泰瑞達 (TER) 2007 Q2 法說會逐字稿

Good morning.

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

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

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

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

(OPERATOR INSTRUCTIONS)

Thank you.

Mr.

Newman, you may begin your conference.

Thank you, operator and good morning, everyone.

We would like to apologize for the slightly late start here and get right to business.

First, welcome to our discussion of Teradyne's most recent financial results.

I'm Tom Newman.

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

Following our opening remarks, we will provide you with the details of our performance for the second quarter of 2007 and for our outlook for the third quarter.

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

Teradyne's press release concerning -- containing our most recent financial results was sent out by a business wire yesterday evening and 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 are providing some slides on our website that will summarize and reinforce some of the highlights.

They may be helpful to you in following the discussion.

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

In addition, a replay of this call will be provided on our website starting around 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 pass code 6348562.

Replays from both sources as well as the slides I mentioned earlier will be available through the second of August.

Investors should accept the contents of this call as the official guidance from the Company for the third 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 ends 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-Q filed on May 10, 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 as 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 Accepted Accounting Principles 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 in 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 between now and our next conference call, Teradyne will be participating in the Citigroup Tech Conference in New York on September 4 through 6 and the Banc of America conference in San Francisco on September 17 through 19.

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 in Q2, 2007 and will provide guidance for Q3.

Then our Vice President and Chief Financial Officer Greg Beecher will provide more details on our financial performance for the second quarter and on our guidance for Q3.

We will then answer your questions.

For scheduling purposes, you should note that we intend to end this call at 11:00 Eastern Time.

Mike?

Thanks, Tom.

Good morning, everyone.

Thanks for joining us today.

I would like to focus on two subjects with you this morning.

The first is to describe what's behind our momentum in semiconductor test with a focus on where we're making headway independent of the overall market recovery.

This will give you a feel for why we expect to increase our market share this year.

And second, I will describe how we are positioning shipments for the third quarter so you have a sense of the current business climate.

I'll also give you some flavor of the issues we are seeing on the competitive front without disclosing any specific customer names, of course.

As always, I don't intend to comment on other markets that we may enter in the future or to elaborate on new products until they are in use at initial customers.

Now as far as the numbers go for the second quarter, we posted revenue of $289 million and earnings of $0.14 per share.

At $307 million, orders for the Company were up 25% sequentially.

In semiconductor tests, orders were up 28% from the first quarter with product orders up 38%.

In our systems test group, orders were up 9%.

So it was a solid showing for us in the semiconductor test sector with strong demand across a wide range of end markets.

We saw particular strength in markets as diverse as cell phones, Bluetooth, automotive, broadband, power management, digital TV, baseband and optical disk drive devices.

Our FLEX products hit an all-time high in orders with nearly 200 systems added to the books putting our total unit sales now over 1,400 systems.

Our IDM and fabless customers accounted for 54% of that demand with Outsourced Assembly and Test companies at 46% of the total.

That's up 33% from last quarter for the OSAT.

This means that this has been an OSAT led upturn for us so far as we are now above our peak OSAT book rate of the last cycle while IDM and fabless buys are only 60% of the last peak.

It's important to note that Japan based segments like image sensor and microcontroller tests where we've been strengthening our position the last few years have so far not been big contributors to the cycle's upturn.

Obviously some of our demand in the first half of this year comes from an overall market recovery, but a good piece of our order increase came from recent design wins.

We added seven new names to our FLEX customer list in the quarter with our most notable wins in power management, digital TV controllers, cellular RF and digital baseband applications.

In addition, the FLEX is branching out inside our existing install base and is capturing sockets where customers find the potential to standardize their test platform investments.

In nearly every case, it's a combination of platform extendibility and throughput that's given us an edge.

A year ago, some customers who were outsourcing tests were concerned that they couldn't find multiple sources where the FLEX was installed in volume.

Now that the FLEX install base in OSATs is nearly 400, with significant fleets in all of the top ten assembly and test houses worldwide.

As a result, we now have a very effective push/pull environment where specifiers and subcons are working together to load their systems.

I hear consistent message from OSATs that they intend to reduce tester variety in the future and this will only occur through flexible multi-use platforms.

On the J-750 front where we have over 2,500 systems installed worldwide, we had a flat quarter with fewer than 100 units ordered, about 60% below the 2006 peak quarter and 50% below the average quarterly unit demand throughout 2006.

So once again, our Q2 results were dominated by the FLEX.

I do expect we will see renewed order rates for the 750 going forward for three reasons.

One, it remain arguably the best small footprint high power [inaudible] focus test values in the market.

Two, we've introduced a new higher speed microcontroller test model this past quarter and it is starting to latch as evidenced by recent press coverage.

And three, the 750 will serve as a base for other new products going forward.

So there is a lot of gas in the 750 tank and it will certainly remain our largest install base tester for years to come.

In our systems test businesses, we had roughly flat sales and slightly improved profitability from the first to the second quarter and growth in bookings just short of 10%.

In in-circuit test, we saw strength in the server and set-top box end markets which drove our test station product through the 1,000 unit milestone.

Our mill arrow orders were up modestly on a sequential basis.

Automotive tests were sequentially slightly up in orders and slightly down in sales as expected since we are coming off a large surge in shipments of our new vehicle measurement module in Europe and the U.S.

During the quarter, the pending sale of our Broadband Test business to Tollgrade Communications was announced.

We expect this transaction to play on schedule in Q3.

Overall, this will have little impact on the Company as BTD has represented between 1% and 2% of sales and even less in profit.

Guidance for the third quarter will be for revenues in the $300 million to $320 million range, and EPS of between $0.15 and $0.19.

Given the responsiveness of our supply chain, we can move shipments up or down to match demand without piling up inventory or letting lead times move out very far at all.

I should note that semi test order visibility is cloudier than this time last quarter.

Some of that is normal seasonality where demand doesn't materialize until after the summer.

Some is due to the extra capacity coming on-line as we speak and some is tied to a very cautious market short-term, a market where device demand is uncertain and where CapEx pressure from the memory market is being felt.

But on the plus side, we have an SOC test market that is now operating at a quarterly $650 million to $700 million level, well below last cycle's $850 million to $950 million peak.

And we have a moderate buy rate level that's at 1.5% for the last six months while the average for the last three years has been 25% to 30% higher.

The net effect is that we expect our SOC orders to be backloaded this quarter with many of those orders shipping early in Q4 so we're raising our Q3 guidance to match current demand yet staying positioned for more growth going forward.

I'm quite pleased with our results so far this year.

In spite of a market that's recovering gradually and despite caution in IDM spending, we're nonetheless showing healthy growth in demand and we're making some important share gains.

In other words, we're reaching a good cruising speed without hitting on all cylinders yet this year.

In summary, we're solidly on course with our longer term plan.

Our focus remains on semi test and the large SOC sector and on continued financial discipline in how we run the Company.

We are now well into the FLEX era with a sizable install base that will, I believe, continue to win share due to the system's merits in parallel tests and instrument extendibility coupled with the unrelenting drive for our customers toward less variety in their test platforms.

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

Thanks, Mike and good morning, everyone.

Our second quarter sales of $289 million were up 14% from the prior quarter while our diluted earnings per share of $0.14 exceeded our second quarter guidance of $0.08 to $0.13 per share.

This bottom line improvement from our guidance was primarily due to improved semi test gross margins.

Total bookings of $307 million were up 25% from the prior quarter led by 28% growth in semi tests.

FLEX bookings set a new record in the quarter with broad customer penetration in wide device coverage with particular strength in RF, automotive and power management.

Before I go through the second quarter results and provide commentary on the third quarter outlook, I would like to comment on two things.

First, you should be aware that the financial results I will cover today are expressed excluding our Broadband Test Division results as BTD is treated as a discontinued operation for all periods presented.

Second, I would like to take a step back and put in context where we are against our longer term growth plan.

Strategically, first and foremost, we have been focussed on building a strong core business in the roughly $3 billion per year system-on-a-chip test sector.

This has meant first divesting businesses or product lines that are not core or expected to provide attractive returns inside of Teradyne.

Second, establish a solid financial model that will deliver improved over-the-cycle profits and strong cash flow.

Third, fully exploiting our leading SOC test capabilities to gain share with high parallelism and platform extendibility.

And lastly, leveraging our financial strength in existing platforms and SOC tests to expand into closely adjacent markets.

So where are we on these four strategic initiatives?

On the first, we have made good progress in refining the portfolio of businesses that are more closely aligned to our core test capabilities.

Most recently, we of reached an agreement to sell our Broadband Test business unit to Tollgrade Communications as we've concluded that that business doesn't offer sufficient growth potential within our rate of system test businesses.

Moving to the second strategic initiative, we have made good progress on our financial discipline.

In the last buying cycle that ran from the second quarter of 2005 through the first quarter of 2007, we achieved our highest ever free cash flow which totalled $272 million or 11% of sales over that same period.

We expect to improve our profitability and free cash flow performance this next cycle through growing market share and maintaining strong financial discipline.

Note that going forward, we are reducing our quarterly breakeven range by $10 million to $240 million to $250 million.

This is at the PBIT line and it excludes -- and it includes stock based compensation.

Roughly half of this improvement is due to the sale of BTD and half is from other cost reductions.

Now third, on fully exploiting our leading SOC test capabilities.

We have been gaining share with FLEX and J750 and see further opportunities going forward.

Our customers are continuing to drive for lower platform diversity and at the same time, they are unrelenting on improving test economics.

We are proving to have a very good value proposition here and are making steady progress step, socket by socket.

The fourth strategic initiative of expanding into closely adjacent markets is one that we have much work underway but cannot for obvious reasons disclose the details.

The essence of our strategy is to leverage our engineering investments into semi-test markets where our base platforms can provide the foundation for differentiated performance.

You've seen the first evidence of this strategy in our J750 EX, introduction last quarter into the high performance microcontroller test market.

Each of our products, that is the FLEX and the J750, offer a very strong base, both technically and also now in market footprint to effectively execute this fourth component of our strategy.

So in summary, our core business is doing well.

We expect 2007 to be a share gain year.

And we have the strength to make and we are making the longer term investments to get into closely adjacent markets through our existing platforms.

So what does this all mean to our model at this point in time?

Our average PBIT rate is about 10% or 11% and this includes stock based comp.

This assumes a normal $3 billion annual SOC test market.

This is below our annual PBIT model of 15%.

Therefore we need to gain about four points of SOC test share to hit this 15% model.

This assumes a normal SOC test profit drop through of about $0.50 to $0.55 on the dollar.

Although we are only at the halfway mark of 2007, we believe we are on course to add a point or more in SOC test market share this year.

Now apart from growth, we also expect further improvements in manufacturing costs by mid-2008 with the moving of printed circuit board assembly to our outsourced partners China plant and the outsourcing to that same plant of [segregation] and tests.

In short we expect this to add about a point of gross margins.

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

Our second quarter gross margin percentage was 47.5% of sales, up from 44.7% in the prior quarter, due primarily to lower manufacturing costs and higher sales volume.

We have described in the past that gross margin should be about 49% at model sales.

The second quarter gross margin performance is tracking to our model as for each $25 million of volume up to about $400 million, we expect to get another point of gross margin.

R&D expenses were $52.4 million or 18.2% of sales as compared to $49.3million or 19.4% of sales in the first quarter.

This dollar increase was primarily due to additional engineering to enter a closely adjacent market with an existing platform.

SG&A expenses were $62.8 million or 21.7% of sales as compared to $63 million or 24.8% of sales in the first quarter.

Our net interest income was $9.2 million, down from $9.7 million in the prior quarter due primarily to lower average cash balances.

We had $3.5 million of income tax expense in the quarter and our quarter ending head count remained at about 3,700 employees.

In the second quarter, semiconductor sales were 79.9% of the total, assembly tests 14.3%, diagnostic solutions 5.8%.

On a geographic basis, our second quarter sales in descending percentage order broke down as follows.

U.S.

21%, Taiwan 19%, Singapore 15%, Southeast Asia 15%, Japan 11%, Europe 10%, Korea 7%, and rest of the world 2%.

We had net bookings of $306.6 million in the quarter.

On a quarter to quarter basis, our bookings were up 25%.

Semiconductor tests product bookings were up 38% while semiconductor tests total bookings were up 28%.

Assembly test was up 9% and diagnostic solutions was up 9%.

Our book to bill ratios for the second quarter were 1.06 for the overall company, 1.12 for semiconductor tests, 0.84 for assembly test.

0.76 for diagnostic solutions.

At the end of the quarter, our backlog stood at $344 million of which 85% is 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.

Taiwan 24%, Southeast Asia 17%, U.S.

15%, Singapore 13%, Korea 13%, Europe 10%, Japan 7% and rest of the world 1%.

Moving to the balance sheet, we ended the quarter with cash and marketable securities of $884 million, flat with Q1.

We used $24 million of cash to repurchase 1.4 million shares at an average price of $16.70.

Since the inception of our stock buyback program in the third quarter of 2006, we have repurchased 12.3 million shares at an average price of $13.46 totaling $165 million.

This leaves us with the remaining authorization for our share buybacks of $235million coming into the third quarter.

In the second quarter, our capital additions net of sales of related capital equipment were $12 million, depreciation and amortization for the second quarter was $23 million including $6.8 million of stock based compensation.

Accounts receivables stood at $211 million or 67 days sales outstanding, up from 60 days in the first quarter.

This increase in DSO was due to the timing of shipments occurring later in the quarter.

We ended the quarter with product inventory of $88 million, up $7 million from the last quarter.

In the third quarter of 2007, as Mike mentioned, we expect sales to be between $300 million and $320 million, with income from continuing operations between $0.15 and $0.19.

Income from discontinued operations should be about $7 million or $0.04 from the disposition of the Broadband Test business.

We expect gross margins to be 48% plus or minus a half a point.

R&D should run between 17% and 18%.

SG&A should run between 21% and 22%.

We expect to be down about $10 million in inventory dollars and accounts receivable to increase about $5 million.

In addition, we expect to spend $20 million or less on capital.

In the third quarter, our depreciation and amortization should be around $23 million including $6.8 million of stock based compensation.

Our tax rate is expected to be about 16% for the balance of 2007.

Now I will turn the call back over to Tom.

Thanks, Greg.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Gary Hsueh.

Yes, hi.

Can you hear me?

Yes.

Hey, thanks for taking my questions.

I'm just going to ask the most obvious question with OSAT as 46% of total bookings and your comments I think last quarter about how it's roughly an eight-month cycle between inventory correction periods.

Where exactly are we and how can we get comfortable about OSAT comprising 46% total orders?

What's sort of the downside risk here to that number going down?

Gary, it's Mike.

As I said, you're correct.

This is an OSAT led upturn for us.

In the past, they were as low as 20% -- low 20% level.

And this is a high for the OSAT surge.

Now part of that percent is obviously what IDMs have done and the IDMs have been more on the sidelines so far in this recovery.

The OSATs have -- are a little bit above, about a 15% above their last peak.

So obviously they've done their part.

But the main drivers for us which have always been over 50% of our bookings on the IDMs have been slower here in this upsurge.

If your question is should we be concerned about overheating, I think you have to look at the total market and the total market is gradually growing.

So I don't think we've got an overheated situation is the short answer.

Mike, if I could just ask a question a different way.

I don't think I asked it correctly.

I was just wondering if you could kind of handicap what that 46% OSAT content would have been last year at last year's market share position?

I know that's tough to do, but obviously you have been gaining share at the OSATs and the OSATs, as you said, are consolidating their tester fleets.

I was wondering if you could handicap that 46% to kind of historical terms.

Well, I'm not sure what you are getting at.

When we think about market share, Gary, we don't think about OSAT market share because that's a complex mix of who's outsourcing.

We look at market share on the specifier basis.

Okay.

I was just wondering about your market share of OSAT.

We don't -- I don't mean to be slow on the uptake here but we don't look at it as an OSAT market share calculation.

Okay.

All right.

No problem.

Thank you.

Sorry if we're not getting -- maybe at the end if there is a little more time come back and ask it and we will be --

Thank you.

Your next question comes from the line of Chris Blansett.

Hi, guys.

Thanks.

Couple things.

How is your order linearity throughout the quarter?

Did you get any rush orders?

And in general, how are your utilization rates for your equipment in the field?

And kind of along the lines of what Gary asked, what are utilization rates at subcons versus IDMs and maybe that's part of the difference?

Okay.

On linearity, this was -- Q2 was a bit more backloaded so we were anticipating that there would be some very short demand which is why we leaned into the capacity and the guidance in the second quarter and we saw just that.

But it was heavily backloaded.

And number two, on utilization.

Utilization, if you recall in our last call, we said that utilization was -- had turned in the February time frame and it has been moving back up steadily all the way through this month.

And that looks -- the projections by external prognosticators on this say that that is continuing up.

We continue to see a difference between utilization at the IDMs and at the OSATs.

That spread has closed and while the IDMs may be in the 90% level, the OSATs are trailing but are increasing.

Now as they take on a large chunk of capacity here, the obvious thing to watch for is does anything move on the OSAT utilization rate, but they have been trending up since about February.

And one quick last question on share repurchases.

You guys did repurchase some stock during the quarter but your current quarterly cash generation rate and the way the share repurchases have been going, you're never really going to catch up.

At some point in time, should we expect a large one-time share repurchase out there?

Well, we're about halfway through the program and we've bought back 165, that's against 400, so we're a little bit behind, I guess, 35 million behind where you might expect us to be precisely.

So we are going to continue the program for the duration of the next year and we would expect to buy back at a higher rate than we did this past quarter.

All right.

Thanks a lot, guys.

Appreciate it.

Yes.

Your next question comes from the line of Satya Kumar.

Yes, hi.

Thanks for taking my question.

Just wanted to follow up on a couple of previous questions.

It seems like you had a pretty good backend loaded quarter.

It seemed like you sort of were sounding cautious.

What has changed in the market and in this three weeks into the quarter that you feel that Q3 might end up being a more backend loaded quarter?

Could you point to any specific area in the end markets or maybe across IDM that OSATs have gone softer that you sound a bit conservative on your September outlook.

Satya, the thing that's different is really only that we expect this to be equally backloaded.

And so as we've sized this quarter up, we're going to respond to the demand that is visible to us plus some uncertain demand that we think is coming because utilization rates are so high.

But this is -- the uncertainty in the market is up a tick from where it was three months ago.

But I don't think we are playing this conservatively.

We are set up so that we can move up to respond to that and we have increased our shipments accordingly.

Where is that uncertainty coming from?

Which end markets or customer segment do you see a bit more uncertain right now?

It's not market specific as much as if you talk to the customers.

The OSATs have put a lot of capacity in.

They're going to push that and load that and everybody is playing and continues to play it very tight.

As I look at this and look at the utilizations continuing to go up, I think the forecast would suggest that this can keep moving up.

The other piece is that the overall size of the market -- we haven't come to the midpoint in the average size of the market per quarter.

We've had three quarters now that have been below the average over the cycle size of the market so all of those things argue for continued strength.

But we're in the summer.

The summer usually is a very quiet period.

And I think that the increases that we might see in Q3 would be satisfied in our shipments in Q4.

Great.

I mean when you look at this pickup that you have seen with those IDMs in Q2 and sort of outlook for Q3, is what you are seeing more seasonal than cyclical, i.e., you see this in Q2 and Q3 every year and maybe goes back to Q4 and beyond?

Actually, there isn't the kind of seasonality that it feels as if there is.

What I mean by that is all of us sense that we tend to see strong Q2s in order to do the build for the end the year.

In truth, in the last three cycles, the peak quarters for us have been -- either have been Q1, they have been Q4, and they have been Q2 in the last three cycles.

So I would think more -- less of this as a seasonality issue and more where the industry is in the cycle and we are on an upturn gradual increase in the cycle and that tends to overwhelm issues around seasonality.

Okay.

My last question, I might have missed this.

Your gross margins came in 150 basis points above your midpoint.

Could you walk through what was the variance driving that?

Was it FLEX and the product mix that helped you or what have you there?

We had lower manufacturing costs in the quarter.

We have been driving down our indirect and our manufacturing costs over a long period of time.

We've also been lowering our material costs and some of that has started to show up in this quarter's gross margin.

Great.

Thanks much.

Your next question comes from the line of Dave Duley.

Yes, good afternoon.

Congratulations on a nice quarter.

I was wondering if you could talk about where FLEX lead times are now and how they have changed over the last quarter?

And then also what would be your cash flow generation target for this upcoming quarter?

Dave, it's Mike.

We have been working very hard to make sure that we keep our FLEX lead times in single digits.

Six to eight week lead times are what we are shooting for.

As you know, we've got a much more efficient manufacturing cycle and we have worked very heavily with our main suppliers so that we can flex the capacity up or down very quickly.

So in spite of the fact that we had a record quarter in FLEX bookings, we're keeping those lead times in check.

On the second question, the free cash flow, we expect that to be over $25 million.

So say $27 million, that neighborhood, in the third quarter.

Okay.

And then one final thing from me is obviously your product bookings and semi tests were up nicely, up the 38% number that you highlighted.

And you gave all the geographic regions but I don't have the comparison numbers to compare.

Could you talk about which regions were the big drivers of that sequential growth on product and maybe give us a little bit more information, more specific information about a couple device types that might be driving that.

I'm assuming it's some of your big customers, the dot-coms and the Qualcomms of the world, but maybe you can talk a little bit more about it.

Well, from a regional standpoint, it maps closely to where the OSATs are located so we have very good bookings strength in Taiwan and South Asia.

Relatively weaker in terms of the percentage of bookings in the U.S.

and Singapore.

Korea also strong for us this quarter.

Going forward, we see Europe and the Taiwan/China segments likely to be down this coming quarter with the U.S.

and Japan rebounding.

Now in terms of segments, very, very strong growth for us in our RF segment.

As we said before, automotive, baseband, optical disk drive devices, those were all very strong sectors for us.

We expect to continue to see very strong RF business.

And we probably, at this point, as we look out, the places that have been softer for us with microcontrollers, we expect that to get stronger in the second half of the year.

And the likelihood that image sensor may get stronger perhaps in the fourth quarter versus the third quarter so those are some of the segment stories.

Thank you.

Your next question comes from the line of Timothy Arcuri.

Hi, guys.

Two things.

Number one, we heard some chatter that the new LCD driver tester had pushed out a little bit, pushed out maybe six months, nine months in terms of shipments.

And that maybe that tester might not derive meaningful revenue until the end of next year.

What's your current update on that product and what the kind of push and pulls are there?

Well let's see, update on the product is that we are not talking in any detail about the product.

The thing I had mentioned on the last call was that this year we have a 750 based product expansion.

We've introduced the 750EX, the microcontroller version of that product, so that is out.

That's at customers.

And we will introduce products going forward when we have penetration into lead customers.

I had also mentioned, as you know, that we intended to use that platform base of the 750 for our next generation product and image sensor and for an entry into the LCD market.

So that's the extent of disclosure on those two other segments.

Schedules, product development schedules, we're not disclosing, obviously.

I will say the work we are doing in those segments with customers continues unabated so we are continuing forward on both of those segments but you will hear more about this later when we are into customers.

Okay, I guess let me ask it maybe just a different way.

So it seemed like maybe coming off the last call it seemed like some of the new products could derive something like $80 million a year in kind of incremental sales, something in that range.

And it seems that maybe while that number has pushed out a little bit, is that still the right overall number?

The -- let's see -- I'm not sure how you got the $80 million but maybe I could help by reinforcing that.

Two of those segments of those three were already in so it will be a little bit hard to discriminate between how much the new product gets in share and how much the existing J750 product gets.

So obviously the first two segments of microcontroller and image sensor will be holding and expanding inside existing customers mostly.

The LCD market, we size it around 10% of the total market, about $300 million.

And we have an overall market share a little bit north of 30% so obviously if we could get to that level, you can hit the kind of numbers that you are talking about.

Okay.

And then I guess last thing, what do you think the tax rates going to be next year?

It seems like you kind of chewed through the NOL so it seems like the tax rate's probably going to go up to the corporate, maybe 26% to 28% next year, and if that's the case, what quarter do you think that it would go up?

Thanks.

Okay.

First of all, the tax rate for the balance this year, it's about 16%.

What will likely happen at some point and it could be as early as the fourth quarter of this year or it could be later, say Q2 of next year, we would likely put back on our books the deferred tax assets that we wrote off and we have over $350 million of NOLs that are still available that we could use these two to reduce the taxes that we would otherwise pay.

But on our accounting, we'd have to put these on our books at some point.

And once we do that, we'd go to a more national rate and I think we said in past calls, that's 26%, 28%.

Over a longer period of time, we would expect to take that down a little bit but I think as guidance for the next couple years, I think 26% to 28% is probably good.

And while we are able to not book this deferred tax asset, a tax rate guidance of 16% is probably okay.

I would be very surprised if we were in 2009 and we were not at 26% or 28%.

I think sometime in 2008 we will likely foot this valuation allowance and be at the 26%, 28%.

Okay, so just to clarify, so the writeback that you will have to the balance sheet will be somewhere in that $350 million?

Yes.

Okay.

Thanks.

Your next question comes from the line of Mehdi Hosseini.

Yes.

Couple of questions.

First, Greg, what would be the tax rate without the options?

And then a couple of questions for Mike.

First, I see your non-semi bookings were up single digit and historically as you move from Q1 to Q2, the seasonality kicks in and it has been up a lot more.

Does that mean that some of that bookings more -- may trickle into Q3 and that would balance any weakness from OSAT CapEx?

And then the last and final question, you mentioned that Japan is going to come back in Q3 and microcontroller is going to be driving that.

Is that cause any ASB difference for your semi test on a blended basis versus the strength in FLEX that was in the Q2?

In other words, to what extent ASB from micro controller would impact the bookings?

Okay.

Mehdi, why don't I go first.

Your question was what would the tax impact be if we excluded options?

Did I get that right?

Yes.

Okay.

Well, the options -- are you talking about options in prior years or going forward?

No, just option expenses.

I'm just trying to calculate earnings without the impact of options.

Okay.

Maybe I should do that for you offline.

The thing I can tell you off the cuff is our option expense is very low right now.

It's very low so I think the impact would be negligible.

But we have restrictive stock units.

There would be tax consequences on that.

So maybe offline I can help you put together a schedule?

Got it.

Okay.

Thank you.

Mehdi, on your other two questions.

The non-semi tests, the systems test businesses are far less a seasonal story than they are a program based story so the changes that you see quarter to quarter there really are typically tied.

Aside from the in-circuit test business which is lots of units of in-circuit tests.

The other business is mil/aero and diagnostic solutions in the automotive space, tend to be program based.

If you think back over the last year or so, big deployment in automotive in our VMM business, vehicle measurement module business, that created a surge in '06 for that business.

As we mentioned last quarter, we've gotten into the commercial airlines test business in the mil/aero space and that will be another bump in future business for us.

So I don't think about the systems test business as an orderly or a seasonal phenomenon as much as I do in a program basis.

On the ASP side, certainly if the 750 becomes a larger piece of our mix, that's a much lower cost platform, small footprint, lower cost platform, so to the extent that we get a resurgence in those spaces, partly driven by the extent of installed base and partly driven by the new products, yes, you will see, arithmetically you will see a decline in ASPs.

But that's the nature of the beast as you get a different mix with a focussed tester versus general purpose tester.

But I wouldn't take much concern with regard to that.

Sure.

There is so much a focus on the semi test, but give me some idea how you see the demand on the non-semi test in the second half of this year.

Well, let's see.

The way we think about it is we are trying to build a healthy portfolio of business that's there that operate for the next year or so in the -- around $60 million, $60 million to $70 million a quarter, with sometimes in-circuit being the leader and other times aerospace and diagnostic solutions changing the order of contribution to that $60 million to $70 million.

That's the modeling I would do with it.

The other piece is we continue to push those divisions northward in profit contribution.

In the past, they were drag on the Company and now we are just insisting that those businesses are structured in a way that they contribute more heavily to the bottom line.

But I think that sizing would be what I use in the model going forward with some lumpiness obviously factored in.

Got you.

Thank you.

Your next question comes from the line of David Egan.

Hi, guys.

Thanks for taking the question.

I was wondering about your comment about CapEx pressure from the memory market.

What does that refer to in particular?

Well, that was more intended to be kind of tonal.

What I mean by that is that there is a general broad hesitation out there about CapEx across the board.

A lot of that comes from the memory space, but SOC is not immune from those kinds of pressures.

Obviously a company that is a pure play in memory, there is no effect in the SOC segment.

But on the combination companies that have both memory and SOC, there is -- we feel the concern and it trickles through in the form of approval for CapEx and so on.

So we might see that -- might see that like in image sensors and things like that?

No.

I think those are more specific to the end markets and to the transitions in technology of the devices in there.

I was just trying to pass along that we are not immune from what's going on in the memory space, and it does have some what I'll call atmospheric effect.

I don't think that the indicators in terms of SOC unit growth or the buy rate or the -- where the recovery is at this point in time, any of those, none of those argue in favor of a softening on the SOC side.

But the summer phenomenon, the back end loading we saw this last quarter and the overall CapEx concern puts a little flavor of -- higher flavor of uncertainty in the very, very short-term.

Longer term I don't -- I wouldn't put as much stock in that.

Okay.

No problem.

This is a question for Greg.

I didn't -- I don't think we got all of the information you were talking about with the break even.

And then also the -- what was the gross margin first of all -- the gross margin guidance for this quarter?

Okay.

The guidance was 46%, plus or minus a half a point.

I'm sorry, for September?

For the second quarter.

No, no.

For the third quarter, I'm sorry.

The guidance.

I'm sorry, the third quarter.

Okay.

48% plus or minus half a point.

And then and then when you are looking at the SG&A, it looks like it's going to be up quarter to quarter.

What is the -- I guess it's about the same of a percentage.

What is driving the increase in the SG&A?

Is it just basically variable comp?

It's variable comp is the single most significant piece.

There is also a new order entry system that's getting implemented but it's really variable comp.

Okay, fine.

And then back to the question I was asking before about the breakeven.

Should -- where should we expect -- as the breakeven comes down, what should we think about the gross margin?

How should we start modeling that?

If we get to what we expect to get to our 15% profit rate, which takes some amount of SOC test share gain, we would expect to be at 49% gross margin on average over cycle sometimes above, sometimes below.

But that would be the target that we set.

We are tracking to it.

What we do need to do is get some modest growth as we've made a number of investments in engineering that gets us access to new markets.

So with that playing out, we should be able to get to the 49% and the SOC test share gains will also get us there.

So I think 49% is looking better than it did a year or two ago when we set this.

It looks very much line of sight target.

Okay.

And the -- on the prior call, you had mentioned that you thought the R&D would tick up in the second half of the year.

Is that still on track for what we should be expecting?

Correct.

It's ticked up and it's to enter a new adjacency with an existing platform, so that's an opportunity that we see as very attractive and we are very far along with some customers on that.

I don't see that as a necessarily a permanent uptick.

That should come down later.

And then finally, from the last call, I think we remember the way we were thinking about the tax rate was that you'd be doing buybacks also and maybe that was going to offset some of the higher tax rate.

Do you think that that in terms of your EPS, do you think that would be something we should consider?

We're going to do buybacks simply because we have -- we think Teradyne stock is a good buy and we have excess cash.

The tax situation itself is somewhat tied to how you capitalize a balance sheet, meaning if five years down the road we wanted to have far less cash and more debt on the balance sheet, then from a weighted average cost to capital perspective, it makes more sense to have debt on the balance sheet.

I don't know if that kind of gets at you, but what I'm trying to say is the tax and the balance sheet capitalization do connect to one another.

The only other way to say quickly is if we had a leverage balance sheet now, we wouldn't get much of an advantage from a weighted average cost to capital because our tax rate is so low.

I remember that you had mentioned this last quarter and I guess our takeaway was it's possible that you're going to relever the balance sheet later in the year or next year and that would help lower the tax rate.

I think we'd do that over a longer period of time and that would lower the weighted average cost to capital, not the tax rate itself.

The tax rate we're lowering independent and at some point we're going to get to a tax rate that is a sustainable rate given our mix of businesses and where the work is done.

But the opportunity for us, like many other technology companies, is can you lower the weighted average cost to capital?

Maybe this is too theoretical but there are models out there that would suggest if you could lower the amount of capital in a business, the investor can get a better return.

Right.

That makes sense.

Do you have any -- a target where you would like to get the long-term tax rate?

The long term tax rate, the target would be about 25% to 27% and that's in part because we have non-semi test businesses.

Semi test itself would be much lower.

Other non-semi tests businesses would be at a higher tax rate.

Still profitable, still making a contribution.

Thank you, guys.

Operator, we will take the last question.

Your next question comes from the line of Tom Diffely.

Good morning.

I was hoping you could give us a feel for which members of the FLEX Stanley were doing the best at this point.

Tim, the RF based systems have been really leading the charge here in the last quarter and we expect them to be pretty strong through this coming quarter.

That's the standout product.

Obviously we have a -- Tom, I mean not Tim, Tom, we have a family here of FLEX micro flex and ultra-flex.

This last quarter, it was more of the mid range performance product, the FLEX product, that led the way.

But the real significant element is that it's been RF based which has led the charge.

Okay.

And on average, in general, do you think your business in the RF world has improved?

Or decreased over the last couple of quarters?

On a competitive front?

We've had some wins in that space.

We think we're very strong in it.

And while there is a lot of competition in that space, there are two things in my view that go on there.

One is the integration of technology including RF elements on SOC devices means it's not just a pure RF instrumentation story so customers are valuing the extendibility of the product and ability to add a variety of instrumentation to their system.

And then it's a cost of test battle and the throughput and parallelism on the FLEX has proven to be important in that respect.

Okay.

And if the market moves back toward the IDMs over the next couple of quarters, does that change the profile of what systems you might be shipping out?

Not discernibly.

I think we give a pretty consistent mix.

And the reason I say that is that all of our customers now have been converted to FLEX and J750.

The one addition I would make is if, as I said before, if micro controllers and image sensors come back stronger,which we expect that they will, then obviously that changes the mix to a heavier J750 element.

Okay.

Thank you.

Operator, we're completed.

Okay.

Do you have any closing remarks, sir?

No.

Thanks everyone for joining us.

We will talk to you next quarter.

Thank you very much.

This concludes the second quarter 2007 earnings conference call.

You may now disconnect.