you were modeling between $60 million and $70 million for those businesses with a long-term trend line of 5% to 10% growth in them, I think that would match up to what we've got.

Okay.

Great.

Again, congratulations.

Okay.

Thank you.

Molly, I think we are done, thank you.

Okay.

Thank you for participating in today's conference call.

You may now disconnect.