泰瑞達 (TER) 2007 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Teradyne fourth 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.

Tom Newman, you may begin your conference.

Thank you, Kate.

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

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

Following our opening remarks, we'll provide you with details of our performance for the fourth quarter of 2007 and for our 2007 fiscal year as well as our outlook for the first quarter of 2008.

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

The press release containing our most recent financial results was sent out by business wire yesterday evening.

In addition, a joint press release from Teradyne and Nextest Systems Corporation was issued today before the market opened regarding the closure of Teradyne's tender offer for the shares of Nextest.

Both press releases are 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 that may be helpful to you in following the discussion.

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

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

A phone replay number in the U.S.

and Canada is 800-642-1687.

Outside the U.S.

and Canada, the number is 706-645-9291.

The passcode for both numbers is 30479782.

A web replay will also be available.

You'll find it by going to www.teradyne.com and clicking on investors.

The replays will be available along with the slides through the seventh of February.

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

Such statements involve risks and uncertainties.

Actual results may 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 some reference to nonGAAP financial measures.

We have posted additional information concerning these nonGAAP financial measures including reconciliation to the most directly comparable GAAP financial measure where available on the website.

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

Also you may want to note that between now and our next conference call, Teradyne will be participating in an Oppenheimer sponsored lunch in New York on January 30th.

The CIBC or Oppenheimer tech conference in Veil, Colorado on February 21st and 22nd.

And the Goldman Sachs tech conference in Las Vegas, Nevada on February 26th and 28th.

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 fourth quarter 2007 and for our fiscal year 2007 and will provide guidance for Q1 of 2008.

Then our Vice President, Treasurer and CFO, Greg Beecher will provide more details of our financial performance for the fourth quarter for our fiscal year and on our guidance for Q1 of 2008.

We will then answer your questions.

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

Mike?

Thank you, Tom.

Good morning everyone.

I'd like to cover three things with you today.

First, a summary of 2007 including a progress report on the important initiatives undertaken this past year.

This will of course include results from this most recent quarter.

Second a preview of some new products that have begun shipping and what our expectations for those products are in 2008.

And third an outline of how the Nextest acquisition when coupled with the final stage of our manufacturing transfers to Asia and other costs and productivity gains will improve our overall financial structure this coming year.

As I'm sure you've read this morning, we completed our tender offer for Nextest shares at midnight last night, signifying that we had more than 90% ownership of the outstanding shares.

So let me officially welcome any Nextest employees and customers to this morning's call.

Our nonGAAP guidance therefore for the first quarter of 2008 which includes Nextest is for sales to be between $285 million and $305 million with diluted earnings per share between $0.09 and $0.13.

I'm going to leave the specific Q4 and Q1 details to Greg, but despite an overall lack luster market in the fourth quarter with system orders down in both our semi-test and system test businesses, we're raising the mid-point of our first quarter revenue guidance $10 million from our fourth quarter revenue level.

That's before the addition of revenue from Nextest.

Now while it's only a modest increase, it nonetheless reflects some short term SOC test demand patterns that warrant such a move.

It's too early to say much more than that, but it's a favorable development from the intensive design end work we've been doing during these last six months when capacity-driven demand has been soft.

Now our overall results in 2007 are better than we had in a similarly sized marked two years ago.

But our mid-cycle results still need to improve by four or five points.

So I'll talk more on how we're going to make significant progress on that front in a minute.

It's important to note that in that same two year period our top line has out performed the overall market.

In 2006 the SOC market grew 22% and we grew revenues 34%.

In this past year when the market declined 24%, our sales fell 19%.

The net of all this is a share gain of almost five points over the two year period, higher than anyone else in this space.

I know you hear from various sources every quarter about share shifts, and it's a subject we obviously watch very carefully, but you have to have a broader reference than one quarter or one site sale or one socket design in to keep an objective view.

And we're very pleased with this momentum despite intense competition in all of our markets.

The share gains in 2007 came as we had a record year in FLEX system bookings with over 500 units sold.

We've made headway this past year in a variety of segments like base band, automotive, digital tv and power management ICs, and we've got strong positions in wireless, image sensors and micro controllers.

With over 1600 FLEX systems and over 2600 J750 systems sold, we've got a very solid install base around the globe with approximately 75% of our test systems in Asia.

Which brings me to my second point.

What's happening in the new product front and how I expect that to factor into this coming year.

We have five major new products rolling out this year.

Four of the five are installed with customers now, although only one has contributed to our revenue in share growth in 2007.

That one is the next generation version of the J750 for micro controllers, it's called a J750 EX.

The next product is a new imaging processing tester, the third one is a J750 base system for LCD driver tests, fourth is a smaller high density version of the UltraFLEX and fifth is a major new 12 gigahertz RF subsystem for the UltraFLEX called [Epsilon].

This last product represents an important differentiated capability for the high growth wireless market segment where we have a strong position.

And it'll be sold with new systems as well as an add-on to our installed base of UltraFLEX systems.

As I said we have installations at key customers for three of the system level products as well as for the Epsilon subsystem.

And all five of these new products will ramp through this year.

As all these products ramp, we're estimating that they'll contribute $150 million to $200 million in revenue this year.

Now some of these sales will strengthen existing positions in the market, but others will enable to us go after new sockets or entirely new customers.

I expect about a third of that dollar total to be into new share gain areas and the rest to maintain our existing share positions.

In total, 2008 will be a significant year for this pipeline of new offerings into the SOC market.

Finally our acquisition of Nextest is significant in two ways.

First is the obvious thrust into memory tests where we believe the Magnum product and the design team behind it offer a very flexible and low cost approach for flash memory testing.

We plan to back their efforts with some design talent of our own as well as to supplement the local applications engineering work force close to their customers.

Our bid is that by doing this, we can accelerate the Magnum product growth over the next few years.

But second, during this year, we'll be able to reduce some of our own spending that's been earmarked for this space.

When you couple those savings with the roll off in R&D from the new product launches, our FLEX manufacturing transfers to China, plus a set of smaller moves, we expect to be able to make further substantial progress on our nonGAAP operating break even this year, hitting our model profit level by year end.

Greg will take you through those numbers in a minute.

So the starting chapter on 2008 is, very good market share momentum the last two years in SOC tests, a broad set of new products to keep that momentum going, an innovative system for Nextest and flash memory tests that can grow faster with our backing.

And finally steady gains in our financial model.

Now let me turn things over to Greg for a more in depth financial perspective.

Thanks, Mike, and good morning everyone.

Before I provide an update on our financial results and outlook, I'd like to first join Mike in expressing how pleased we are with the results of the Nextest tender offer.

As described in our release early this morning, we acquired over 90% of Nextest outstanding shares in a tender that closed last night.

We'll promptly acquire the remaining shares using a short form merger.

The Nextest Magnum product will be a very important part of our growth plan.

We expect the acquisition to be slightly dilutive in 2008 on a GAAP basis and slightly accretive in 2008 on a nonGAAP basis, that is after excluding the impacts from purchase accounting.

Now back to the financial highlights.

Our fourth quarter sales of $260.4 million were down 13% from the prior quarter, while earnings from continuing operations totaled $0.10 on a GAAP basis and $0.09 on a nonGAAP basis, both of which benefited about $0.02 from tax true-ups.

For the full year, our sales totaled approximately $1.1 billion and our earnings per share from continuing operations was $0.39 cents on a GAAP basis and $0.45 on a nonGAAP basis.

For comparative purposes, our 2006 sales were approximately $1.4 billion and our earnings per share from continuing operations was $1.06 on a GAAP basis and $0.90 on a nonGAAP basis.

The single biggest factor to our 2007 results versus 2006 was the expected cyclical SOC test market falloff from $3.4 billion in 2006 to about $2.6 billion in 2007.

As Mike commented, our SOC test business declined 19% in 2007 while the overall SOC test market declined 24%.

So our falloff was less than the overall market, and that was due to our 2007 SOC test share gains.

Now while our SOC test operating profit has improved by about 10 points from two years ago when the market was of a similar size, we are about five points short of our 15% over the cycle operating model as we end 2007.

We intend to achieve model operating profits of 15% by the end of 2008 through the following steps: First, we will lower our quarterly nonGAAP operating break even levels by about $20 million or more a quarter by year end.

I'll explain this in a minute.

Second we will be introducing a new set of products that Mike talked about in 2008 that should contribute $150 million to $200 million in sales of which a third is targeted at new socket wins.

And third we plan on growing the Magnum flash memory test sales from about $70 million to about $100 million a year.

Now let me give you some details on the break even reductions.

First the planned 2008 operating break even reductions are quite significant and will affect all lines in our P&L.

We have very detailed plans throughout the Company to achieve these gains.

Let me start with gross margins.

We'll complete our manufacturing transfers to China by the third quarter spot on schedule with what we described in the past.

This means that essentially all of our FLEX and J750 products will be produced in an integrated line at FLEXtronics in Suzhou, China.

The line starts with board assembly and ends at final configuration and test.

We will be unique in having this end-to-end capability in one low cost outsource site.

Our 2008 new product offerings will also improve gross margins.

In R&D the improvements will come from a reduced run rate of new product investments stemming from the five products that Mike outlined, and of course from the synergies from the acquisition of Nextest.

In SG&A, the improvements come from a lot of actions such as lower insurance costs, lower real estate costs, less IT spending and so on, all of which add up.

To summarize, between now and the end of the year, we expect to lower our nonGAAP operating break even level by $20 million or more per quarter from these initiatives.

Of course combining Nextest with Teradyne brings our break even level up by a similar amount.

So the very positive net effect is we will fold an established flash memory test business into our P&L with no increases in our operating break even by year end.

So what does this all mean to our model?

Well with Nextest and excluding purchase accounting adjustments, our model would be for gross margins of 50%, operating expenses of 35% and PBIT at 15%.

As we've described previously, this PBIT figure includes stock-based compensation expenses.

This overall model is generally consistent with our long term model that we've talked about in the past.

The bottom line is we're planning on going from our average profit rate of about 10% currently to 15% by the end of 2008.

Now let me take you through some of the details of the fourth quarter and then our guidance for the first quarter of 2008, which will include Nextest from January 24th through the end of the quarter.

Our fourth quarter gross margin percentage was 45.5% of sales, down from 48.2% in the prior quarter, due primarily to lower volume and less favorable product mix.

R&D expenses were $50.4 million or 19.4% of sales compared to $52.2 million or 17.4% of sales in the third quarter due primarily to lower variable compensation.

SG&A expenses were $62.2 million or 23.9% of sales as compared to $62.9 million or 21% of sales in the third quarter also due to lower variable compensation.

Our net interest income was $8.7 million, up from $7.7 million in the prior quarter.

We had $2.2 million of income tax benefits in the quarter due primarily to foreign and state tax true-ups.

Our quarter ending headcount was approximately 3600 employees.

In the fourth quarter, semiconductor sales were 80% of the total and the system test group was 20%.

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

24%, Europe 10%, Japan 13%, rest of Asia 48%, rest of world 5%.

Our book-to-bill ratios for the fourth quarter were 1.08 for the overall Company, 1.06 for semiconductor tests and 1.18 for the system tests group.

The semiconductor test product bookings of $164 million were down 11% from the prior quarter, while the semiconductor service bookings of 56% were up 76% from the prior quarter.

At the end of the quarter, our backlog stood at $339 million of which 81% is scheduled to ship within the next six months.

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

27%, Europe 15%, Japan 12%, rest of Asia 46% and rest of world 0%.

Now moving to the balance sheet.

We ended the fourth quarter with cash and marketable securities of $743 million.

During the quarter we authorized another $400 million stock buy back program against this new authorization, we used $11 million of cash in the quarter to repurchase approximately 1 million shares at an average price of $11.66.

Our buying was stopped during the quarter due to the Nextest acquisition discussions.

In the fourth quarter, capital additions net of sales of related capital equipment were $15 million, depreciation and amortization for the fourth quarter was $20 million, this includes $3.8 million of stock-based compensation, accounts receivable stood at $190 million or 66 days sales outstanding an improvement of five days over the prior quarter.

We ended the quarter with product inventory of $80 million down $12 million from the last quarter.

Our first quarter guidance includes Nextest results from today through the end of the quarter.

In the first quarter 2008, as Mike mentioned, we expect nonGAAP sales between $285 million and $305 million with nonGAAP diluted earnings per share between $0.09 and $0.13.

Note that this nonGAAP guidance excludes the purchase accounting adjustments such as the elimination of deferred revenue that would otherwise be recognizable in the first quarter, but for the purchase accounting rules, the amortization of acquired identifiable intangibles, any inventory step up or possible in-process R&D charge.

Lastly it also excludes some modest restructuring charges.

Now, turning to the P&L details.

We expect nonGAAP gross margins to be about 47%, plus or minus 0.5 point.

R&D and SG&A will be up slightly due to the Nextest acquisition and should run between 18% and 19% and between 21% and 23% respectively.

Our tax rate is expected to be about 17% in 2008, slightly higher than previously mentioned, due to the impact of Nextest.

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

Kate, we'd like to take questions now.

(OPERATOR INSTRUCTIONS).

Your first question comes from Chris Blansett from JPMorgan.

Hi guys.

Good morning.

Mr.

Blansett your line is open.

I'll move onto the next question, one moment please.

Your next question is from David Egan from Lehman Brothers.

Thanks for all the details today, and congratulations on getting that deal done so quickly.

I guess the first question, I guess, the one that I'm working through based upon what you, what you guided to and talked about in terms of your model, and I just wanted to make sure that I understood this, so you're saying that you had core-- you're existing business right now, if I make this assumption that your average revenues were around $275 million over cycle, you add $25 million Nextest, $50 million to $60 million from the new products that get you to let's just say $350 million revenues on average, is that about right?

Is that how we should think about this?

Well that's very close, we use $340 million, but you're close enough.

Okay and then given those numbers that OpEx then would be something like $120 million to $122.5 million, is that where you're targeting?

Little less, we'll be targeting closer to about $118 million.

$118 million.

Okay, so you're thinking, I didn't do this then, but that your EPS is going to be something like, well over a $1, maybe $1.10 is what you think the normalized number is?

The normalized number would be $1 or just over a $1.

So you got that right.

Okay, now getting into some of the new products, how much of this, if you were to break it down and talk about the new products that you're looking at, how much of it is going to come from the micro controller and the LCD driver and how much of it's coming from the high density UltraFLEX and the Epsilon?

Dave, we are not breaking that down at this point.

Obviously, the LCD product is brand new into a new market.

The others are complimentary into spaces that we currently are, but we're estimating a lot of this depends on how big the overall market is.

So our estimate is we can get as I said $150 to $200 million in those.

But we're not, at this point, going to break those down.

As we go through the year and we get some resolution on it, we may start to give some disclosure around how-- the velocity in each one of the products.

I guess the color that I was looking for is, would it be fair to say that the UltraFLEX and the Epsilon is more towards existing market in defending share, maybe trying to get a little bit, but the other ones are, say like the LCD driver is new virgin territory?

Yes, the-- right, I'd put a spectrum and at one end of the spectrum would be total green field and you'd put the LCD driver at that end.

At the other end of the spectrum actually I would put the image sensor product.

Because that product is where we have the highest market share.

I'd put the others in the middle because they'll- obviously a big piece on the wireless and on micro controllers is holding what we have.

But there's enough differentiation there on new performance that we think there'll be offensive plays with those products as well.

But the reason I put that all into one batch is saying we think about 1/3 of the total amount will be market share shifts, was to try to give some estimate on what might move here on the new, on the new socket side.

Okay, and in terms of that, that market size and this $150 million to $200 million and the 1/3, how much of that depends upon the market being better in 2008 than it was in 2007?

All of this is a bit of a crystal ball at this point.

The way we thought about this is to say that the market would be a little bit better next year, 5% to 10% better in total.

Not that it would be exploding and that this would-- the new products aren't going to be depending that much on overall market rebound.

So we're doing it in the context of a, I'll say a sub $3 billion market.

Okay, very good.

And one last question and I'll, I'll go away.

The strength that you're seeing right now, what didn't show up in your orders for 4Q, so that's something you're seeing right now?

Is that correct?

And is that primarily related to a couple wireless customers or is that beyond that?

Well it was, as we said a lackluster Q4 on the systems side, it's just that the early demand as we enter the year is, has picked up.

It's quite broad.

If you thought about segments, we're expecting some strength in RF and automotive and some other consumer applications like hard disc drive.

So, it's sprinkled, so-- it's so broad, there's no single thing that's going to push it.

Thank you.

Yes.

Your next question is from Dave Duley from Merriman.

Yes, good morning.

Could you talk a little bit about on the new product front, what's going on with this new Epsilon product?

Did you say that it was already out in beta?

And is this the product that should be able to test a converged RF SOC products that will show very rapid growth in the RF segment?

Right, Dave, this is a subsystem product.

So this goes into existing installed systems as well as into new ones including this high density system in the UltraFLEX line that we're also going to have this year.

We've got, the reason it's called Epsilon, it's a fifth generation product.

But it-- so we've got a very solid share position now in the RF space.

This is obviously to try to make sure that we keep that and then expand the footprint going forward.

But the real calling card is that it's obviously got a much wider frequency range than our current products or some of the others that are in the market right now, but under the covers, there's some very interesting architectural elements to it.

There's what we call a universal pin capability, so it's-- everything is, is full performance on every pin of the option.

So you don't have to make trade-offs and configure your system in, in order to get very high parallelism as well as to get high performance.

I could wax on this for awhile, but that's the bottom line.

It's a much more powerful, frequency, flexibility and therefore, cost to test product than we have and that we think others are offering at this point.

So if I heard that then,any pin can test RF or more traditional stuff at any time, so it's completely configurable pin-by-pin?

It's just that the different ports require different capabilities and you don't have to make any kind of careful trade-offs as to how you configure the system.

It's a very, it's sort-- think of it as universal pin RF capability.

Okay, and it's true there's a new segment in the RF market besides your traditional RF market that's very high end converged testing that this product line can address?

Yes, we've been testing those parts already with our fourth generation, but this is a step-up in performance, and it will handle both more complex parts with, that have all of these variety of ports, but it'll also configure in a way that does that with the maximum parallelism.

We think there's going to be a real difference in what people can do in multi-device testing.

Okay then on your guidance statements could you, and you mentioned it earlier, but I just wanted you to maybe elaborate a little bit more, talk about what is the direction of the core business?

And then what is, what is kind of being added by Next in your guidance statements on revenue?

Okay, this is Greg.

The core business, as Mike mentioned before, is up about $10 million.

This past quarter we were at 260 in the fourth quarter.

And the core business by itself has gotten us to the mid-point of our guidance of, without Nextest, would be 270, so there's $10 million there.

Nextest we're adding $25 million and that's from January 24th forward.

The Nextest business this quarter, if I could, the entire calendar quarter, which we cannot count because we didn't own-- have control of them prior to January 24th, they're looking closer to about $30 million maybe a little more than $30 million this quarter.

So they're off to a strong start.

Okay, and when I look at that core business guidance of up $10 million sequentially, and I think you mentioned your semi-test bookings were down 11% which is about the same number on the downside, so is the confidence of increasing your core business guidance driven by the other test businesses or will you be shipping more from backlog in your semi-test?

Or how should we look at that?

What's driving the very slight uptick here is some very short term demand that we're seeing in SOC space.

The other businesses are stable.

Those would be turns business in the quarter.

Okay, I guess a final thing from me is, does this appear to you that you're, I guess it was just your December or your March which is not that much difference in revenues for the size of your Company, does this appear that this is a bottom or will we see a bottom in June?

Too hard to tell.

Sorry.

I'm not being evasive, but the caution in the world, in our customer base is very tight.

The utilization efforts to keep utilization really, really tight has been obvious throughout 2007.

And we've got behind us a whole, what all of you know in the overall consumer market.

So very, very uncertain environment.

Okay, I promise, this'll be my final one.

With that kind of uncertainty out there, in the macro economic issues that everyone's chatting about, how much is your guidance being somewhat-- with the current environment getting a little bit worse, does the guidance statements reflect that kind of very cautiousness in, from your customers?

Right, it's all mixed into this.

And really, I think the only thing you should take away from this is that as we enter 2008, we've got some indications that are very, very close in.

Some indications that customers want a bit more than they've wanted over the last six months.

We're responding to that rather than trying to be, we're responding to the demand timeframes rather than trying to manage anything in terms of curvature of shipments.

Okay, thank you

Your next question is from Patrick Ho from Stifel Nicholas.

Thanks a lot.

Mike if you could follow-up a little in terms of your discussion in the semi-test outlook.

Do you believe this is a customer specific market base or is it related to the share gains you mentioned during your official presentation?

You mean what's happening right now, is that--?

Yes.

Well a month does not a trend makes.

So I think what we're seeing is, this is more a function of some pretty hard design work that we've been, design in work we've been doing over the last six to nine months.

And I'm frankly having trouble reading anymore into it than that.

I don't think it's-- obviously you have, always have some customer trends that where your customers move and the others don't.

That's why this issue of how share shifts really has to be looked at on a longer term.

So I think it's much more specific around some sockets and since we work on lots of sockets at the same time there's enough going on there that's moving this up.

Great, in terms of the Nextest acquisition, you've been working on obviously other memory applications within Teradyne itself before the acquisition.

How does the Nextest acquisition I guess impact some of your other memory development work that you've done?

Are you going to be integrating some of that or are you going to be I guess divesting yourself from that given that now you have a solid memory or a-- at least on the flash memory side, you have a solid tester on that front?

Well the first thing we're doing is two fold.

One is Nextest was very attractive to us because of the unique architecture of that product, both in performance and cost and in the team that's behind it.

It's a very, very interesting flexible architecture and a very capable fast moving team.

So that was what was interesting on that front.

That made us-- it possible for us to take our flash memory long term investments and shift that into their basket, not ours.

Now what we do on other memory fronts, we still have other work and other investments going on there and that's frankly one of the things we've got to carry with us as we move to model this year, is to be able to keep those investments going so we can expand even further in the memory space.

That's not something you're going to see in 2008, but it'll be beyond that time.

But I think we've got a pretty clean approach here with Nextest driving the flash memory side of the equation for us.

Great and a final question for Greg.

In terms of your cash flow generation projections for the year, post the Nextest acquisition, will this allow you to continue the buy back programs that you've been quite aggressive with in the previous, at least in the past year or so?

The answer is generally yes, but at a more modest level.

After the Nextest acquisition, we'll have $443 million of cash.

I've mentioned in the past we can operate as low as $300 million.

I've also said $350 million, $400 million might feel to be about the right place to be.

So there's a little bit of room to buy more Teradyne stock back.

Obviously we'll generate cash throughout the year.

So I think with the cash we generate, we would be looking to buy Teradyne stock.

And maybe some of the cash we have now, we'd also look to buy some Teradyne stock, obviously dependent upon where the price is, but at the price it is today, it's very attractive to us.

Great thanks a lot guys.

Your next question is from Steven Pelayo from HSBC.

Yes Mike, could you help me think about the organic growth, I guess the core SOC market with the [inaudible] share gains and new products coming in.

What are you thinking when you size it and then when you size the flash test market opportunity in '08?

Steve, you're asking what's happening with the market itself?

Total market?

Correct.

Well, it's not a boom business here in SOC test.

It's been, the market over the last three years has been, fluctuated between the low point, which is this last year about $2.5 billion, $2.6 billion and $3 billion, let's say $3.3 billion or $3.4 billion in '06 and '05 was a little bit in between those-- was in between those two.

So we've been modelling this around a market that's going to, that's going to operate in the high 2s.

Not that's going to grow a tremendous amount out of that, except for what will be driven by unit growth and dollar growth in the semiconductor market.

So we've got pretty modest expectations about how that market's going to move on its own which is why we focus so much around the share gains.

Now the memory market has been much stronger and it's grown, it's got a higher buy rate, it's grown faster than the SOC test market.

Obviously two things going on there.

Bit growth in, especially in the flash memory market have been explosive, but on the other side, huge amounts of work to keep the cost of test down.

But I think overall we'll see a bit more growth on that front, but it'll be up and down over the next few years.

But we have a relatively small footprint now with Nextest in that market and so there's a lot of upside for us to be able to expand in it.

But again, we're not counting, we're not counting on the tidal up lift in the SOC market to make a huge difference in our plan, and our break even plan and our model profit plan this year is built around a market that is lower than 2006 and only slightly higher than 2007 is.

Okay and that actually brings me to my next question, you guys have this goal of 15% PBIT by the end of the year which implies a revenue level we've been talking about.

When you think about the linearity of the year, do you think that's a steady growth or are you really baking in more of a second half to get to that revenue number to drive that 15% bottom line goal?

This is Greg.

The 15% goal is, at the end of the year, if we are at our average revenues, will be 15%.

If we're above our average revenues, we'll be above 15%.

If we're below, then we'll be below the 15%.

So it's based upon average revenues is how we set the 15% model so that, in any point in time, we could be above or below the 15%, just simply depending upon what the revenues are in that particular quarter.

That was actually a goal for the model, not necessarily a goal for where you think the Company's going to be at?

Yes we're not trying to intersect the point that says the revenue is at a peak and we'll hit 15% there.

It's mid-cycle revenue line and therefore the linearity, the steady progress through the year on the break even side.

We're unable to call what the third or fourth quarter revenue levels would be, so instead we model against average revenue levels and our commitment would be that our profit rate and that's the fourth quarter would be at a rate that if we adjusted those revenues to average revenues, you would see we're at 15%.

Last question really for you, Greg, is on the-- when I think about incremental margins, you guys got I think some revenue growth coming, you got some cost controls, you've got full quarter of Nextest going to be happening.

As we look beyond the first quarter, when I think about kind of the incremental gross margins in the first half of the year, versus the second half of the year, maybe if we'd just assume revenues were flat, I would assume you're going to get some margin improvements, could you try to help me think about that a bit?

Right, if revenues were flat, we would probably get 1.5 points of margin improvements by the end of 2008 from a set of initiatives that are not tied to new customer wins.

Okay, so this current quarter coming up, you're talking about 47%, but that's not actually a full quarter of Nextest.

If Nextest was in for the full quarter, it would still be 47%.

Okay, and so roughly about a 1.5 point from there.

Okay.

Yes.

Thank you very much.

Sure

Your next question have from Chris Blansett from JPMorgan.

Hi guys can you hear me now?

Yes thanks we can.

I got a couple housekeeping things here.

What's your expected share count for next quarter given the buy backs and how this is going to end up?

Well the share count right now it's $173 million.

At the end of next quarter, we're estimating $176 million.

That does not include buy backs if we do buy backs then it's going to be adjusted.

All right.

Now, I guess, when you integrate Nextest into the business, how should we view this?

You said before you're going to keep it as a separate entity, but would we expect some of the I guess more operational or common functions to be, to start to be integrated into the new companies or will it be held really as a separate entity the whole year?

The thing we're doing right out of the box will be to integrate the customer facing side of this so we'll have very quickly a sales distribution applications engineering support.

That'll be the first thing that we do.

Whether we do more, we're going to be much more careful on other steps.

One thing our customers have voiced is, just don't do anything that disrupts the lead times and availability so if we do manufacturing transfers that would be done very, very carefully and over a longer period of time.

And on the engineering front, we're going to, we're going to put a little bit more heavy hitting talent in where needed if the Nextest team needs some additional engineering talent and that's probably in small numbers.

We'd inject that into the play.

All right.

Now.

I guess, in the event of, I guess-- determining how this is going to play out, do you have certain milestones to figure out when you make the decisions?

Is it certain revenue levels from Nextest, I'm trying to understand the long term progression of how you expect the Company to look in maybe two or three years?

Well the thing we've done here is to get some growth engines that are both inside the SOC space organically, that's what's behind the new products, that's what's behind the close end adjacencies like LCD.

So we expect some growth on that front, number one.

Number two, we're expanding, this is really at a lower level, but it's a steady, steady initiative around expanding some of our service offerings to customers to be able to provide them a more total solution in their socket solutions.

And then, thirdly, the memory business and the growth behind the memory business.

And we're going to try to accelerate that by putting some capability behind the product development that they've got.

All right.

And lastly, when you think about levering up the balance sheet or at least the discussions that occurred in '07, how does the purchase of Nextest change this?

Maybe timing of this, or delaying of this?

Well we would at some point look to investigate putting debt on the balance sheet and buying back stock, but we're not quite at that stage yet.

The things that would move us faster there would be one, being at our model profitability rate is one.

Two, having a tax rate that is higher than where it is now.

Once those two things occur, then it's financially, much more interesting for us to look at this alternative as it would help lower our cost of capital.

So I think it's something over the next, probably the end of the year we'll be looking harder at other opportunities that make sense for us.

Now one real quick one.

Got to ask the quarterly utilization rate trends question.

Utilization moved down around November timeframe for us, and I think the market statistics on this are similar.

So it nudged it down a little bit.

Still pretty tight in the, all in the 80s, high 80s, so it's being operated, continues to be operated in our installed base at a very, tight, tight level.

But it has moved down a bit in this, during the course of the fourth quarter.

All right.

And any ideas since we're kind of a good month into it.

You indicated, you thought some of your customers might want to buy more equipment but might be more cautious, you think-- are you seeing utilization rates pick up a little bit?

I think that's, that is too fine for us to be able to call.

There's anticipation of new product and, in the second quarter I think revenue, so I think they're anticipating tighter utilization, at least in the products that we've got, but there's not a macro move here.

Okay.

Sounds good, thank you guys, appreciate it.

Your next question is from Jim Covello from Goldman Sachs.

Hi is this [Kate Kotlarsky] from Jim Covello.

A couple of questions.

My first question is, to the extent that we do see a macro slow down in 2008, I was curious whether you have more flexibility in your expense line to sort of, to reduce expenses further than what you had alluded to originally?

Okay, is this Greg.

I did mention we plan to lower our quarterly operating break even by $20 million or more, so there is a more there.

But for now the target we have is $20 million and it might be a little bit higher.

Okay and just a follow-up question.

Obviously you're very focused on maintaining profitability throughout the cycle and I was curious to the extent that you have certain share goals for 2008, if we do face a macro slow down and you're faced with a decision of gaining units share or sacrificing your margin, I was curious where you would lean toward?

This is Greg again, let me comment that the new product wins we've achieved over the last two years have been at very attractive standard margins because of the differentiation in our product.

So, we have not been taking business at steep discounts.

I know you may hear that, but that frankly is not what occurs.

If you look at all the business we've taken in, the average margin, it meets our model.

Okay and just a final housekeeping question.

Previously you had talked about your tax rate moving up post 2008 to about 26% to 28%, is that still the target or is it a little bit higher post Nextest?

Correct.

It's a little bit higher post Nextest.

Probably safer to say 28% to 30% now.

Okay.

Thank you.

Your next question is from David Egan from Lehman Brothers.

One follow-up question about the demand environment.

In terms of NAND, clearly Nextest saw some very good business in the fourth calendar quarter, but in our checks, we're hearing about squishiness across a number of the different NAND chip makers in their demand.

Do you see any weakness ahead and do you have any concerns about that?

Well, beyond what is in the short term, Dave, I honestly can't say.

The short term demand in Nextest is-- looks pretty good, but beyond that, I think it's all in the same category here that we're in a very, very uncertain and volatile market.

I think the trend line overall in the product offering here, there'll still be good demand for the Nextest product because I think it really offers very, very good economics of test.

And in addition it has a very flexible architecture to adapt to what changing test requirements are.

So I think it'll do pretty well, but obviously it's going to ride whatever the cycle is here, but I can't predict what's going to happen beyond what we see in the short term.

Okay.

Thank you very much

Your next question is from Mehdi Hosseini from FBR.

I'll move onto the next question.

The next question is from Tom Diffely from Merrill Lynch.

Yes, good morning.

Could you talk a little about the relative business trends or strengths between the IDMs and the OSATs right now?

Yes, Tom, let me do that for you.

The, I'll tell what we are-- if I can find it here.

I got it.

I got it.

The-- our business on, sorry Tom I got a few papers in front of me.

The split in our business, I'll give you the last couple of quarters because I think that gives you some indication of what's changing.

Our-- we break it down, by the way, in terms of specifiers and OSATs.

And I know it's done differently by different, different suppliers here, but we think about it as IDMs and fabless companies who specify into the OSATs.

And over the last, let's say, three quarters, our business has gone, the specifiers have gone from 54% to 59% to 71%.

So obviously what you see is a, more, much more of a slow down in the OSATs in the last, as you break down that 100% of business.

Yes.

Now, if you go back far enough, you see that that, the OSATs have gone down as low as the low 20s for us.

So they're in the high 20s right now so it's not outside the trends that we've seen in the past.

I think the other thing to open the time window a little bit wider, in a down year, in '07, our overall bookings, as we said before, the market went down X, we went down Y.

Overall bookings went down 11%.

Our OSAT business in that same period went up 25%.

So the OSAT resilience for us, the number of customers specifying into the OSATs for us has really kept that in a growth curve.

So we've got a solid position in the OSATs, 75% of our business in Asia.

So as they gain share and as we gain share with the specifiers, we're getting the flow through into the OSATs.

When you look at the recent uptick in business, has that trend changed at all?

Does that 29% still look like a good number in the first quarter or is it starting to move back again?

I honestly haven't looked at what the break down is.

We're not-- we're-- we sort of look retrospectively at this rather than thinking that there's something happening with regard to OSAT versus specifiers.

Okay.

And based on the potential volume discount, does your margin structure change at all between IDMs and OSATs?

No, there's no differentiation there.

The IDMs specify products into the OSATs and the fabless companies specify.

So it would be hard for us to have a different pricing structure when the, when the decisions are driven by those companies.

Obviously high volume customers get leverage and price versus low volume customers.

Yes.

But beyond that, there's no difference.

Okay, and then also with the slow down in the fourth quarter, did you see your competitors get a little more aggressive on the pricing front with their tools?

Nothing out of the ordinary.

There's always, there's always some situational orders where that's happening.

Let me think.

As, as some of the companies kind of reconfigure themselves, I'd say there's likely to be aggression there to try to establish positions.

The other thing I will say that we've seen, and I don't think this is out of the norm though is, in the effort to establish some products that haven't been latching, that's where you see the most aggressive price moves competitively.

Okay.

And finally with the introduction of your CMOS image sensor program, does that mean you'll cancel the Nextest image sensor program?

No, that's a good question, thanks for asking that.

Nextest has got a modest SOC business and that's the only place where there's a little bit of overlap between what we do and they do.

Image sensor is one space that they've been introducing an image sensor product to the market just as we combined with them.

The message to their customers is we're not going to disrupt those customers by abruptly doing anything, so we're going to support the products that they've got and if customers want those, we'll sell those.

Obviously we want, overtime, not to have redundancy in our R&D and spaces like that, but that'll work itself out more gradually.

Okay, thank you.

Your next question is from Mehdi Hosseini from FBR.

Yes guys, can you hear me?

We can hear you Mehdi.

Okay great.

My apologies, I jumped into the call late and got disconnected.

Regarding your nonsemi-tests, how would you see the Q1 momentum and then your overall impression or expectation for demand for 2008?

I'll take that one.

The nonsemi-test business or system test group will start off the year a demand level similar to the fourth quarter, maybe up a slight amount, but we would expect as they go through the year, their volumes will increase as they are tied to various program buying at some accounts that they are the incumbents.

So we would expect their lumpiness to continue and that they will grow in the second half of the year.

Given the fact, in the semi-test, maybe we're in the secular trend, utilization rates may not drop by much, even if we see further slow downs.

Do you expect the nonsemi-test to be even more volatile or to be, to have even less visibility than semi-tests?

On the order front, the systems test business is choppier, believe it or not, choppier than the systems-- than the semi-test business, just because it's program driven.

You get designed in, you have a slug.

But in terms of revenue, I think the revenue profile would be steadier, because those program orders convert to slower and more steady deployment.

Right and the lead times for nonsemi-test are a lot shorter.

Right but the lead times-- the system test group is made up of three businesses.

One business has very quick lead times, the in-circuit test, and then there's another that has very long, because it's program buying.

So it really is a mix.

But you expect them to vary less than semi-tests.

They might vary 5%, 10%.

But they're not going to vary the way semi-test does.

And one final one for me.

I'm not sure if you provided any comment on this, but can you elaborate on the cost structure or rather margin profile between the semi-and nonsemi-tests?

The semi-test has a higher gross margin than the system test group.

Generally a point or two higher.

Even with the new margin profile?

Yes.

Okay and semi-test gross margin obviously is higher than the corporate average, correct?

Yes, and the system test group spend less on R&D.

So that's how these models all work back down to 15%.

Got you, thank you.

Kate, we'll take the last question now.

The final question is from Satya Kumar from Credit Suisse.

Hi, this is [inaudible] for Satya.

I have two questions.

The first is Nextest kind of focused on memory final test, but some of the memory companies have shifted their focus to probe.

So can you give a broader overview on your memory strategy?

Well Nextest-- you're right, Nextest has a strong position on the flash final test arena.

Architecturally the system is capable of extending into probe test and that's the aspiration of the Nextest organization and product is to move in that direction.

So, there's no wall between final test and probe with regard to system capability and we'll see how that plays out overtime as we, as we together target to expand.

Okay.

Another thing is, one of your [inaudible] competitors kind of mentioned their focus away from the MP market, and so want to find out what kind of opportunities does this create for Teradyne and if you can kind of size any opportunity on a timeframe, that would be great?

Well, I think that'll shake out gradually.

The defocusing of a competitor on a space obviously opens up the potential, but the-- any conversion there I think will be somewhat gradual as different suppliers get qualified.

It does open up a bit of space for us and for others but I can't say more about how that might develop until we get further into it.

Kate, I think we're done.

Thank everyone for their interest and participation.

And we'll talk to you next quarter.

Thank you.

This concludes today's conference call.

And you may now disconnect.

Thank you and have a great day.