泰瑞達 (TER) 2007 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Newman, you may begin your conference.

Thank you.

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'll provide you with details of our performance for the third quarter of 2007 and of our outlook for the fourth quarter.

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

The press release containing our most repeat financial results was sent out over 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 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 view them, simply access the investor portion of our site and click on live webcast followed by click here for webcast.

In addition, replays of this call will be available starting around noon today Eastern time.

These will be available along with the slides through the 1st of November.

The matters that we discuss today may include forward-looking statements about events or the future financial performance of the Company.

Such statements involve risks and uncertainties.

Actual results can differ materially from such forward-looking statements.

Some of those risks and uncertainties are detailed in our press release and our filings with the SEC.

Additionally, those forward-looking statements including guidance are made as of today, and we do not take any obligation to update them.

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

During today's call we will make reference to non-GAAP financial measures.

We have posted a reconciliation of those measures to the most directly comparable GAAP financial measure on our website.

To view them, go to the investor portion of our website and click on the GAAP to non-GAAP reconciliation link.

Also, you may want to note that between now and our next conference call Teradyne will participate in the Credit Suisse Technology Conference in Phoenix on November 27, through 29; the Lehman Brothers Global Technology Conference in San Francisco on December 5, through 7; a San Green Securities luncheon in Boston on December 10; and a San Green Securities luncheon in New York on December 13.

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 the third quarter 2007 and will provide guidance for Q4.

Then our Vice President and Chief Financial Officer Greg Beecher will provide more details on our financial performance for the third quarter and our guidance for Q4.

We will then answer your questions.

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

Mike?

Thanks, Tom.

Good morning, everybody.

Thanks for joining us today.

I would like to cover three topics with you today.

The first is what's behind the slowdown in SOC test orders these last few months, and are these recent events signaling a fundamental change in test demand and CapEx for the future.

Second, what are the implications for our revenue projections and market share.

And, third, what progress are we making on new products and on our financial goals for the future.

As always, my comments on new product momentum in those comments I won't elaborate on any unannounced new products until they're in use at customers.

On the surface the slowdown in orders in Q3 was somewhat unusual as the SOC market normally runs about a six-quarter up cycle after a trough.

In this case the market is seeing a pullback after only two quarters of recovery.

In fact, the industry has had somewhat similar digestion pauses in the past but they've tended to be muted as they have occurred across quarterly boundaries.

The more central issue is that this year the main driver of our industry, semiconductor growth will be off significantly from the growth rates it's seen in recent years.

In fact, 2007 SOC semiconductor revenue and unit growth rates will be lower this year than any period since 2002.

Revenue growth is forecasted to be only 4%.

That's far lower than the 7 to 19% annual growth rates of the last four years.

Unit increases will be at a six-year low at approximately 7%, far off the 10 to 18% growth rates of the last five years.

Combining that with uncertainty entering 2008 and you have a back end environment that is sensitive to over expansion, is pressing utilization very, very hard and is expecting and getting for the most part very fast deliveries.

All of this combines for a continued climate of very, very short-term visibility.

But the important question that underlies all of this is, does the current set of events signal a more fundamental shift in semiconductor test demand going forward?

My view is no.

It is not likely that we're seeing a step function change in the tester demand trend line.

Having said that, we are in a low growth market that for us requires continued share shifts and new market expansion to satisfy our overall growth objectives.

Let me comment on what I see as the forces underlying this question of the overall market trajectory in growth rates.

On one side of the debate is what I will call the productivity camp.

Central themes here are parallel tests, high throughput architectures, small footprints, multi-use flexible systems, and high up time.

All of these compress the market for testers.

But there is another camp or set of countervailing forces that push in the opposite direction, device unit growth, relentless integration of devices, system and package architectures, and subtle fault mechanisms are exerting strong upward pressure for more testing.

Even parallel test has a price as system configurations require added costs to expand site counts.

My view is that this irresistible force of productivity and the immovable object of complexity and unit growth move very gradually.

You can look back at the list of productivity disrupters like C-MOS, design for test, built-in self test, per pin tester resources, and so onto see the last generation of productivity enablers and to conclude that they helped control the rate of tester growth but did not have a step function impact.

Having said all this, the rate of growth in the SOC tester space is in low single-digits as we've discussed before.

Whether that's 3 or 4% or even 0, we know that it won't yield sufficient growth to meet our aspirations, hence our three-prong strategy of gaining share, internal productivity initiatives, and investment into adjacent markets where we can leverage our core technology.

Now moving back to the current climate, there is another important issue for our investors.

That is what's happening in market share right now.

Put bluntly, is our 16% sequential drop in orders in semi tests indicating a loss of market share?

The answer is no.

For us the facts are as follows--first, last year in an up cycle we grew revenue 34% while the overall market grew 22%, so we gained share.

This data, of course is publicly available.

Second, in the first six months of this year, the market declined 18% from the prior six months and we declined 11%, so we gained some more ground in the down cycle.

Third, in 2006 we added about $100 million in new design wins and we followed that up with about $60 million more so far this year.

We're in good standing in the last eighteen months where market data is available in our internal score card of new business.

I know on many of these conference calls there are discussions about potentially large share shifting events.

These come infrequently and most of this terrain is made up of small socket wins that blossom over time.

Hence, our focus on fanning out the FLEX and 750 products into more parts of our customer's technology centers and winning new socket opportunities.

Now, three areas of success for us have come this year in power management, digital TV, and baseband applications.

In all three our instrumentation portfolio combined with high parallelism have been the key differentiators.

Looking forward, as I said, the tester demand environment remains cloudy.

Despite high sustained utilization in back end equipment we're in a short notice environment for orders.

On this call last quarter I commented on this, and others in our sector have reinforced it.

It was consistently voiced by customers in my meetings with them in Asia last month.

As such, we're projecting a revenue range of between 250 million and $275 million for the fourth quarter and EPS of $0.04 to $0.10.

Greg will elaborate on those numbers shortly.

On the new product front, our J-750 EX has taken hold in the microcontroller, FPGA, and image sensor space.

We have installations in all of these applications, so we expect to expand our 2500 plus installed base as customers drive on higher frequencies and wider parallel test applications.

Despite a downtick in unit sales of FLEX systems from the second quarter record we did add over 100 more FLEXs to our customer base.

The UltraFLEX hit a new quarterly record driven by applications as diverse as smart phone components, MP3 players and digital SLR camera processors.

Over 30% of our more than 300 FLEX systems sold in the last six months have been RF configurations.

We've added over 40 more RF upgrades to the installed base in that same time, so the presence we have in the RF space has been a main stay in this cycle.

Now in our systems test businesses our bookings were up 18% led by strength in our Mil/Aero sector offsetting weaker demand in commercial board tests and automotive diagnostics.

We're especially pleased by recent decision by the Department of Defense to standardize Air Force Avionics testing.

This is a program called VDATS which stands for versatile depot automated test system.

This test system will be based on Teradyne instrumentation from our systems test group.

In total revenue now for our systems test group will be essentially flat from Q3 to Q4.

Our migration of manufacturing to Asia is on schedule with no business interruptions, and we continue to make progress on our business model.

Greg will elaborate on these subjects as well in just a couple of minutes.

Most important for the long-term is our commitment to invest in new market product development.

We have a larger piece of our R&D dedicated to this in 2007.

At the same time we intend to deliver better over the cycle performance while these investments are made.

So the bottom line is, one, we're in a challenging market for climate due to a four and five-year low in semiconductor dollar and unit growth respectively in the SOC space.

Two, customers are likely to continue operating in a very tight utilization environment.

Three, we're continuing to expand the FLEX and 750 footprint and are optimistic about the increasing preference, especially in OSATs for flexible multi-use systems.

And four, we'll continue to make headway on our business model at the same time that we invest in long-term growth initiatives.

Let me turn it over now to Greg for more of the financial picture.

Greg.

Thanks, Mike.

Good morning, everyone.

Our third quarter sales of $299 million were up 4% from the prior quarter while our non-GAAP earnings per diluted share totaled $0.17.

Our GAAP earnings per diluted share totaled $0.22 and included the gain from the sale of the Broadband Test division and other smaller specials which have been detailed in our press release.

Total bookings of 273 million were down 11% with semiconductor test bookings down 16% and the system test group up 18%.

Please note that going forward we will report two segments--semiconductor tests and our system test group with the latter made up of Mil/Aero tests, commercial board tests and automotive tests.

Semi test buying in the quarter was broad-based with the top 10 customers making up 51% of our third quarter bookings versus 58% in the prior quarter.

59% of our semi test orders came from IDMs and fabless companies, and 41% from OSATs.

This is versus 54% and 46% respectively in the prior quarter.

There was improved demand in microcontroller tests and in some consumer segments; however this buying was overshadowed by decreases in RF and automotive which had strong second quarter bookings.

Utilization levels were flat at IDMs, were up a few points at OSAT customers and are in the high 80s, low 90s percentages.

Before I go through the third quarter results and provide comments on the fourth quarter outlook, I would like to provide some summary commentary on 2007 against our longer-term growth plans.

First, I expect that 2007 will be a key year for us in that we will have gained market share and SOC tests with FLEX and the J-750 for the second year in a row.

Over the past eighteen months we have won many design-ins that have grown our market share and increased our gross margins several points.

In many of these gains we have had a 30% or better cost of test improvement over the incumbent.

This 30% plus advantage is critical to shifting market share at attractive gross margins.

This is primarily due to the FLEX architectural advantages that enable much more efficient parallel tests.

FLEX also covers a very wide range of devices which plays particularly well with OSATs who are clearly pushing their customers more than ever to select test providers who can offer a flexible platform.

The OSATs are also increasing their share of tests as IDMs look to outsource more.

We expect the share gains from SOC tests to continue and that these gains along with the continued focus on gross margins will get us to our model profitability rate of 15% operating income.

This assumes a normal market size.

Currently we operate at about a 10 to 11% operating income rate assuming a 3 billion annual SOC test market.

Of the 4 to 5 operating income points we need to get to our model P&L, about one-third comes from manufacturing savings, and the other two-thirds comes from SOC test share gains.

The manufacturing savings comes from moving board assembly, electro mechanical integration and final configuration on tests for FLEX to the same outsourced site in China.

The savings should come in evenly over the next five or so quarters.

Our first FLEX shipment from this single site was on August 8, and now two-thirds of our FLEX shipments come from this single site.

This transition is on schedule and requires very significant planning and oversight to pull off.

We are unique in having this broader capability of board assembly to final configuration and tests in one low cost site.

In addition to the obvious benefits of lower material costs, this one site allows for more efficient manufacturing, less inventory, and lower shipping costs.

The other major initiative to get us to our model is continued SOC test share gains.

We need about 2 to 3 points of further SOC test share gains to achieve our model P&L.

Our trajectory of share gains over the past two years would suggest that this could occur over the next year or two.

Note for modeling purposes each point of SOC tests share gain improves our operating income rate by about 1 percentage point.

You should also note that while the SOC test market site has averaged about 3 billion a year, it has ranged between 2.6 billion and 3.4 billion over the last four years.

With this annual volatility our operating income rate would be expected to increase or decrease by about 1 percentage point for each $100 million annual swing in the market size.

While progress on the model is clearly important, we also recognize that the steady SOC test share gains are not enough to provide the necessary growth given the underlying growth rate in SOC tests, so 2007 will also be important in that we are continuing to make the long-term investments to access closely adjacent markets with differentiated products.

These investments are quite significant both in the level of spending currently and by the amount to which they increase our available market over each of the next three years.

We are investing aggressively for the mid term while steadily growing and improving our profitability nearer in.

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

Our third quarter gross margin percentage was 48.2% of sales, up from 47.5 in the prior quarter due primarily to lower manufacturing costs and slightly higher sales.

The product mix remains favorable as well.

R&D expenses were flat at $52.2 million or 17.4% of sales compared to $52.4 million or 18.2% of sales in the second quarter.

SG&A expenses were also flat at $62.9 million or 21% of sales as compared to $62.8 million or 21.7% of sales in the second quarter.

Our net interest income was $7.7 million, down from $9.2 million in the prior quarter due primarily to reposition our investment portfolio to shorter maturities which caused a $2 million accounting loss due to the increase in interest rates and also a lower average cash balance.

We had $4.7 million of income tax expense in the quarter.

Our quarter ending head count was 3,600 employees.

In past calls I have talked about a longer term tax rate of about 26 to 28% once we eliminate our evaluation allowance against our net deferred tax assets.

This remains our best estimate longer term, for next year 2008 we would expect to continue with a lower tax rate of about 15%.

In the third quarter semiconductor sales were 81% of the total and the system test group was 19%.

On a geographic basis our third quarter sales in descending percentage order broke down as follows--U.S.

19.3%, southeast Asia 17.2, Singapore 15.3, Europe 12.9, Korea 11.6, Japan 10.6, Taiwan 10.6, and rest of world 2.5%.

Our book-to-bill ratios for the third quarter were 0.91 for the overall Company, 0.89 for semiconductor tests, 1.0 for the system test group, at the end of the quarter our backlog stood at 317.5 million of which 80% 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--U.S.

22.5%, southeast Asia, 19.1, Taiwan, 15.2, Singapore 13.5, Europe, 10.5, Japan 9.5, Korea 9.2, and rest of world 0.5%.

Moving to the balance sheet, we ended the third quarter with cash and marketable securities of $748 million.

We used $176 million of cash in the quarter to repurchase approximately 11.4 million of our shares at an average price of $15.38.

Subsequent to quarter end we have repurchased approximately 4.2 million of our shares at an average price of $13.91 which completes our authorized share buyback program.

In total we have repurchased 27.9 million shares at an average price of $14.31 totaling $400 million.

This program lowered our outstanding shares by 14% leaving us with a balance of 173.6 million shares outstanding.

As we have just completed the authorized buyback, we will comment on our cash plans in our next conference call.

In the third quarter capital additions net of sales of related capital equipment were $12.6 million, depreciation and amortization for the third quarter was $22 million, including $5.6 million of stock-based compensation, accounts receivable stood at $231.6 million or 71 days sales outstanding.

This is nine days above our model of 62 days.

In short the nine-day increase is largely due to extended payment terms connected with some recent SOC test share gains.

These extended terms are backed by letters of credit.

We ended the quarter with product inventory of $91.9 million, up $3.8 million from the last quarter.

In the fourth quarter of 2007 as Mike mentioned, we expect sales to be between 250 million and $275 million with diluted earnings per share between $0.04 and $0.10.

We expect gross margins to be between 45 and 46%, R&D and SG&A expenses should be flat in dollars but up in percentages to between 19 and 21% and between 23 and 25% respectively.

We expect to be down about 10 million in inventory dollars and accounts receivable to be down also about 10 million.

In addition, we expect to spend 18 million or less on capital.

In the fourth quarter our depreciation and amortization should be around 22 million including 5 million of stock-based comp.

Our tax rate is expected to be about 10% in the fourth quarter.

Now I will turn the call over to Tom.

Thank you very much, Greg.

We would now like to open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is from Dave Duley with Merriman.

Good morning.

I was wondering if you could talk a little bit about the PC end market, specifically the graphics area, what you're seeing there, and where do you think you are gaining share in the SOC space?

Dave, it is Mike.

The PC and graphics space for us is a small piece of our market share, so it doesn't move the needle for us significantly.

We expect in the next quarter, this quarter for our business there to be up, but it is not big enough to be a standout.

In terms of segments where we're gaining share, it is a broad set of segments.

Automotive and power applications is one that stands out, digital TV is another one that stands out, and while we've got a large share position in RF, we've been able to expand that into adjoining spaces.

Those would be the largest three.

Okay.

One final thing from me is I think Sverige put out a new RF product, I think it's kind of geared at the higher end that marketplace.

What have you seen with that and what competitive responses would you expect?

Well, let me talk about what we're doing on that front, and that will touch upon what's happening on the competitive front.

We have a very significant position in the RF space.

We're participating and do business with 6 of the top 11 leading SOC/RF companies in the world.

So we've got a very greater than 50% market share position, and the adoption of our products there and the new products that we've introduced over the last year of our fourth generation of RF instrumentation on the FLEX and UltraFLEX system as you saw in the opening comments, that's been very substantial adoption, 100 systems out of the 300 we sold in the last six months plus another 40 plus upgrades.

So we're in pretty solid shape with those customers.

There are competitive offerings that are being offered, Sverige and other companies are offering RF instrumentation as an add-on to their existing systems, so obviously that intensifies the battle there.

As you probably know, each generation has a new one following it, we're doing some new product development in that area, and most of our customers, if not all of our customers at this point are aware of our new generation of RF that they'll be seeing in the future.

Thank you.

Your next question is from David Egan with Lehman Brothers.

Hi, guys.

Thanks for the call.

Just on a housekeeping note, the share count, where do you think the share count will be next quarter?

About 177 million would be the diluted shares for EPS purposes.

Okay.

Perfect.

And then I guess another housekeeping question.

In terms of R&D, I guess we expected it to pick up based upon your earlier comments in the year that R&D was going to be higher for some new product development.

Where are we in terms of that and how should we be thinking about that going forward?

I think you'll see the R&D will be about flat, and that extra spending is in the R&D numbers now for a near inadjacency.

So that, we shouldn't be thinking that the number will pick up any more from here?

No.

Okay.

Perfect.

And then the tax rate, could you repeat what you said?

Did you, because in prior conversations and in the conference call I believe what you were saying, and you said earlier that mid-year that the tax rate was going to pick up to 26 to 28, but you do say today now we should expect 15% through the entire year?

Correct.

2008 will be 15%.

The subsequent year it's more likely 26 to 28, and we'll keep you posted as we get a clearer view of that.

Okay.

Fantastic.

Then lastly, on that next gen RF product, could you give us a little more understanding of that, that is, is that more in terms of integrating RF onto UltraFLEX and what kind of timing are you expecting for that?

Dave, I won't comment on timing.

It is a fifth generation of RF capability.

All of our customers are aware of what we're doing on that front, and it is an expansion in parallelism and frequency.

Okay.

Thanks so much, guys.

Yes.

Your next question is from Chris Blansett with JPMorgan.

Hi, guys.

Thanks for taking my call.

Since you guys have completed your current share buyback program I noticed you haven't mentioned an announcement of a new one.

What should we expect for that going forward?

As we just completed this buyback program this very month, we will comment in our next conference call as to our plans on cash.

We're just not prepared at this point to do that.

Does that mean during the quarter we shouldn't expect any share buybacks?

That's correct.

Then based on your prior comments of when you would think about restructuring the balance sheet and your comments just earlier about the tax rate staying low next year, does that mean that this restructuring exercise is likely pushed out until '09?

Yes.

We would not look to be more aggressive on the balance sheet leverage until the tax rate was higher, but we would also consider other factors, for example where are we against our model profitability, what is the volatility of the industry, how are other companies positioned with cash, but that would be one of many factors we would look at.

And then kind of a last question here, specifically you indicated that utilization rates at the subcons are relatively flat and IDMs crept up a little bit.

Could you provide that data actually, and then, I mean what are you seeing now a month into the new quarter?

It is high 80s, low 90s.

There isn't a dramatic shift from when we talked last quarter.

It strengthened a little bit, but it is just very, very high levels across the product line.

I guess what I am trying to get at is at this time are your customers becoming much more active about utilizing the equipment more efficiently or is it just a matter of you just haven't seen the unit growth pull through yet as far as you can tell?

Quite frankly they're pressing their installed base for more and more as they try to keep a cap on their capital expenditures.

Then one last question actually.

On the LCD driver platform that you guys have talked about before, can we get a status update on that?

As I said last quarter, we're not going to comment about new products until they're introduced.

We're working with customers on that product in trials now.

That's as much as I can say at this point.

Thanks a lot, guys.

Appreciate it.

Your next question is from Nick Tishchenko with Global Crown Capital.

Good morning.

Thank you.

Two very short questions.

Number one, what are the current lead times for FLEX and the 750, and the second question is what was historical high and low share of revenues in terms of business?

Okay.

Lead times are six to eight weeks.

Let me just confirm.

That's correct.

They're pretty quick, five to seven, yes.

Put a band around 6 to 8 and you've captured all of the product lines.

On your question on turns, in semiconductor the turns this quarter were 44%.

If you look back over time the range tends to be 40 to 46%, in that neighborhood.

Some of our other businesses have much higher turns business as well.

In what degree you accounted for turns business upside in turns business in your guidance for December quarter?

We assumed a relatively consistent assumption based upon what we've seen in the average there.

We did not put any extra increase in there or any decrease assuming either higher or lower turns.

We just assumed the average.

Thank you very much.

Your next question is from Mehdi Hosseini with FBR.

Yes.

Thanks for taking my question.

A couple of questions regarding your commentary on getting into new businesses and you brought up the parallel test.

Can you comment on what your strategy is exactly in giving to parallel tests and then where are we on your entry into memory?

Mehdi, no comment on the memory side.

Obviously a part of our future investment is in the memory space, but I can't give you any details on where the magnitude of that or the timing.

Are we looking at the 2009/2010 or would it be sooner?

It is a multi-year program, so it is out in that time frame.

Should we expect to hear more in 2008?

I think you'll only hear from us on the subject when we have products and customers on that front, but your question on parallel tests, say a little more on that or maybe I can--.

When you talk about parallel tests, the first thing that comes to my mind is basically doing more tests on the wafer which could essentially reduce your addressable market, so help us understand what exactly you mean by parallel tests.

Well, we mean having an architecture that is scalable so that customers can get a multiple of what they're currently testing.

For the final test or is it on the wafer test?

It is both.

On the wafer test what is the strategy for the probing?

What's the strategy for probing?

The strategy for probing is similar to final test, and that is that if customers are currently at 2, architecture, pin counts, et cetera, and the DSP architecture of the products allow customer to say get a very high effective throughput by moving let's say to 4 and parallel.

Let me give some quick numbers.

If a customer bought a tester from us for $1 million for a single sight but then wanted to go to a dual site, they would have to put extra instrumentation in the system, and that would probably sell for close to 1.7.

The customer certainty gets the benefit, but it is not 2 to 1 from us, but they get a benefit, but then they also get to leverage their other equipment in the test cells, so the savings can add up to a customer as they don't need to buy multiple pieces of other equipment.

It doesn't mean that eventually you will be collaborating more with some of the probe companies that are trying to get into the parallel test under wafer?

I don't believe so.

Not in the SOC test area.

Okay.

Just one final question.

As the new realities of the lower growth rate for SOC becomes more of a consensus, any chance of consolidation?

Is this going to be the final straw to push some of you guys to consolidate?

Well, if the growth rates that are being experienced in 2007 which are five and six-year lows in units and in devices, that obviously puts pressure on the total market.

That presses, consolidation is one of the potential outcomes because of that pressure.

In terms of consolidation, if you come back, consolidation works in this market if you can get healthy players combining if there is growth potential and if there is a high degree of complementarity versus conflict so that you don't give away the gains that you get through the combination.

That's been the hurdle in the industry.

It remains the hurdle.

That will be the most challenging aspect if M&A is a result of the compression.

Good.

Your next question comes from Satya Kumar with Credit Suisse.

Thanks for taking my question.

I just want to understand the turns business expectations once again.

You said you were not assuming any changes in the average turns business but looks like looking at your customer's businesses and the like, they are actually strengthening some more into Q4.

What's the possibility that you're perhaps being on the conservative side here in terms of your outlook for Q4?

I guess that possibility could always exist.

Let me just give some quick numbers.

Last quarter 44% of semiconductor test bookings were booked and shipped in the same quarter.

If you go back over a handful of quarters, the range of that is 40 to 46.

I haven't seen a range of 40 to 70 or 40 to 60.

There might be a little bit of upside or maybe there is some new indicator that you're seeing that we just haven't seen or factored in.

We have just picked a number that's in the middle of the range for our turns assumption.

What is the last point in the quarter?

I guess if you get an order end of November, is that still shippable at the end of the quarter?

Yes, unless it has very unusual configuration, the answer is yes.

I have a bigger picture question.

I short of share your belief that SOC business is growing slower this year than any years in the past but again, I guess I am not sure I agree with the conclusion that if that is the only reason for a secular decline and test the CapEx because it seems like in off years when you had higher semi growth it did not actually result in higher test (inaudible) growth.

If there is a risk that we might be in a secularly declining test CapEx and the cycles are getting more muted and becoming maybe perhaps more seasonal than cyclical, why should Teradyne not be thinking also about the potential to lower the break even further and in that case we sort of eliminate or offset the impact of secular simply to have higher earnings growth?

We're constantly looking at ways to improve productivity, lower break even.

And there are many initiatives that we have here that are tracked, executed against, and some of them are the gross margin improvement plan that we've mentioned that will bring in 1 point, 1.5 points of improved gross margin, that in turn lowers break even, so there are a set of actions that are in place.

The thing that we aren't willing to give up on though is we have very significant investments, very significant in longer term growth adjacencies, and we see the bigger issue is growth and we could get to model profitability a lot faster, or we could get there over some number of quarters and then have the upside of a much larger available market with products that have differentiation, so we clearly are playing it that way.

What is your break even right now?

It ranges between, the way we calculate it, it ranges between 240 million and $250 million.

We do that at the operating income line, so we don't include interest income or taxes.

For modeling purposes I should think that break even remains the same through the rest of next year?

We'll talk more about that at the next call, but seeing some of the changes we've talked about, I think you might expect it could go down a little, but we'll talk more about that next call.

One final question.

Can you update us on what you think is the appropriate level of cash for Teradyne to run the business?

It is a very wide range.

I think 300 million, 700 million is a wide range, but I think in that range that is reasonable.

You have to keep in mind that we are not at our model profitability and we're in a very volatile industry.

Having said that we could operate with less cash if we chose to.

Thank you.

Your next committee is from Jim Covello with Goldman Sachs.

A lot of the stuff has already been covered, but I have a big picture question from the standpoint of do you think there is anything else that you guys need to be doing structurally to get to where your competitors are profitability-wise?

So from a structural profitability perspective do you think the initiatives, the growth initiatives in the memory space or RF space and the restructuring initiatives on the manufacturing side are enough to eventually get you there or do you think you are going to have to take incremental steps given your profitability versus your most profitable competitors?

Jim, except for what Greg just talked about which is this continuation here of productivity and off-shore manufacturing, et cetera, and that is going to give us some additional break even progress next year.

The answer to your question is, no, we don't think that we should be doing anything structurally.

The bet we're making is the long term bet to invest more heavily now in these, outside the SOC, outside the core SOC space because the present value of that overwhelms any cuts we could make.

At the same time we haven't said, well, we're going to give up on any progress.

The progress we have made on the top line on the share side, on the assumption that we're not going to get an uplift from the market there.

That continues and the progress on the cost and structure side of this also continues.

The two levers of cost and some incremental gain in share in the central space get to us improve profitability.

At the same time, we could get there faster, but we're just not going to do that, and not invest in these longer term plays.

I certainly understand and agree with the idea that it is better to grow than just to cut.

That said, I think you guys have acknowledged it is proving challenging to make real inroads into the memory market because the competitors there are pretty well entrenched.

Is there a point at which you guys would say, look, this isn't working, and we need to think about going in the other direction or what kind of sign post should we look at?

We're talking about 2009, 2010 as it is, but is there sign posts along the way which you guys are going to be looking for that tells you, yes, we can get there versus even though we know this is a better strategy, it is just not going to work?

The sign posts will be very visible to us and less visible to you for awhile, but the sign posts would be are we getting the depth of engagement with some lead customers in the development and process, and if we see that flagging, then we would be looking for different ponds to play in.

That's going to be the leading indicator for us.

That's helpful.

Then final question relative to that.

Is your value add in the memory space going to be throughput, costs, or both?

Well, high.

Sorry.

The performance issues in the memory space, and there are multiple segments in the memory space.

So we're intending to, as we make investments there to look and work closely with lead customers.

Are there performance characteristics that we can build into and leverage off our existing FLEX architectures.

That's the way we would come at it and FLEX brings to the table cost of test, parallelism, advantages in the SOC space.

We try to leverage those into memory if we find a space in there.

Thank you very much.

Your next question is from Tom Diffely with Merrill Lynch.

Good morning.

Earlier you talked about the utilization rates being in the 80, 90% range.

Low 90s.

Is there a practical limit that you see for utilization rates, or is it possible to squeeze another 10% efficiencies out?

I don't think they can squeeze 10% more.

I think what breaks it is that they see their forecast ticks up a little bit and then they just need to start ordering.

I think they're about at the limit, could they go to 92, 93 maybe, but they're close to the limit.

If they see a tick up in unit growth they'll be ordering.

Is this level today at historical peak then for utilization rates as you track them?

Yes.

It is very close to the prior peaks, yes.

Quickly you talked about the interest income coming down a bit.

Was that just due to the lower cash balance or is something else going on there?

Well, we believe interest rates would be increasing, so we shortened our portfolio to take advantage of that, and that has worked to our favor, but in doing that you take an accounting loss but then you can reinvest the money in higher interest rate securities.

There is really no economic consequence.

It is just an accounting event.

Great.

Thank you.

Your next question is from Steve Balog with Cedar Creek Management.

On the program to move manufacturing to China, could you expand on it a little bit more?

Specifically what are you moving and from where?

What risks are involved there and what are you doing to control that?

And are we left with excess capacity in the United States?

First we have moved FLEX and MicroFLEX starting as of August 8, and now as we sit here today two-thirds of all of our FLEX shipments come from a single site.

UltraFLEX will go early 2008.

That's a more complex product.

Some of the work that had been done in the U.S.

was already at Solectron, a site in North Carolina.

The work that happened in North Redding, Teradyne's location was the final configuration and test.

That area at some point will be less of use.

We still will have new product introduction as well as new products in new markets introduced here at Teradyne first, but the footprint we need at Teradyne is reduced.

That in fact will help us sell a building and squeeze into this campus, give us some facility savings as a result of that.

To get to the real thrust of your question the way we've managed this is our operating team, very senior, very confident folks, have taken people from Solectron, brought them back, trained them on our equipment.

We have our people there, on their site, overseeing the work.

It is constant, and we make huge investments.

We're probably spending $1 million a quarter extra costs to make sure that we have enough people flying back and forth to train the Solectron folks on using this highly complex equipment.

We also recruit the people as well, make sure that we're satisfied that they're hiring the right people.

It is a huge effort and it has gone very well.

Steve, the shorthand, though, is we're not going to have excess space here, we'll consolidate into a smaller footprint, number one, and number two, the actual head count in manufacturing personnel inside Teradyne that's domestic is going to be a very -- it is under 50.

Okay.

Thanks.

Your next question is from Timothy Arcuri with Citi.

As I look at the world (inaudible) data so I graph it now every month going back I guess 15 years now, 16 years, there is a pretty clear secular decline.

We have lower peaks, and I guess the most obvious area was that in this most recent upturn if you look at the SOC buy rate, we only ever got to about 1.7% on kind of a monthly basis, and in '04 we got near 3% which was the same thing that we had done the prior cycle, so it seems like something -- you're kind of troughing at the same level, but you're peaking certainly in this recent kind of mini upturn much -- at a much lower buy right than what happened in '03 or '06, so what particularly happened this time?

Are the subcons acting that much differently because it just seems like a huge difference?

I think the big difference is in our customers, revenue, and units.

It is the growth rate there, the one standout issue is the growth rate there is dramatically different in '07 than it has been in the last five years, and when they're faced with that, they are obviously just reeling it in.

The total buy rate, I agree with you, the buy rate so far in this up cycle has still, against historical measurements, it still has a lot left to go if it is going to get back to that level.

It has only been as you said in the 1.3 to 1.6 level this year.

So I agree that if that stayed, then you would have a lower buy rate and you'd have a lower market than the average of $3 billion which you have over the last four years.

I guess I am not sure, Mike, that I see that the unit growth rate of the industry slowed.

If you look at the unit at semiconductor unit sales as reported by the SIA, there really hasn't been a significant slowdown in that.

Units have been pretty strong.

Are you looking at SOC only?

I am looking at semiconductor units, yes.

No, you should look -- break it between memory and SOC, and the difference here is that the memory unit growth has been strong, and the comparison, though, to SOC for this year in '07 is dramatically off the trend line.

Yes.

Okay.

I think the real question everyone is facing is, well, is that going to revert back to the normal unit growth rate.

If it does, the buy rate comes back.

And there is nothing that we hear from customers that says to us that there is a new level of unit growth in SOC.

They all see that '07 was a off the trend line year, they are all talking about a whole bunch of new products and they're bullish about the unit growth that they're going to see in '08, but if it stayed low, I think your point would be right, that you'd have a different threshold here for CapEx in the SOC space.

Yes.

I think what's probably happening there is there is a mix shift to the lagging edge in the SOC space, but I guess my other question is why this quarter why wouldn't you do a buyback?

I understand that you just finished the authorization, but is there something strategic, some potential acquisition, some review, something that's preventing you from actually doing a buyback this quarter?

Because if you look at your cash levels, there is only one Company that at least I cover that has more cash as a percent of their market cap today.

So I am wondering if there is something that you're not alluding to that is preventing you from actually buying back stock?

We don't want you reading anything in at this point.

We're just going to come forward as we work with our Board on what we do next.

Okay.

Okay.

And then I guess last thing, Mike, it seems like the new products are kind of -- it seems like every quarter they kind of push out a little bit in terms of the timing of them, and I am wondering what specifically the issue is with the new products?

Is it that they're kind of ahead of their time and they're kind of the product waiting for the market to catch up to them?

What's the issue?

Well, you mentioned that last quarter when we talked, and let me try to recap the score on that.

The new products that we've introduced the year, the 750 EX4, the microcontroller space, digital applications, and for image sensor, on schedule, adopted by customers, full speed ahead.

We said we have an LCD product.

A year ago we had some work around resetting the performance feature set for the target customers on that because of unique requirements they had, so we did have a reset in that space, about nine to twelve months ago.

Since then we've been on schedule, and we're in the trial phase of that far product now.

So looking back, you would say, yes, we did have a reset, and that's about a year ago.

Your next question comes from Steven Pelayo with HSBC.

Mike, I am trying to think a little bit about next year, Teradyne's growth opportunities in the organic or inorganic.

You're talking about a slower industry growth environment, a zero growth environment, market size that's ranging from 2.6 to 3.4.

What are you assuming for industry growth next year or buy rate assumptions for next year?

And then if you could talk a little bit about the inorganic stuff.

It sounds like you mentioned you're on a trajectory to gain a couple of points of market share over the next year or so at $3 billion levels are you thinking about [60 million] in organic market share gain next year?

In inorganic?

Okay.

What we need to do to grow and get to model profitability here is 2 to 3 more points of share over the next couple of years.

That on a $3 billion market, and when we say 3 billion we're just using the average market size over the last few years.

If the market goes down obviously we have got to get more than 2 or 3 points.

We're not building our plan around a growth rate assumption in the overall ATE/SOC market.

So the way we work it is we say we have got to get somewhere between 50 million and $100 million of new business that we win, straight out win in the course of a year.

Now, you would say that should be 3 points of share gain.

No one has an undefeated season.

We don't either.

When we think about it we think we have got to get $2 of wins because there is compression and there's competitive things we don't win.

So if we do that and continue on that pace over the next year-and-a-half to two years we'll be where we need to be in market share, and the track record over the last two years is -- supports that we should be able to do that as we fan out the FLEX and the J-750 product.

You asked about inorganic.

Did you mean by inorganic new market?

The industry growth organic means pure industry growth, inorganic means market share gains and new markets, anything doing something different if you will.

Your industry growth is just going to feel like whatever it may be, actually going off with individual design sockets and specific products, and it sounds like you're talking about $100 million over the next couple of years.

Yes.

In your definition of inorganic as we move -- if you think about the new product set in the J-750, we've got an image sensor product, a microcontroller product, and an LCD product coming.

The image sensor product we've got 70% plus share.

That would be principally a market share hold product, maybe a little upside.

I would say that is kind of a 90/10 meaning 90% to preserve, 10% to expand.

Microcontroller and digital side, that's more like 75/25, and the LCD space which is about a 250 million to $300 million market is a 0 hold 100% new opportunity.

That's where our "inorganic" growth will come from and contribute to this share gain requirement that we've got in the next year.

We can get 10% market penetration in that.

That's 25 million to $30 million a year.

If we can get 20, it's double that, et cetera.

That would be one of the levers that contribute.

Last question on the non-semi test side, you were running kind of a 40 million, $45 million a quarter in revenue on the system test business for quite a long time and looks like you stepped up into the mid-50s and you're talking about flat for the next quarter.

Is this a new higher, sustainable level we should be thinking about, 200 million plus annually for the systems business?

Yes.

The 55 is more sustainable.

We would expect to grow that into 2008.

It may bounce back down for a quarter, but over time you will see 55 will be a low base, and we'll be moving that up over time.

Thanks a lot, Greg.

Okay.

Your next question is a follow-up question from the line of Dave Duley with Merriman.

Yes, one final question from me is last quarter you described the outlook I think as murky, and we ended up having order rates down 11% total and down 16% in semi test.

You used those same kind of descriptive words so I am assuming that orders will be down again in December.

I am just wondering if you feel that December would be the bottom?

Well, we can't look out beyond.

All I can give you is the climate from our customers.

The tightness here says that that's clearly a short-term issue for them.

They're very explicit on that, trying not to buy much, so any upsurge is not in the tone of their voices.

Beyond that point as they get through the fourth quarter bulge, they would -- they're anticipating they get relief on unit and dollar volume in the first quarter, so you could see this level of business going out for a couple of quarters is the way I would think about it.

That would mean more flattish orders, then?

That's the directional signal we're getting from them.

Thank you.

Operator, we'll take one last call, please.

Certainly.

The last question will come from Mehdi Hosseini with FBR.

Thank you.

Mike, want to go back some of the opportunities you're working on.

Several years ago there were companies that were trying to promote their built-in self test as a means to lower the total cost to test and recently I have been hearing more about it.

What's your view on it and whether this is an area where you can leverage some of the software development to your favor or to your advantage?

Well, I think of built-in self tests as one of the many things that test companies are working with our customers on, and it is a, one of the elements that contributes to the productivity increases, and so as we work with our partners and with our customers on this, it is one of the levers, Mehdi, but it is not the silver bullet.

It is something that all customers are doing and we're developing with them.

There hasn't been any resurgence or any change, is that what you're saying?

There is a steady amount of activity.

I would not say that this has been any uptick or down tick noticeable to me.

Thank you.

Thanks, everyone.

We'll talk to you again next quarter.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.